60

Q: Didn't a Soviet delegation recently visit Panama? Doesn't this signify that Torrijos is communist-leaning?

A: Five Soviet foreign trade specialists visited Panama July 19. No formal agreements were reached.

Various matters relating to trade were discussed, including possible negotiations for establishment of commercial and economic relations between the two countries. These were preliminary talks and we do not know of any follow-up discussions.

Currently, Panama and the USSR do not maintain diplomatic or trade relations.

Many Latin American countries have trade agreements with the USSR. We do not attach any particular significance to these recent initiatives, but we will continue to watch the situation.

Matters discussed include:

- possibility of setting up a factory to repair heavy-duty equipment and manufacturing spare parts for sugar processing equipment;

- possibility of a Soviet contract to build a hydroelectric plant;

- possibility of opening a Soviet bank in Panama;

61

Q: When General Torrijos visited Libya earlier this year, he signed various cooperation agreements. Can we expect to see growing Libyan involvements in Panama?

A: We think it unlikely. Although several general declarations calling for cooperation in various fields were subscribed to by Panama and Libya during the visit, no concrete results have followed. Torrijos primary reason for making the visit was probably his hope for some financial assistance for Panama -- but he went away empty-handed. Beyond this, he certainly hoped and expected to obtain Libyan endorsement of Panama's canal aspirations, as part of his general policy of rallying any available support. This he obtained. Finally he probably hoped to advance his personal stature on the world scene by sharing the stage with a "revolutionary" leader like Qadhafi. But with a new treaty now concluded, the incentive for Torrijos to continue to seek Libyan support, either financial or moral, is greatly reduced.

9/23/77

62

Q: How stable is the Torrijos Government? Can it make the new treaties acceptable to its people?

A: Panama's current government has been in power since 1968 and demonstrates considerable stability. A change of government does not seem likely at this time.

Regarding the government's ability to sell a new canal treaty to the Panamanian people, our judgment is that this treaty, which takes account of the legitimate interests of both countries, will be broadly acceptable to both peoples. Despite differences with the Torrijos Government over its internal policies, all Panamanian political factions want a new canal treaty and a more equitable relationship with the U. S. Panama's plebiscite will be in late October.

9/23/77

63

Q. What about the press, is it free or controlled?

A. Panama has neither the free press enjoyed in the United States, nor the rigidly controlled press of communist or totalitarian regimes. The communications-media are not government owned, except for one government owned radio station. Within limits, Panama's press is free to criticize or support government action or proposals and within those limits it does criticize, often sharply, ministerial or bureaucratic actions. It cannot, however, directly attack the "revolution" per se. Newspapers and broadcast journalism vary in their support or opposition to officials and government programs.

9/23/77

64

Q. What is the legislative process?

A. The general practice is that draft legislation is prepared by the National Legislative Commission a 10-member body, 9 of whom are appointed by the executive, the tenth being President of the National Assembly of Community Representatives. Proposals for legislation, however, can also be made by resolutions of the National Assembly, the provincial coordinating councils or by non-government interest groups as such as the National Council of Private Enterprise (CONEP). The National Legislative Commission under the Constitution, carries on consultations or hearings with groups and individuals affected by the proposed legislation. Much of this consultation is done by having members of the Commission travel to the provinces to discuss legislative proposals with the provincial coordinating councils. Once the hearings are completed the Legislative Commission submits the hearings reports and the proposed legislation to the National Legislative Council which considers and enacts legislation.

9/23/77

65

Q. What is the composition of the National Legislative Council?

A. It is composed of the President of the Republic, the Vice President, the President of the National Assembly of Community Representatives, the members of the National Legislative Commission, and all Cabinet ministers. The Council members present must unanimously approve a piece of proposed legislation before it can enter into effect.

9/23/77

Q: Is it not likely that ratification of this new treaty will perpetuate the Torrijos government indefinitely? Will this not free it to turn to the left, and further against our interests?

A: Whether the new treaty will strengthen or weaken the Torrijos government is a matter of some speculation. Some have argued that the new treaty is a feather in Torrijos' cap and will establish him as a Panamanian national hero. Others suggest that this treaty will change the political focus in Panama and in effect make a leader like Torrijos obsolete.

His political future is Torrijos' problem. Our objective is neither to strengthen nor weaken him but rather to implement a treaty acceptable to both parties which protects our interests.

In any case, we do not see Torrijos turning sharply to the left. He is primarily a nationalist and a pragmatist. It seems unlikely that this political orientation will change.

9/23/77

Q: According to newspaper reports, our Embassy in Panama has reported that the Panamanian economy is in dire straits, with heavy foreign debts, including many owed to U. S. private banks. What is the economic situation in Panama? How does it affect the stability of the Torrijos Government?

A: During the 60's Panama's economy enjoyed an exceptionally high rate of growth. The rate was far above the historical average and thus probably unsustainable over the long term. In the early 70's, economic growth started to fall off. This trend accelerated with the onset of oil price increases and the resulting world-wide inflation and recession. In order to maintain aggregate demand at an acceptable level, the government has carried out a large public investment program. This has kept up economic activity and provided employment, but has resulted in a major increase in the level of debt. Debt-service requirements increased from $138 million in 1975 to $253 million in 1977. Panama has started to take additional measures to deal with its fiscal problems and to stimulate private sector investment.

9/23/77

68

Q: Will implementation of a treaty help the Torrijos Government solve its economic problems?

A: While the new treaty will not in itself solve Panama's fiscal and economic problems, it will help.

Also, elimination of friction between the two countries caused by the terms of the 1903 treaty will remove an element of uncertainty in the investment climate for the private sector.

In addition -- and over the longer term -- Panama will have the opportunity to exploit those land and water areas that we do not need to operate or defend the canal.

9/23/77

69

Q: We understand that the Torrijos regime has been sustained largely through concessional loans from the U. S. Government. Is this true?

A: Panama has been a heavy borrower internationally to finance its ambitious economic development programs. However, the U. S. Government, through the Agency for International Development, has been only one source -- and not the major source -- of such foreign loans. Panama has also received substantial loans for infrastructure and economic development from the various international lending agencies. It also has received and continues to receive substantial loans from private foreign banks which lend money -- at hard, not concessional, interest rates -- in the expectation that Panama will repay the loans, plus interest, at a profit to the lending institution.

9/23/77

70

Q. Isn't it true that the Torrijos Government has nationalized some U.S. investments in the country?

A. Yes. Several years ago, the Torrijos Government nationalized the private electric power and the telephone companies which served Panama City and other areas of Panama, and incorporated them into its publicly-operated power and telephone utility systems. Both private companies were formerly American-owned. In both cases, the former owners received equitable compensation for their investments. In connection with its land-reform program, which has been operating since the early 1960s, the Government of Panama has occasionally nationalized land areas in which American individuals or companies owned or had on interest. In these cases, again, either equitable compensation has been paid or negotiations for such compensation continue.

The last major investment dispute was the United Brands and a new contract between the GOP and United Brands was worked out over a year ago to the satisfaction of both parties. The U.S. Government has not had to play an active role in settling such disputes. In general, Panama has had a very favorable

2

climate for U.S. investment. This is reflected
in sizeable investments which have taken place
in the banking and other sectors and in a
contract signed with a U.S. firm (Texas Gulf) to
exploit the Cerro Colorado copper deposits which
will be the largest project, aside from the Canal,
ever carried out in Panama. We have not had any
U.S. firms request that sanctions provided for
under U.S. law be applied.

9/23/77

Q: Who will operate the Canal when the new treaty goes into effect?

A: The United States will have the right to manage, operate and maintain the Canal during the term of the Treaty. The United States is also granted a series of general and specific rights necessary to carry out Canal operation. The United States will exercise its rights through a United States Government agency to be called the Panama Canal Commission which will replace the Panama Canal Company.

9/22/77

Q: Won't the operating efficiency of the Canal be adversely affected if Panamanians operate it?

A: More than 70% of the current work force is Panamanian. The Treaty provides for training programs and on-the-job experience for Panamanians at all levels of the operation during the period of United States control. By the time the new treaty expires, there should be well-qualified Panamanians to fill all the positions related to the Canal's operation. Moreover, Panama has a tradition of encouraging foreign investment and utilizing foreign contractors. It is therefore reasonable to assume that Panama would employ foreign nationals in the event special skills not available in Panama were required.

9/22/77

75

Q: What increases do you foresee in canal traffic and canal revenue?

A: Based on the current toll rates, the following increases in canal traffic and revenues are expected in 1978,79 and 80, based on the 1977 figures:

| Fiscal Year | Millions of PC tons | $ Millions |
|---|---|---|
| 1977 | 133 | 167 |
| 1978 | 140 | 175 |
| 1979 | 144 | 180 |
| 1980 | 148 | 185 |

These projections do not include any estimated impact on traffic or revenue because of North Slop oil.

9/22/77

Q: Is it true that the U.S. workforce will be reduced 20%? How many employees would be affected?

A: The Treaty provides that at least 20% of those U.S. citizens in the employment of the Panama Canal Company immediately prior to the entry into force of the Treaty will no longer be employed by the Panama Canal Commission five years after the entry into force of the Treaty.

9/22/77

Q: What rights will the employees have who are separated from their employment as a result of the Treaty?

A: They are entitled to the rights and protections provided in current Civil Service regulations, including reduction-in-force and reassignment rights, transfer of function rights, and discontinued service retirement. In addition, there will be an "early optional retirement" program.

9/22/77

85

Q: Won't relinquishment of the Panama Canal be a blow to the international prestige of the U. S.? Will we not be seen as giving up an important commercial and defense asset in response to threats of violence?

A: Quite the contrary. By negotiating this new treaty the U. S. is showing that it has the wisdom and foresight to recognize when constructive change is needed to protect its interests and the interests of all of the maritime nations of the world, many of whom are our allies. The nations of the world will have much more confidence in our leadership if we make timely adjustments that protect our interests (as this treaty does) than if we cling tenaciously to an outmoded arrangement which puts those interests in jeopardy.

9/23/77

Q. Was the EIS prepared in time to make an impact on actual negotiation of the Treaties?

A. Preparation of the environmental assessment and final negotiation of the Treaties have proceeded concurrently, including the detailed negotiation of the lands and waters aspect of the new arrangement. In addition to this environmental analysis we have incorporated provisions in the Treaty itself designed to aid in the protection of the environment, including the establishment of a Joint Environmental Commission. We believe that the environmental assessment which has been prepared will be of valuable assistance to the Senate in its consideration of the Panama Canal Treaties.

9/23/77

TABLE OF CONTENTS

Question

CANAL DEFENSE:

1 Specific United States Rights

2 Vulnerability of Canal to Sabotage

3 Defense of the Canal without Canal Zone

PERMANENT NEUTRALITY:

4 Neutrality Regime

5 Defense Rights after 1999

6 Need for United States-Panama Agreement on Measures taken

7 Defense of Canal Against Panama

8 Possibility of GOP inviting USSR or Cuba to Run Canal

9 Possibility of Inequitable Rules after 1999

10 Priority Transit of United States Vessels

11 Effect of Neutrality Protocol

12 Protocol as Endorsement of United States Action

TERRITORY AND PROPERTY:

13 Treatment under Treaty

14 Value of United States Assets in Canal Zone

15 Compensation to United States for these Assets

IMPLEMENTING LEGISLATION

16 Implementing Legislation for Property Transfer

17 Role of Congress

18 Content of Implementing Legislation

19 When will Implementing Legislation be Submitted?

20 What appropriations will be in Implementing Legislation

21 Implementing New United States-Panama Relationship

22 Legislation Needed to Establish the Commission

23 Appointment of Officers and Directors

ECONOMIC PACKAGE FOR PANAMA:

24 Payments to Panama

25 Need for Appropriations

88

Q: How did the U.S. negotiating team arrive at the figure of $.30 per Panama Canal ton for Panama's share of tolls?

A: This annuity was negotiated on the basis that it was an amount that was entirely sustainable from Canal revenues considering the projected operating costs of the Canal.

9/23/77

89

Q: Why does the new treaty provide Panama with price adjustment indexation when such adjustments have been rejected by the U.S. elsewhere? (e.g., the USG has rejected indexation for commodity agreements and for the OPEC countries to protect the latter's financial assets in the U.S.)

A: The Panama Canal treaty payments should be distinguished from payments under trade and other economic agreements because of their purpose. The payments of the treaty are designed to reflect a partnership arrangement in the canal operation. The United States will retain control of the operation itself as well as the advantage of considerable economic benefits to its economy. Panama will assist the United States in the canal operation and the annuity payments give Panama a stake in that operation. Therefore, the indexation is designed to maintain Panama's interest in the canal current and alive. By the end of the treaty, the 30¢ per Panama Canal ton annuity may be worth very little. To ignore the effects of inflation and other price changes would mean that Panama's financial state in the canal could actually diminish during the treaty period.

It is worth noting also, that under existing treaties, we have twice (1939 and 1973) adjusted the annuity upward to account for devaluation of the U.S. dollar.

September 24, 1977

90

Q. How will the indexation adjustment of the 30 cents per Panama Canal ton be applied?

A. The basis for indexation will be the Wholesale Price Index for Total Manufactured Goods of the United States compiled by the Department of Labor.

The adjustment will be made every two years beginning five years after the effective date of the treaty. Each new rate shall be determined by multiplying the rate of 30 cents per Panama Canal ton by a fraction in which the numerator is the average index for the 12 months ending the 2-year period and the denominator is the average index of the 12 months preceding the first 2-year period.

This formula avoids compounding inflation, and this causes the annuity rate to rise more slowly than it would if compounding took place.

9/24/77

91

Q: Why was the Wholesale Price Index selected as the basis for annuity adjustment?

A: It was selected because it is a modest, yet reasonable measure of price changes.

9/23/77

92

Q: The second $10 million annual payment by the Canal Commission is paid to Panama only if revenues permit, but acts as a cumulative charge on canal revenues. What happens in the year 2000 if there is a cumulative debt with respect to the second $10 million payment?

A: The Canal Commission is obligated to pay, each year, $10 million unconditionally, and in addition a second $10 million per year to the extent that canal operating revenues exceed expenditures. The unpaid portion of this second $10 million is to be paid from operating surpluses in future years. This obligation terminates with the treaty. If there are no operating surpluses from the canal at the end of the treaty, the United States is under no obligation to pay Panama any cumulative balance from this part of the annuity payments. Therefore, the Commission will not have to budget for this payment as an expenditure. On the other hand, because this payment represents a U.S. treaty commitment, the Canal Commission is obliged to make a good faith effort to operate the canal in a prudent manner which would reasonably result in annual operating surpluses being available.

9/23/77

93

Q: What do you foresee to be the operating costs of the canal operation during the new treaty?

A: During the period Fiscal Years 1978 through 1980, annual canal operating costs are estimated to range between $160 million and $175 million exclusive of costs incident to phasing out the Canal Zone Government. The variables that will affect these costs are the rapidity with which Canal Zone Government functions are terminated and thus no longer a charge on canal operating costs, and the extent of various transition costs, e.g., employee and plant replacement costs during the early years of the treaty. During the same period, $40-42 million will be paid annually to Panama under the 30 cent per Panama Canal ton formula, and $10 million under the fixed annuity provision -- plus another $10 million if canal revenues permit.

9/23/77

94

Q: Will you please explain the borrowing authority concept of the Panama Canal Company? How has it been used in the past and how would it be used under the proposed treaty?

A: Section 71 of Title 2 of the Canal Zone Code authorizes the Panama Canal Company to borrow from the U.S. Treasury, for any purposes of the Company, up to $40 million. Although the Administration has not yet reached a conclusion on the matter, in the interest of prudent management it is likely that legislation will be sought to extend borrowing authority to the new Commission.

The Panama Canal Company has heretofore utilized its borrowing authority to obtain additional funds to cover obligations. We believe that this practice should be continued by the Panama Canal Commission.

Also, availability of the borrowing authority is one form of insuring against the use of appropria-
tions to finance operating expenses.

September 24, 1977

Q. Was Federal Financing Bank (FFB) funding of the
Panama Commission considered? Why was it rejected?
What is the FFB's role under the Treaty?

A. At one point early in the recent negotiations, there was consideration of providing for the Panama Canal Company -- or its successor, the Panama Canal Commission -- to borrow from the FFB to finance economic development projects in Panama. Since the Company, as then constituted, was a U.S. "agency" under the FFB Act, it was determined that, in keeping with FFB's policy of making its loans available to all Federal agencies of an equal basis, FFB could purchase any obligations which the Company was authorized to issue or guarantee.

We did not pursue this idea, and it was never discussed
with Panama.

As you know, the economic arrangements ancillary to
the treaties consist of a prepared commitment to develop for
Panama a program of loans or loan guarantees from Eximbank,
OPIC, DOD, and AID. FFB currently makes all DOD-guaranteed
Foreign Military Sales Loans and if such loans are contem-
plated under the arrangements and approved within the Foreign
Military Sales Program, they would presumably be made by FFB.
Also, FFB lends directly to Eximbank; and it is also authorized
to purchase Eximbank-guaranteed loans, but has never done so,
and none are contemplated.

9/24/77

96

Q: Are payments under the new treaty designed to provide an economic assistance program for Panama?

A: No. Its purpose is to provide Panama with a fair return from the operation of the canal in its territory and to give Panama a stake in the canal operation. The best way to attain these purposes is to provide Panama with annuity payments from the canal operation.

9/24/77

97

Q. Can you compare the value of the treaty annuity payments to military base payments elsewhere?

A. Yes. The canal treaty annuities will provide Panama initially with $50-60 million per year at no cost to the U.S. taxpayer. Base arrangements in Spain, Turkey, and Greece will cost the U.S. taxpayer $170 million, $200 million, and $175 million per year respectively.

The package of credits and loan guarantees to be provided to Panama outside the Treaty totals $345 million. Credits and loans to be made available under base arrangements for Spain, Turkey, and Greece amount to $1.05 Billion, $800 Million, and $345 million respectively.

9/24/77

Q. Have the user countries of the Panama Canal given their consent to the treaty economic arrangements?

A. The new treaty is a bilateral agreement between Panama and the United States; no third countries are party to it. However, the Latin American countries which depend on the canal more heavily than either Panama or the United States support the new treaty as evidenced by the recent treaty signing ceremonies.

9/24/77

Q. Should Canal user nations not demand some form of compensating payments from the U.S. because of the higher toll rates for Panamanian annuity requirements?

A. The United States will retain control of the canal operation during the life of the treaty. As the canal operator it has the right to charge reasonable rolls for the service of the canal. Annuity payments to Panama are part of the cost of operating the canal. There is no requirement to subsidize canal users even though present-day control rates could, in effect, be considered a subsidy since they are barely above 1914 levels.

9/24/77

100

Q: Is the market strong enough to support the financial requirements of the Panama Canal Commission under the proposed Treaty?

A: Our studies on sensitivity of traffic to various toll increases were made in 1974, and pre-date the two increases we have had plus the rule change which total about a 50 percent increase from the 1974 base. The 1974 study concluded that a 75 percent increase in toll rates would achieve about the maximum revenue. If this is still correct, you could only increase tolls by another 16-17 percent and achieve maximum. However, if the first increase has been offset by inflation, you could increase tolls by about 40 per-cent before reaching the point of diminishing revenue return. If all increases have been offset by inflation, you could start at 0 base again and go 75 per-cent. No precise answer is possible without updating previous studies. We have begun undertaking such an update through a Contractor. Final details have not been settled. We expect to obtain a forecast for the following years: 1978, 1979, 1980, 1981, 1985, 1990, 2000, for the following: transits, cargo, tolls, and P.C. net tons. In addition, we expect to obtain sensitivity tables for the following percentage increase in tolls: 25, 30, 35, 50, 75 and the development of a new maximum revenue curve. We are looking

102

Q: What appropriations would be required for the elements of the economic and military assistance package?

A: All of the economic programs involve credit and guarantees which should entail no outlay of funds from the U.S. Treasury. No appropriations are required for the economic elements of the package.

Similarly, we do not anticipate any net outlay of government funds for the military assistance package, although here the procedure is different. A repayment guaranty under the Foreign Military Sales program involves the obligation of appropriated funds in an amount equal to 10 percent of the principal amount of the loan that is guaranteed. These appropriated funds are charged to the Foreign Military Sales account and are credited to a special account in the Treasury which constitutes a single reserve in the event of claims under any outstanding guarantees. This procedure, which is established by Section 24(c) of the Arms Export Control Act, operates to limit the volume of loan guarantees that can be issued. There have never been any claims requiring disbursement from the reserve account in the history of the Foreign Military Sales financing program.

9/24/77

104

Q: We have heard that Panama is delinquent in its repayments on foreign military sales credits. What is the extent of the overdue indebtedness? Can this sum be collected immediately from Panama?

A: Panama's National Guard has traditionally purchased items it needs from the United States. Ordinarily these items have been purchased for cash. In recent years, however, the United States has started a small FMS credit program in order to start to help prepare Panama for an expanded role in Canal defense.

Panama is current on paying its FMS credits. Some of the FMS credits ($1.5 million) have been used to provide medium term financing for prior year purchases by Panama of U.S. military items (i.e., military uniforms, trucks and helicopter engines). These purchases had not been paid either because of a breakdown in our military accounting procedures due to a change in our system or for other unknown reasons.

9/22/77

105

Q: Is Panama current on all its international financial obligations, whether to governments, international financial institutions, or private investors?

A: Panama has an open economy and is a significant financial center for Latin America (i.e., it attracted about 72 banks which have deposits of $10 billion). Panama thus has a very large stake in maintaining its favorable investment climate and international credit worthiness by meeting all its financial obligations.

As far as we know, Panama is current on all its obligations (i.e., obligations that are not in dispute).

Panama is certainly current on its official debt to the U.S. Government, e.g., A.I.D. and Export-Import Bank of loans.

9/22/77

106

Q: What reply do you make to the allegation that the Panama Canal treaty settlement is a bail-out for American banks?

A: This allegation is untrue. The position of the American banks in Panama was never a consideration in the treaty negotiations.

Like many LDCs, Panama has borrowed heavily to finance its development program and in response to the world economic down turn of the mid-1970's. Panamanian public debt is about $1.5 billion. The service on this debt is large, but Panama has met her obligations.

We do not know how Panama will use the annuities it will receive under the new treaty. However, the size of the annuities was the subject of hard negotiations. As you know, Panama's original position was for a payments provision that would have far exceeded the most optimistic estimates of canal revenue. On the other hand, the United States position was that any payments to Panama should be financed by canal operating revenues in order to give Panama a fair share of the returns from the operation of the canal and a stake in the canal itself. The U.S. position was the one that was finally adopted in the treaty. It is our understanding that Panama will use these payments for development purposes.

The economic cooperation program outside the treaty
is designed to strengthen Panama's economic well-
being during the treaty period. In no way can the
treaty payments or the economic program be regarded
as a bail-out for either Panama or American banks.

September 24, 1977

107

Q. Is it true that the Panamanian Government owes the Panama Canal Company and Canal Zone Government about $8.6 million?

A. The total amount owed is about $8.6 million. It represents unpaid water, garbage and Palo Seco leprosarium bills. Most of the $8.6 million represents pre-1960 water and garbage bills plus a $4.6 million leprosarium bill which increases at the rate of $37,000/month.

Some of the debt is in dispute for various reasons. We expect that now that the new treaties have been signed we will be able to negotiate promptly a reasonable settlement with the Panamanian Government.

September 23, 1977

Q. What will expeditious passage mean in practice? Will our warships automatically go first?

A. The right of "expeditious passage" means that the vessels are entitled to transit the canal without delay. In circumstances of congestion "expeditious passage" could require preferential treatment in scheduling.

September 24, 1977

109

Q. What would be the Administration's view of the Senate's adopting reservations or understandings that would spell out our interpretations of critical provisions of the Treaty, such as that covering our right to take action under the Neutrality Treaty?

A. The Administration would not favor any "reservations" that would change the terms of the Treaty. In our view no "understandings" are necessary. The terms of the Treaty adequately protect U.S. interests.

September 24, 1977

Q. What is to prevent the Government of Panama from nationalizing the Canal once it has jurisdiction over what is now the Canal Zone?

A. Nationalization refers to the concept of a governmental taking of private property. Under this Treaty we would not operate the Canal as a private enterprise in Panama, but on the basis of rights granted to us in the Treaty itself. We currently operate the Canal on the basis of rights granted to us under the 1903 Treaty. Our new treaty rights would be no less binding than the rights under the existing treaty.

Panama has not attempted to abrogate the 1903 Treaty unilaterally, and there is no reason to assume it would act differently under this new Treaty which terminates in 1999.

Moreover, we will during that Treaty have the same forces there to maintain our rights.

9/24/77

111

Q: The Administration has said it will have the right under the Neutrality Treaty to use armed force to protect the neutrality of the Canal from a threat from any quarter. Doesn't the UN Charter limit the right of any country to use military force in the territory of another country without its consent? Doesn't the UN Charter override any rights derived from a bilateral Treaty?

A: Article 2(4) of the Charter prohibits the threat or use of force against the territorial integrity or political independence of any state or in any other manner inconsistent with the purposes of the United Nations Charter. The Neutrality Treaty is entirely consistent with this provision. It authorizes the use of force for the sole purpose of maintaining the neutrality of the Panama Canal. It does not authorize, and the United States would not consider the use of, armed force against the territorial integrity or independence of Panama or in any other manner inconsistent with the purposes of the UN Charter.

September 24, 1977

112

Q: Does the Hay-Pauncefote Treaty with the UK continue in force? Is the Neutrality Treaty consistent with Hay-Pauncefote?

A: The Neutrality Treaty carries forward the general principle of neutrality originally established by the Hay-Pauncefote Treaty and incorporated in the 1903 convention. The new Neutrality Treaty is consistent with Hay-Pauncefote. The Hay-Pauncefote Treaty remains in force, but it may be superseded by the regime of neutrality established under the 1977 treaty if the UK accedes to the Protocol to the Neutrality Treaty.

September 24, 1977

113

Q. Exactly what does paragraph 2 of the treaty article on construction of a sea level canal mean?

A. Paragraph 2a requires that no sea level canal can be constructed in Panama except with our consent. At the same time, Panama's consent is also required. In effect, there is a double veto.

Paragraph 2b, which was negotiated in exchange for 2a, the U.S. agrees not to negotiate rights to construct a sea level canal outside Panama until the year 2000 without consent.

Since construction of a sea level canal on routes outside Panama would be considerably more expensive, this appeared to be a reasonable *guid pro quo*.

9/24/77

114

Q: With regard to the Sea level Canal, why did the United States agree that it would not build a sea-level canal except in Panama?

A: During the negotiations, Panama agreed that no third country be permitted to build a sea-level canal in Panama except with our consent, but asked the United States, in exchange, to agree to limit any sea-level canal construction to Panama. Our negotiators agreed, judging that we got the best of the bargain. That is, we obtained a treaty commitment excluding foreign construction in exchange for a limitation on our ability that has very little significance when you consider that the Interoceanic Canal Commission concluded in 1970 that the two preferred routes for a sea-level canal excavated by conventional means are in Panama and that the next preferred route would be more than 3 times as expensive to construct.

I should add that all these provisions expire with the termination of the Panama Canal Treaty on December 31, 1999.

September 24, 1977

115

Q: How much did the U. S. pay private landowners for their property in the Canal Zone?

A: $44 million. This figure includes the $40 million paid the French Canal Company as a result of the 1903 treaty and some $4 million for miscellaneous purchases for the Company's assets including the stock of the Panama Canal Railroad.

9/23/77

116

Q. Is it true that General Torrijo's brother Moises Torrijos was once involved in drug smuggling in the United States?

A. We cannot comment at this, as it is the subject of a criminal investigation by Justice Department.

9/24/77

117

Q. Will we be able to take the 20% reduction in U.S.
employees which is required during the first five years of
the Treaty without adversely affecting Canal operation?

A. The treaty does not require a 20% reduction in U.S. employees per se. The treaty requires a 20% reduction within the first five years of U.S. employees who were employed by the Panama Canal Company immediately prior to the entry into force of the treaty. We will be able to accommodate this requirement.

9/24/77

Q. How important is the canal to U.S. maritime and transportation interests?

A. In FY 1976, 78 million tons of cargo out of 117 million tons of cargo transitting the canal were part of U.S. domestic or foreign trade. The canal still represents a valuable transportation route for U.S. trade since about seven per cent of our total oceangoing trade transits the canal.

September 24, 1977

119

Q. Will American private businesses be permitted to operate as they did in the former Canal Zone?

A. Private businesses and non-profit activities in the present Canal Zone will be able to continue their operations on the same terms applicable to similar organizations already established elsewhere in Panama. For the first 30 months after the new treaty enters into force, these organizations will be permitted to continue their activities under the terms and conditions that now apply in order they may bring their activities into compliance with the requirements of Panamanian law and receive licenses to do business in Panama.

Thereafter, they will be fully subject to Panamanian law and will be permitted to continue operating at their present locations in the same manner as other businesses in Panama without discrimination.

In this regard, it should be noted that there is a high level of foreign investment in Panama and that a large number of U.S. businesses and non-profit organizations have operated quite successfully there for years. Indeed, many of the organizations now operating in the Canal Zone also have operations in Panama.

- 2 -

The Treaty also establishes that private ownership
of buildings or other improvements in the present
Canal Zone shall be recognized by Panama, and that
the owners of such improvements may continue to
occupy the land upon which they are located at
reasonable rental rates. Should Panama decide to
sell such land, the owners of the improvement will
have a first option to purchase it at reasonable
prices, or in the case of non-profit organizations,
at a nominal cost in accordance with prevailing
practices in Panama. (Panama's practice is to
afford land to churches and other non-profit service
organizations at no cost or extremely low cost.)
The Treaty also specifically provides that should
any of these organizations be required by the Govern-
ment of Panama to terminate their activities or
vacate their property, they will be compensated at
fair market value.

9/23/77

Q: Will the Administration provide the Committee the documentation it needs to understand and judge the treaties including (1) minutes of the negotiations, (2) communications between the negotiators and the Secretary and the President, (3) internal agency studies of the effects of the Treaty, (4) interagency communication, (5) reporting cables, etc.

A: The Administration wants to cooperate fully with the Committee and to provide it with the necessary information. Let us consider your request and work with the Committee to identify the Committee's needs, any Executive Branch concerns, and mutually agreeable arrangements.

September 24, 1977

121

Q: Panama's Chief Negotiator Romulo Escobar Bethancourt, told Panama's National Assembly August 19, 1977, that "we are not giving the United States the right to intervene." How do you square this interpretation with what U. S. officials have been saying on this point?

A: Escobar, in effect said that the United States has the practical capability -- or as he put it, the right -- to intervene in Panama with or without a Neutrality Treaty. Escobar went on to indicate that by agreeing to the Treaty, Panama had merely formalized something which the U. S. would, as a practical matter be in a position to do in any event.

This type of statement is perfectly understandable in the context of Escobar's defense of the most politically sensitive aspect of the Treaties before the Panamanian Assembly and people. It should also be read in the context of the statement which General Torrijos made at the September 7 signing ceremony: "We are agreeing to a treaty of neutrality which places us under the protective umbrella of the Pentagon."

The important point for the United States is that under the Neutrality Treaty the United States agrees "to maintain" the neutrality of the Canal. Any action which we take to maintain the neutrality of the Canal will be for that purpose only -- not to intervene in the internal affairs of the Republic of Panama.

-2-

Q: Panama's Chief Negotiator, Romulo Escobar Bethancourt, has stated that under the Neutrality Treaty United States vessels have no preferential rights with respect to transit. Yet United States officials maintain that expeditious transit equates to preferential transit. What does the Treaty really mean?

A: Escobar stated that the United States had proposed preferential transit for U.S. warships through the Canal. The Panamanians, he said, could not permit privileged passage because this contradicted the non-discriminatory concept contained in the Neutrality Treaty. He then stated "The understanding is that they will have the right to a speedy passage - the speediest possible."

This is precisely what the United States negotiators had in mind. So there would not appear to be any differences between the two parties on this point.

October 3, 1977

-3-

EXCERPTS FROM ESCOBAR STATEMENT RE NEUTRALITY

"The criticism being made against [the Treaty]...by a number of people who like to nitpick is that we are giving the United States the right to intervene in our country after the year 2000. Those people believe that the right to intervene is granted, but nobody grants big powers the right to intervene. They intervene wherever they damn well please with or without a pact." "But there are people who believe it is articles in a code which tell a country whether or not it has the right to intervene. They do not know that it is the bayonets and cannons and the atomic bombs which give a country the right to intervene. A country like the United States can land its troops in Panama whenever it pleases after 2000 with or without a neutrality pact." "This is reality. In other words, with the neutrality pact we are not giving the United States the right to intervene." "To be even more frank, they do not need that neutrality pact to tell them whether or not they may intervene. They need it to show their Congress; in order to be able to tell their Congress: 'Look, we are turning the Canal over to the Panamanians, but we still have the right to watch over them so they behave.' That is truth."

(Statement to the National Assembly of
Community Representatives, Panama,
August 19, 1977)

10/2

122

Q: Panamanian negotiator Romulo Escobar has stated that under the Neutrality Treaty Panama does not have any obligation after the year 2,000 to keep the Canal open if it is no longer economically viable. How can you maintain that the Canal will always be available for our shipping and the shipping of the rest of the world in light of this statement?

A: Article II of the Neutrality Treaty states that "the Republic of Panama declares the neutrality of the Canal in order that in time of peace and in time of war it shall remain secure and open to peaceful transit by the vessels of all nations . . ." So we would not agree that Panama has no obligation to keep the Canal open.

Panama derives considerable economic benefit from the operation of the Canal. The $250 million in yearly benefits represent approximately 12% of Panama's GNP. Panama has a vested interest in keeping the Canal open and economically viable.

In drafting any treaty, it is not possible to take into account all possible contingencies which might arise in the future. The best alternative is to adopt language which is sufficiently flexible so that it will cover a number of contingencies. In this instance, it is, of course, not possible to predict with accuracy what the economics of maritime transportation will be several decades from now. Should the Canal at some future date prove to be operable only at a financial loss, we would anticipate, in light of the obligation contained

-2-

in the Neutrality Pact, that consultations would take
place between the United States and the Republic of
Panama with respect to actions which might possibly
be taken. The views and interests of each nation
would be an important part of such consultation.

10-7-77

123

Q: How will the War Powers Act affect our actions under the Neutrality Treaty?

A: Under the Neutrality Treaty, the United States is in a position to take such action as may be required to maintain the Canal's neutrality. Such action by the U.S. Government could involve various measures, up to and including the use of armed force.

However, the Neutrality Treaty does not mean we are obligated to take any specific *type* of action in any given situation that might arise.

Actions of our Government would of course be taken in accordance with our own constitutional processes. We would not be bound by this treaty to use troops irrespective of those processes.

10/1/77

124

Q: Can forces other than Panama's be used under the Neutrality Treaty to maintain the Canal's neutrality regime?

A: Panama and the U.S. are allies under the Inter-American Treaty of Reciprocal Assistance. It is reasonable to expect that in the event of a threat to the neutrality of the Canal, both parties would seek the assistance of their other allies under the Rio Treaty. However, the Treaty does not preclude the U.S. from acting on its own if that should appear necessary in a given situation. Until the year 2000, the U.S. will maintain forces in Panama and have primary responsibility for Canal defense. Thereafter, Panama would be precluded by Article V of the Neutrality Treaty from allowing any foreign nation to station troops in Panama or maintain military bases there.

10/1/77

125

Q: What happens if a ship carrying missiles or other weapons to a potential Latin American adversary of ours (e.g. Cuba) seeks to transit the Canal? Will the situation be changed by the new treaty?

A: The 1901 Hay-Pauncefote Treaty between the U.S. and the U.K. established the basic framework for the Canal's neutrality which has been in effect since the Canal was opened. That Treaty provides that the Canal shall be free and open to ships of all nations without discrimination. We have taken the position in the past that during periods in which the United States is at war with another country, the Hays-Pauncefote Treaty does not preclude us from denying use of the Canal to our enemies. The case has never arisen in practice since no enemy ship has ever reached the Canal and asked to transit in war-time.

However, we have never considered that in any other circumstances we would have any right to exclude vessels, or cargoes from the Canal on the grounds that they were bound for potential adversaries. The new Neutrality Treaty is even more explicit than Hay-Pauncefote in this respect. It requires that the Canal be open to vessels of all nations without

-2-

Q's and A's

discrimination in time of war as well as in
time of peace. We and Panama would therefore
continue to be bound to transit vessels irres-
pectiye of our relations with the country to which
they are destined.

10/1/77

127

Q: How much will be saved by Panamanian assumption of public services? In other words, how much are we presently paying for the services and how much will we pay?

A: The Canal Zone Government's estimated costs for public services -- i.e., civil functions -- is $49.1 million in fiscal year 1978. Under the new treaty, the Panama Canal Commission will pay Panama $10 million per year for services that would have cost the Canal Zone about $18 million. The remaining services will be provided by Panama and will not be subject to reimbursement. It is assumed that the public services provided by Panama and to be reimbursed by the Commission will be provided at less than the cost to the Canal Zone Government, largely because of lower wage rates.

10/5

128

Q: How much will it cost Panama to provide public services?

A: It is difficult to say what the exact costs to Panama will be. Hopefully, it will be less than costs for the same services to the Canal Zone Government, now estimated to be about $18 million. Because of this uncertainty, we have agreed in the treaty to a $10 million annual payment, subject to periodic revisions to reflect actual costs to Panama.

129

Q: What is the net financial gain to Panama from the public services payment?

A: We expect that there will be little, if any, net financial gain to Panama since the public services payment is a reimbursement for the cost of services. The functions of the Canal Zone Government will be gradually assumed by Panama during the transition period. Thus, the Panama Canal Commission will still be performing some of the same services for which it will be paying Panama in the early years. Even so, Panama should realize little financial gain from such "double payment" because of the initial expenses in the establishment of the Panamanian public administration system in the area of the Canal Zone.

10/1/77

130

Q: Is it correct that the Commission will begin to pay Panama immediately upon ratification of the treaty but that our own services will not terminate for 30 months?

A: We will be paying Panama for public services while they are being transferred to Panama during a 30-month period. The payments will be made each year once the treaty goes into effect. During the transition period Panama will gradually assume responsibility for all public and governmental services now provided by the Canal Zone Government.

10-4-77

131

Q: What are the current projections for Canal revenues?

A: Projections for Canal revenues depend on several factors, such as the extent of toll increases and the sensitivity of Canal traffic to such rate increases. Current toll revenue estimates for fiscal year 1977 are $165 million. Depending on the levels of Canal traffic and toll increases, toll revenues could range from $220-235 million by the early 1980's. One important factor in the projection of future revenues is the impact of North Slope oil transiting the Canal during the next few years. According to Panama Canal Company estimates, Canal revenues may increase by $9-25 million per year as a result of this traffic.

10/5

132

Q: Why was the Panama Canal enterprise not required to pay the U.S. Treasury interest before 1951?

A: Before 1951, the Panama Canal operated on a different organizational basis than is the case today. Until 1951, the "Panama Canal" was simply another government agency whose operating and capital costs were funded by Congressional appropriations. The old Canal Zone Code did not require payment of interest to the U.S. Treasury; therefore, no such payments were made. In 1951 the canal enterprise was reorganized into the Canal Zone Government and the Panama Canal Company, the latter being a self-sustaining government corporation. The new Canal Zone Code required that the company pay an interest return on the investment of the United States in the Panama Canal, and such payments have actually been made since that reorganization.

10/1/77

133

Q: How were the "replacement costs" of the Panama Canal and the Canal Zone military installations calculated?

A: If the existing canal were constructed today, it is believed that it would cost almost the same as it would cost to build a sea-level canal (approximately $5.3 billion). The replacement cost for the property, plant and equipment of the Panama Canal enterprise is estimated to be $3.573 billion, and was calculated by the Panama Canal Company on the basis of purchase price plus inflation considerations.

The replacement costs of the military facilities are estimates provided by U.S. Southern Command in July 1977. A/recent estimate puts these costs at just over $1.5 billion.

10/5

134

Q: What is the status of the $15-million Housing Guarantee currently considered by A.I.D.? Is it part of the economic cooperation package?

A: No, it is not part of the economic cooperation package. This guarantee, whose purpose is slum upgrading and home improvement, has just been authorized by the Assistant Administrator for Latin America.

10/2

135

Q: How much of the original cost of the Canal has been recovered by the U.S. Treasury?

A: The answer depends greatly on the accounting method used to figure it.

The Canal originally cost $387-million. That figure is only a portion of the gross investment from the Treasury, however. Funds and property transfers, including appropriated funds, to the Canal enterprise totalled almost $2-billion.

The Canal was not required to pay interest on this investment to the Treasury before 1951. Since then, interest on the net investment of the U.S. Government, as recorded in the accounts of the Panama Canal Company, was $269,080,331.35 (fiscal years 1952-76). Except for $7,356,656.12 withheld as "unearned" in Fiscal Year 1976, all of this was actually paid into the U.S. Treasury by the Panama Canal Company.

The total computed interest on net direct investment of the U.S. Government in the Canal since 1904 is $642,523,318.85 -- this includes some $373.4-million for the years prior to 1951, which was computed but not actually paid into the Treasury.

Different methods of computation, therefore, can produce different answers to this question. For example, the GAO requires the Panama Canal Company to include the following

10/1/77

- 2. -

[10]

"costs" in the investment computation:

- interest to the Treasury before 1951 (even though the Canal was not required to pay it);

- interest return on the U.S. investment in the Canal Zone Government and the Thatcher Ferry Bridge (even though no such payment is required or made); and

- the interest actually paid since 1951.

Using the CAO method, the investment of the U.S. Government is increased to the point that the "unrecovered" balance is $752-million, a figure which has been reported to Congressional committees in the past.

However, another method gives a different result; for example, a comparison of the net balance of funds paid by the Treasury, and the amounts actually recovered from the Canal operation, since 1904 is as follows:

Gross Investment from the Treasury $1,974,000,000
(funds and property transfers
including appropriated funds)

LESS Gross Payments to the Treasury 1,915,900,000
(deposits and deposit credits
from all sources including
interest return to the Treasury
since 1951)

EQUALS Net Unrecovered Balance $ 58,100,000

This does not include U.S. investment in Canal Zone military installations, and is not an audited statement

- 3 -

or presentation of funds and property by normal U.S.
Government accounting methods. But it does illustrate
the various ways in which this question could be answered,
depending on the accounting method used. Using the latter
presentation, our unrecovered investment in the Canal is,
by comparison with the size of the total investment,
relatively small.

136

Q: Are there any differences between the U.S. and Panama on the treaty provisions on the sea-level Canal? Panamanian Chief Negotiator Escobar commented that the United States did not have the exclusive right to build such a canal in the treaty.

A: There are no differences between the two countries on this matter. Dr. Escobar's comments on this point were made before the part of the treaty dealing specifically with the sea-level canal had been finally agreed. His statement may have reflected Panama's view at the time it was made. But the specific language of the treaty was actually negotiated thereafter, and there is full agreement on that provision as it exists now in the treaty itself.

10/1/77

137

Q: What has the Department of State done about the environmental effects of the Panama Canal Treaties?

A: The Department has prepared and issued a draft Environmental Impact Statement which assesses the potential environmental impacts associated with the implementation of the new treaty. When comments from the public and from other government agencies have been received, a final EIS will be issued. The draft EIS notes that the U.S. and Panamanian Governments commit themselves to implement the treaty in a manner consistent with protection of the environment. A Joint Environmental Commission will be set up to monitor these matters. The Canal Treaty also includes a variety of measures to protect the Canal watershed and ensure adequate sanitation.

10/1/77

138

Q: Why wasn't the Environmental Impact Statement issued earlier so that environmental considerations could be included in our negotiating positions?

A: It was difficult to prepare an assessment of the probable environmental impacts of treaty provisions before the texts of the treaties were definitely agreed upon. There have been complaints that the Treaty texts were not included in the draft EIS, but this would have delayed the EIS' issuance. The draft EIS shows that environmental considerations were reflected in our negotiating positions -- witness the Joint Environmental Commission and the agreement on the Barro Colorado Nature Monument as examples.

10/7

139

Q: Does the draft Environmental Impact Statement assess the impact of the Treaty upon the environment of Panama?

A: Yes, the draft EIS devotes an entire section to the impact of actions required by the Treaty in Panamanian land and water areas. It discusses Panamanian Government plans for removing squatters from Canal watershed areas and for resettling them. Panamanian planning for sanitation projects is also reviewed.

10/5

140

Q: What are the major environmental impacts of the new Canal Treaty?

A: As noted in the draft EIS, the key elements of the environment which will be affected by the Treaty are the tropical forests in the Canal Zone (with their flora and fauna), and the economic and social dislocation of those employed in the operation of the Canal. The draft EIS discusses measures which will be taken to protect the forests in what is now the Canal Zone, and in the Canal watershed. It also discusses steps to preserve the rights of displaced Canal employees, through such measures as re-employment by the Government of Panama or the US Department of Defense in the Canal area, early retirement, or preferential arrangements for obtaining other US government positions.

10/2

141

Q: What are the areas in which the United States has use rights?

A: Article III.2.a of the Treaty, in conjunction with the Agreement in Implementation of Article III, grants the U.S. the use of various areas and installations (including the Canal) for the purpose of the management, operation and maintenance of the Panama Canal. Article IV, in conjunction with the Agreement in Implementation of Article IV, grants the use of other areas and installations for the protection and defense of the Canal.

Under the Treaty and related agreements, the United States has the use of four principal types of areas and installations:

1. The Canal Operating Areas, described in paragraph 1 of Annex A to the Agreement in Implementation of Article III.

2. Housing Areas (dedicated to the primary purpose of Housing U.S. citizen employees and their dependents), described in paragraph 2 of Annex A to the Agreement in Implementation of Article III.

3. Defense sites, described in paragraph 2 of Annex A to the Agreement in Implementation of Article IV.

4. Military areas of coordination, including training areas and military areas of coordination for housing, as described in paragraph 3(a) of Annex A to the Agreement in Implementation of Article IV.

10/1

143

Q: Won't the surrender of the Canal set the stage for giving up Guantanamo in order to appease Castro?

A: First of all, we are not surrendering the Canal.
We will be operating it until the year 2000, and
thereafter we will have some very important rights
with respect to it.

As for Guantanamo, the treaty and lease under which
we have its use are valid until the two parties
mutually consent to a change.

We have no plan to withdraw unilaterally from
Guantanamo, and the issue has not been a subject
for discussion. So this is not a problem.

144

Q: Recent congressional testimony indicated that the State Department and the Canal Company have contracted a new study on maximum revenues obtainable from the canal. Should not this study have been made before negotiation of the treaty economic arrangements with Panama?

A: The economic positions of the U. S. negotiators were based on existing canal revenue studies and careful analysis by the negotiating team which was aided by experts from within and outside the government. The purpose of the study now under preparation is to measure the impact of the completed treaty on the future of the canal operation and to help plan the structure of the new Panama Canal Commission. Obviously, this could not be done until after all the terms of the new treaty were negotiated and their full impact could be measured.

# Panamanian Economy Fact Sheet

## Growth

The Panamanian economy has been stagnant for the last three years. Real GDP growth dropped from an annual average rate of 7.5 percent between 1966 and 1973 to 2.6 percent in 1974, 0.6 percent in 1975 and zero growth in 1976 to a level of about $2 billion or about $1,200 per capita. This economic downturn partly results from the impact of the world recession and oil crisis, but it is also attributable to domestic factors.

## Investment

Private investment has dropped dramatically since 1973 because of weak demand, high production costs, declining labor productivity and uncertainty regarding the Canal negotiations. In addition private investment has been dampened by the depressed state of the construction sector which, following a building boom in 1971-73, remains overburdened by a surplus of high-cost residential housing. In this setting, the acceleration of public investment by 80 percent in 1975 to 55 percent in 1976 merely served to offset the contraction in private investment. The increase in public sector spending was accompanied by a reduction of bank credit to the private sector (an average annual increase of 47 percent from 1971-73 to 5 percent in 1975-76), which reinforced the recessionary trends of the period.

## Employment

Unemployment was estimated at 6.5 percent in 1976. Rising labor costs discouraged employment creation, but the upward trend in wages slowed to 5 percent in 1976. Labor Code revisions at the end of 1976 will tend to further dampen upward pressure on wages.

## Public Finance

While public sector expenditures increased in an effort to stimulate the economy, revenues stagnated resulting in a growing public sector deficit of about $300 million in 1976 which has been financed mainly by commercial borrowing. Public sector debt stands at about $1.5 billion of which almost half is owed to commercial banks. Almost two-thirds of public sector external debt is now in the five to ten year maturity range, despite large increases in long-term borrowing from international financial institutions. Over two-thirds of the public sector debt has been financed abroad.

-2-

Total public sector debt service is projected at about $175 million in 1977. Of this, $110 million is the direct responsibility of the Central Government, representing some 32 percent of Central Government revenues.

Panama has introduced a number of new tax measures designed to increase revenues. The government has reported that the new measures yielded nearly 20 percent increase in revenues during the first seven months of 1977. The new taxes were accompanied by an increase in incentives designed to stimulate non-traditional exports and employment.

## Balance of Payments

Panama's balance of payments traditionally showed a large trade deficit of about $400 million in 1976, but this was partly covered by substantial service exports. Provisions of goods and services to the Canal Zone gave Panama a positive balance with the Zone of $225 million in 1976 ($50 million in goods, $175 million in services).

9/22/77

-2-

Cabinet Decree 238, July 2, 1970:

-- Establishment of a Banking Commission to monitor Panamanian banking. (Note: Panama has no central bank.);

-- Power of the Commission to issue banking licenses; and

-- Establishment of legal reserve and asset requirements.

(Since the 1970 Decree the number of banks in Panama has increased by more than 100 percent.)

9/21/77

# Panama Canal Treaty
## Economic Arrangements Fact Sheet

### 1. Annuity Provisions (Article XIII)

The new Panama Canal Commission shall pay Panama the following three annual payments exclusively out of Canal operating revenues:

a. 30 cents per Panama Canal ton transitting the Canal (This rate will be readjusted during biennial periods on the basis of the wholesale price index of total manufactured goods of the U.S. beginning 5 years after entry into force of the treaty.);

b. $10 million; and

c. Up to $10 million to the extent Canal operating revenues exceed expenditures.

### 2. Payments for Public Services (Article III)

The new Panama Canal Commission and its U.S. citizen employees will be exempted from taxation by Panama. The Commission shall reimburse Panama $10 million for the cost of municipal public services; i.e., police, fire protection, street maintenance, street lighting, street cleaning, traffic management and garbage collection. Every three years that cost will be reexamined to determine whether an adjustment of the payment should be made.

### 3. Economic Cooperation Outside the Treaty

Outside of the treaty, the United States has pledged its best efforts commitment to provide Panama with an economic program to promote its economic stability and development under existing statutory programs. Each element of the program would provide non-concessional loans, credits or guarantees and would require private sector participation. The economic cooperation program over 5 years would include:

- up to $200 million in Export-Import Bank credits;

- up to $75 million in A.I.D. Housing Guarantees; and

- $20 million in Overseas Private Investment Corporation loan guarantees.

Panama will also receive up to $50 million in foreign military sales credits over a period of 10 years, under existing statutory programs, to improve Panama's ability in the Canal's defense.

9/14/77

Miscellaneous Values of the Panama Canal

(Source: Panama Canal Company)

1. Original Cost of Building the Canal: $387 million

2. Original Cost Value of the Panama Canal Enterprise (4/1977)

| Description | Amount |
| :--- | :--- |
| -- Lands, titles and treaty rights | $ 14.7 million |
| -- Interest during original construction | 50.9 million |
| -- Canal excavation, fills and embankments, dry dock excavation | 324.9 million |
| -- Canal structures and equipment | 203.5 million |
| -- Other Marine facilities | 29.6 million |
| -- Supporting and general facilities | 176.7 million |
| -- Plant additions in progress | 25.1 million |
| -- Schools, hospitals and other facilities | 111.9 million |
| -- Other | 55.8 million |
| | **$993.1 million** |

*Includes $10 million paid to Panama under the 1903 Treaty.

3. Book Value of the Panama Canal Enterprise (Plant and Equipment (6/30/75))

| Description | Amount |
| :--- | :--- |
| -- Panama Canal Company | $501.8 million |
| -- Canal Zone Government | 59.6 million |
| -- Total | $561.4 million |

4. Replacement Value of Canal Operations (including armed force)

| Description | Amount |
| :--- | :--- |
| -- Property, Plant and Equipment | $ 3.573 billion |
| -- The Panama Canal | 5.000 billion |
| -- Military, naval and air plant | 1.245 billion |
| | **$ 9.818 billion** |

5. Value of Unused Canal Zone Land: $115 million

6. Annuity Payments to Panama since 1903: $ 70.5 million

7. Canal Zone Gross Payments and Income Flow to Panama**

| 1975 | 1976 | Since 1963 |
| :--- | :--- | :--- |
| $253.2 million | $243.1 million | $1.8 billion |

** Includes the annuity, wages and salaries to Panamanians, direct purchases, retirement payments and resident expenditure.

September 1977

FACT SHEET

# UNITED STATES MILITARY PRESENCE IN THE PANAMA CANAL ZONE

## 1. ORGANIZATION:

a. The Headquarters of the U.S. Southern Command is located at Quarry Heights overlooking the Bay of Panama on the Pacific side of the Canal.

b. USSOUTHCOM Headquarters was reorganized in 1976, reducing manpower authorization from 200 to approximately 150 personnel. The Commander in Chief is a U.S. Army three star general, while his Deputy Commander is an Air Force brigadier general.

c. Major in-place forces are a U.S. Army Infantry Brigade and a U.S. Air Force Composite Wing. The Commander, 193d Infantry Brigade (CZ), Commanding Officer, U.S. Naval Station, Panama Canal and Commander, USAF Southern Air Division, are dual hatted as Commanders of U.S. Army, Navy, and Air Force components, Southern Command. There are approximately 9,000 assigned military personnel and an additional 17,000 military dependents and DOD civilians:

d. The major U.S. military base complexes are as follows:

- The Howard Air Force Base/Fort/Kobbe/ and U.S. Naval Station, Rodman Complex.

- The Fort Clayton/Corozal Army Reservation/Albrook Air Force Station complex.

- The Fort Davis/Fort Gulick complex.

- The Fort Sherman Training Center; and

- Several other small military sites.

## 2. MISSION:

The primary mission of USSOUTHCOM and its service components is the defense of the Panama Canal. In addition, USCINCSO is responsible for coordinating U.S. military activities through Central and South America, including:

- Monitoring the Security Assistance-Program for Latin American countries.

- Directing the U.S. military advisory effort in Latin America.

- Directing U.S. participation and support in joint/combined training exercises designed to improve the internal defense capability of the Latin American countries and to develop cooperation between the Armed Forces of the Hemisphere.

- Monitor mapping and charting activities, and

- Directing disaster relief and search and rescue operations.

## 3. TREATY ARRANGEMENTS:

Under the new Treaty the U.S. will maintain the force levels and base facilities required to carry out its primary Canal defense responsibilities.

FACT SHEET

Ownership of Property in the Canal Zone

The United States owns property in the Canal Zone. The facilities used in connection with the operation and defense of the Canal as well as facilities used by other agencies of the United States in the Zone are property belonging to the United States. However, the exact status of the title to much of the land in the Zone is cloudy. We consider that we have good title to that land originally held by the Panama Railroad, which comprises roughly 1/3 of the Zone. About another 1/3 of the Zone is land for which we paid damages to private owners in accordance with a procedure established in the 1903 Treaty. We consider the remaining lands to be public lands of Panama over which we have use rights in perpetuity under the Treaty. It would, however, be practically impossible to determine from the available records the precise state of the title to any particular parcel of land in the Zone. In addition, Panama has disputed the assertion that we have title to any of these lands.

No land in the Canal Zone has been transferred to private ownership since 1903 with the exception of 4 lots in Cristobal which the Panama Railroad transferred to the Sojourners Lodge of the Ancient Free and Accepted Mason in 1921 pursuant to an act of Congress. However, private persons, organizations and businesses have erected buildings and other improvements on land in the Zone which they do not own, but have had the right to use under land license from the United States. Panama has agreed in the Treaty to recognize under its law their ownership of these buildings and other improvements. If the Government of Panama elects to sell such land, the owners of the improvements will be offered a first option to purchase such land at a reasonable cost. In the case of non-profit enterprises, such as churches and fraternal organizations, the cost of purchase will be nominal in accordance with the prevailing practice in Panama.

September 16, 1977

Fact Sheet

Sea Level Canal Study

Prepared by: Atlantic-Pacific Interoceanic Canal Study Commission

Authorized By Congress - Sept. 22, 1964

Commission Members (5) Designated - April 1965

Final Report Submitted to President - Dec. 1, 1970

Number of Routes Specifically Considered - 8

Including, by location:

Nicaragua and Costa Rica - 2

Panama (incl. Canal Zone) - 4 (including present lock canal route)

Panama and Colombia - 1

Colombia - 1

Principal Conclusions of Commission Report:

1. "The construction of a sea-level canal by conventional means is physically feasible."

2. **Most suitable site:** Route 10 (Chorrera-Lagarto Route) in Panama, ten miles west of present lock Canal (therefore, outside the Canal Zone).

3. **Amortization** of Route 10 construction cost might or might not be possible, but potential national defence and foreign policy benefits justify acceptance by U.S. of substantial financial risk.

4. Cannot count on availability of nuclear excavation technology at this time (1970).

Comparative Sea-Level Canal Cost Estimates

| | Commission Report | Est. 1977 dollars a/ |
|:---|:---|:---|
| Panama Route 10 - recommended route | $ 2.88-billion | $5.29-billion |
| Nicaragua-Costa Rica - nuclear methods (if available) | $ 5.0-billion | n.a. |
| - conventional methods | $ 11.0-billion | n.a. |
| Colombia (Feasible only with nuclear excavation) | $ 2.1-billion | n.a. |

a/ Note: On May 5, 1977, the U.S. Army Corps of Engineers estimated that, adding to this figure additional costs of real estate acquisition and construction of a bypass to facilitate two-way traffic, the total costs of construction of a Route 10 sea-level canal in 1977 dollars would be $ 6.16-billion.

# GOVERNMENT OF PANAMA

## 1. Executive Branch

a. **President** and **Vice President** elected by National Assembly.

b. Constitution recognizes **General Torrijos** as **Maximum Leader** of the Panamanian **Revolution** and gives him various powers for six-year term ending in 1978, including direction of foreign relations and appointment of officials.

c. Torrijos serves as head of government, with the President acting as head of state.

## 2. Legislative Branch

### a. National Assembly

(1) Serves as sounding board for both government and people -- not strictly speaking a legislative body.

(2) Membership: 505 representatives -- one from each of the country's municipalities. Elected for six year terms.

(3) Next election - fall 1978

(4) Powers

(a) Approve or reject treaties -- except Panama Canal Treaty, which under constitution must be submitted to plebiscite.

(b) Declare war

(c) Hear and debate annual reports from each Minister.

### b. Legislative Commission

(1) Proposes legislation

(2) Nine or more members appointed by the Executive, plus President of National Assembly.

### c. Legislative Council

(1) Enacts legislation

(2) Membership: the President, the Vice President, the Ministers, the President of the National Assembly, the

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the members of the Legislative Commission.

3. <u>Judicial Branch</u> - supreme court and lower courts.

4. <u>Political Parties</u>

a. All parties officially banned.

(1) Torrijos suspended organized political activity after coming to power in 1968.

(2) Cabinet decree in March 1969 declared previous parties extinct.

b. Some informal party activity continues.

(1) Liberal and Panamenista (Arnulfo Arias) Parties have recently held open meetings and issued statements concerning the treaties.

(2) Communist Party (officially known as the People's Party) since 1970 operates under informal arrangement in which it supports the Government in return for non-enforcement of the 1953 law which outlawed the Communist Party. Torrijos uses this arrangement to control the PdP closely. PdP maintains low profile; membership is less than 500.

NOT FOR RELEASE

FACT SHEET

Torrijos' Government and Human Rights - Pluses and Minuses

Pluses

-- The Torrijos political system has opened greater opportunities for participation on local political issues to a broad segment of the populace previously uninvolved in politics of any sort.

-- Torrijos' Government has, generally been very reluctant to use even the legal means available to it to restrict human rights, except in political cases where it has been publicly provoked or its authority challenged.

-- Political detention or imprisonment, torture or murder are uncommon or nonexistent, particularly in recent years -- exile is normally the harshest instrument of political repression used.

-- Freedom of individual thought and opinion is generally respected; criticism of the Government and its policies is normally tolerated so long as it does not become public political agitation against the Government's existence.

-- The Government has further relaxed the restrictions it has imposed to permit widespread discussion of the new Canal Treaty.

-- There is considerable latitude accorded to the press, and even more to the broadcast media, in discussing and criticizing Government actions and policies. Recently, this has even extended to Canal Treaty policy. On local issues, this freedom appears total.

-- There is no legal racial discrimination; the Torrijos Government is more open to blacks and other minority groups than any of its predecessors.

-- There is no religious discrimination of any sort.

-- Private property rights are generally respected. Expropriation is limited, and normally equitably compensated. Expropriation for political reasons is constitutionally barred, and this ban is honored.

-- Torrijos' Government has greatly broadened socio-

NOT FOR RELEASE

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economic participation in the "system", orienting government assets and services toward a much broader geographic and economic spectrum of the population than its predecessors.

-- There appears to have been a steady, if gradual, improvement in the Government's overall pattern of conduct on human rights since it assumed power; forceful repression is much less common, and governmental measures on the whole less harsh.

-- The Government has shown that it is sensitive to legitimate criticism on its human rights record, and -- when it sees the criticism as honest rather than politically-motivated -- is willing to quietly moderate its conduct in this respect.

## Minuses

-- The Torrijos Government is basically authoritarian -- it can legally abridge many rights (even if it normally chooses not to), and it can act extra-legally without significant independent oversight from within its own system (even if it normally shies away from this except under extreme provocation). This capability is itself a significant repressive factor.

-- While not common, abuse of authority does exist, particularly by lower-level police. When it occurs, the system often seeks to ignore it, or cover it up.

-- Exile for political reasons is used by the Government, even if other forms of political repression are rare.

-- Political participation on most issues of national policy is deliberately discouraged; the indirect and locally-oriented representational system, by design, restricts opportunities for direct popular participation on national questions.

-- Political parties operate without legal recognition, both in the formal sense and in the sense that the Government simply ignores them and they have no institutional way to make their weight felt.

-- Much of the press is Government owned and guided. The rest, due to Government warnings about "responsibility" in journalism, is self-censored into habitual blandness.

9/23/77

Human Rights Reports

1. <u>Freedom House</u> (1977)

a. Terms Panama "not free"

b. On basis of political rights (defined as authentic electoral procedures) ranks Panama 7 on a descending scale of 1 to 7.

c. On basis of civil rights (defined as freedom from censorship, open public discussion, independent judiciary, freedom from government terror), ranks Panama 6.

d. Comment: Freedom House rating system leads to some paradoxical conclusions, e.g. Panama is ranked the same as the Soviet Union on political rights.

2. <u>Panamanian Committee for Human Rights</u> (1976)

a. Only a few members of Committee have publicly identified themselves; it appears to be made up mostly of Panamanian dissidents.

b. Published three volumes, only partly devoted to human rights. Much of report was devoted to US ties and aid to Torrijos, economic conditions in Panama, and the canal negotiations.

c. <u>Principal Human Rights Charges</u>

(1) 33 people assassinated by the Government

(2) 81 people exiled for political reasons

(3) 8 persons tortured

(4) "Hundreds murdered, thousands imprisoned or exiled" - statement made by Committee representatives to House Appropriations Subcommittee this year.

d. Analysis of Committee's charges

(1) Bulk of Committee allegations are from 1968-72 period.

(2) <u>Department</u> has been <u>unable to confirm</u> many of the <u>allegations</u> of murder and exile, and none of those involving

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tortures.

3. Amnesty International

a. Report on Torture (1973): most serious allegations of torture in Panama date from before 1970. Single torture allegations noted in 1971 and 1972.

b. International Report, 1975-76: No mention of Panama.

4. Washington Office of Latin America (WOLA) (1977)

a. A church-sponsored organization

b. Concluded that most allegations of human rights violations were politically motivated either to discredit Torrijos Government or defeat proposed canal treaties.

5. State Department Congressional Presentation for Security Assistance Programs

a. Panama does not have record of serious human rights violations.

b. Government basically authoritarian but subject to Constitution.

c. Torrijos Government based on broad support in Panama.

d. Allegations of arbitrary imprisonment, torture, or political murder cannot be corroborated.

e. Press restricted--editors and media made aware of what will be tolerated by government.

f. Other rights generally observed.

EXILES

1. We do not know how many Panamanians are in exile:

a. Some are voluntary exiles

b. Others are not free to return

2. Principal exile groups include:

a. Leftists, many of them former guerrillas against Torrijos, mostly in Mexico.

b. Followers of deposed President Arnulfo Arias, living mainly in Miami.

c. Former National Guard officers who split with Torrijos, living in Miami and Venezuela.

d. Conservatives opposed to Torrijos, mostly in Miami and Venezuela.

3. Most famous exile incidents are those of 1976:

a. 14 persons, mostly prominent businessmen (including Roberto Eisenman), exiled in January 1976 for anti-government statements (at least five have since been permitted to return).

b. 3 persons exiled in September 1976 following anti-government student riots.

4. Torrijos earlier this year gave permission for 82 exiles (most were not prominent, and none were from the 1976 exile groups) to return. Although some exiles have shown interest in this offer, none that we know of has yet returned to re-establish permanent residence in Panama.

5. Torrijos recently offered to allow any exiles named by the Panamanian Student Federation to return. The students are preparing a list but are unlikely to name any of the most prominent exiles, particularly those from the right.

Fact Sheet

Anti-Semitism/Panamanian-Israeli Relations

A. Jewish Community in Panama

1. Relatively small, a few thousand, but supports three synagogue congregations, a school and an active community association.

2. Has traditionally had a secure and accepted position in Panama, particularly since World War II when many European Jewish refugees came there.

3. Community is fairly apolitical, but Jews have occupied high political office, including Vice Presidency (1964-68).

4. There are no legal or administrative restrictions applying to the Jewish community, its members, or their conduct of their activities, which discriminate between Jews and any other Panamanians.

B. Recent Anti-Semitic Incidents

1. Perez-Herrera letter to Government of Kuwait:

a. Carlos Perez-Herrera is a GOP official and Torrijos' cousin. He is a former priest, now a well-known leftist.

b. Letter attested--incorrectly-- that there was no "Jewish" involvement in a major Panamanian dam project.

c. Perez-Herrera said publicly that he signed it in effort to find jobs in Kuwait for Panamanians.

d. Letter was disavowed as GOP Policy by Minister of Finance.

2. Two incidents in 1977 of anti-semitic leaflets and swastika-painting.

3. One rabidly anti-semitic newspaper article; same paper printed several rebuttals to it.

### C. Torrijos' personal ties with Jewish community

1. Father-in-law is Jewish

2. Children attend school operated by Jewish community (Albert Einstein Institute).

3. Has normally kept himself personally accessible to Jewish community leaders, and is considered by them generally responsive to their concerns.

### D. Panamanian-Israeli Relations

1. Israel has had several technical assistance projects, and Israeli advisers, in Panama.

2. Israel has been (1972-73) one of Panama's few non-U.S. arms suppliers (commercial sale of light machineguns and light mortars)

3. Panama has consistently voted against

Zionism-is-racism and similar anti-Israel resolutions
in United Nations, and publicly opposed anti-Israeli
positions in meetings of Non-Aligned Movement.

4. Torrijos has accepted an invitation to visit Israel in late September of this year.

Fact Sheet

Panama and Libya

1. Libya and Panama have diplomatic relations but maintain no embassies

2. Torrijos visit to Libya (May 1977)

a. Issued several non-substantive communiqués

b. Discussed:

(1) Exchange of military training

(2) Possible construction of oil refinery in Panama and preferential sale of Libyan oil to Panama

(3) Possible establishment of Libyan bank in Panama

c. To date no implementation of any of these proposals.

c. But Panama continues to maintain diplomatic relations with Seoul, not with Pyongyang

3. People's Republic of China: occasional trade missions and small amount of trade

4. Yugoslavia: several technicians worked on recently completed major hydroelectric program

Fact Sheet

Panama and the Non-Aligned Movement

1. Panamanian membership in Non-Aligned Movement

a. Admitted at Lima in 1975

b. Torrijos attended Non-Aligned Summit in Colombo in August 1976

2. Panamanian strategy in Non-Aligned Movement

a. Primary objective--obtaining support on the Canal issue

b. Otherwise, passively accepts non-Aligned consensus in voting in non-Aligned meetings, except anti-Israel resolutions, which it opposes.

3. Bilateral relations with non-aligned countries outside Western Hemisphere are minimal.