Miren Gutierrez*

ROME, Oct 23 2006 (IPS) — In a referendum Sunday Panama unequivocally said ‘yes’ to a massive canal expansion at a cost of half its gross domestic product, maybe more, in investments. With most of the votes counted, about 80 percent of Panamanians seemed to have approved the mega-project.

The winning line of the argument – that of the Panama Canal Authority (PCA) – is that the future of this maritime route depends on the deepening of the navigation channels, the construction of two sets of locks at both ends of the canal, and of a third lane capable of handling large container ships, bulk and gas carriers, and tankers that have previously been too wide. The canal handles nearly 5 percent of international trade.

However, not everyone is happy with the result.

The contest generated bitter confrontation between groups who opposed the project and people who believe expansion will increase its current yearly earnings of 1.2 billion dollars and create thousands of jobs.

Miguel Antonio Bernal, a constitutional lawyer and a leader of the anti-expansion movement, says that the PCA shut the public out of the debate. He said the expansion will actually cost much more than expected, and will not bring in the promised riches.

The 5.2 billion dollar project was unwrapped in April, and is expected to be completed by 2014. The PCA has said the cost would be paid by users of the canal through a graduated system of toll rises, supplemented by 2.3 billion dollars in loans or bond issues.

It will be the biggest construction effort in Panama since the completion of the “path between the seas” by the United States in 1914 at a cost of 352 million dollars.

The canal links the Pacific and Atlantic oceans, lifting ships through a system of locks and artificial lakes, and saving them the trip around the continent. The United States controlled the canal until 1999, when it was handed over to Panama in an accord signed between former U.S. president Jimmy Carter and then Panamanian president Omar Torrijos, father of present President Martin Torrijos.

Operated now by the PCA for the benefit of Panamanian people, the 80km waterway gives passage to about 40 ships daily. The United States, China, Japan, Taiwan and Chile are its main clients.

PCA administrator Alberto Alemán Zubieta says the canal operates close to maximum capacity. A report by PCA director of corporate planning Rodolfo Sabonge estimates that 16.2 percent of the vessels crossing the canal will not get a reservation slot this year; in 2007, the number of ships without reservation will more than double.

Vessels with reservations can get through in about 16 hours, the report says, but the time lag for those without reservation is almost two days on average. There can sometimes be 100 vessels in queue. Six-month advance bookings are standard.

More decisively, ‘post-Panamax’ liners cannot fit through.

At the time of its completion, the locks were big enough to take any vessel of the time. Now only ships classified as Panamax that carry up to 4,000 containers can pass through its locks. This unit of measurement has been a key factor in the design of cargo ships.

But post-Panamax vessels are increasingly in production. More than 60 percent of ships ordered for construction in 2003 were post-Panamax vessels, carrying more than 7,000 standard containers on average, according to the World Shipping Council. The expansion is therefore deemed crucial by the PCA.

Bernal says the plan is too risky. “We don’t want a country at the canal’s service, but a canal at the country’s service,” he said in an e-mail interview.

With an estimated annual per capita GDP of 4,900 dollars, Panama appears to be one of Latin America’s more affluent nations. But income disparity is among the world’s highest. About 37 percent of the population lives below the poverty line, over half of these in extreme poverty.

Many who campaigned against the expansion say the real cost of the project is not clear. There have been contradictory reports on the source of funding.

Alemán Zubieta told IPS in an e-mail interview that “the expansion is estimated to cost 5.25 billion dollars. APC (PCA) personnel developed the costs…based on numerous demand forecasts, under the guidance of premier firms, using sophisticated financial modelling to provide their surveys and estimates.”

But Undersecretary of Defence for the Western Hemisphere Roger Pardo-Maurer said at a 2005 hearing of the U.S. Senate Committee on Foreign relations that “the redevelopment of the Panama Canal is going to be one of the biggest infrastructure projects in history. It is probably a 16, 20, 25 billion dollar project.” A great deal more than the PCA estimates.

Tomás Drohan, former chief engineer of the Panama Canal, says the 5.2 billion dollar price tag is an underestimation. “Adjusting the 1993 tripartite estimate for post-Panamax locks (5 billion dollars in 1990 dollars) for inflation, plus a 50 percent contingency factor gives 12 billion dollars in 2010 dollars,” he said in an email interview.

“Note that the PCA estimate is based on a conceptual design. Conceptual designs have a high risk of being underestimated….Panama should do nothing until a more precise estimate is available, after completion of a detailed, final design,” Drohan said.

Whatever the price, the financial feasibility of the project now depends on whether the canal’s clients are prepared to bear the costs. The Panama Canal Advisory Board, which includes a number of big ship owners, has given its blessing in principle, as long as the increases in tolls are reasonable, spaced out, and transparent.

Among the members of the board are the influential William A. O’Neil, former secretary general of the International Maritime Organisation (IMO) and Wei Jiafu, chairman of China Ocean Shipping Company (COSCO), the biggest user of the canal.

On the other hand, in a feature published in The American Journal of Transportation, Thomas Burke, senior adviser to the shipping company Kawasaki Kisen Kaisha Ltd, said “the carriers are vitally concerned and in no way can assume the entire cost.” Burke was earlier member of the U.S. State Department’s Panama Canal Alternative Study Commission.

“I don’t see how the ocean carriers are going to do it,” Burke said. “Our industry runs in peaks and valleys, and the carriers simply are not going to be able to fund a 5 billion to 6 billion dollar expansion.”

The master plan for the expansion says tolls would be increased by an annual average of 3.5 percent for 20 years. Another 2.3 billion dollars will be needed from 2009 to 2011 to complete the job.

Resolution D-4 of 2004 of the powerful American Association of Port Authorities (AAPA) recommends that “Panama Canal tolls remain at stable and predictable levels to assure maximum use of the waterway.” Bernal says “this resolution shows that the PCA won’t be able to raise the tolls every year as easily as it has made us believe.” AAPA is an alliance of leading ports in the Western Hemisphere.

The industry has not swallowed toll rises well in the past. In June 2002 when the PCA announced an increase of tolls, INTERTANKO – a group representing tankers – and other shipping associations expressed “concern” over the proposal.

Drohan argues that the shipping industry has committed to nothing. When the expansion is completed, it will make new business calculations that may or may not include the canal, depending on the tolls it demands.

“The 600 post-Panamax container ships which exist are all built for non-Panama routes and they are all profitably plying other routes (such as Asia-Europe via Suez, Japan-China and China-California). When Panama post-Panamax locks are inaugurated there will be zero post-Panamax container ships available to use the Panama route,” he says.

“If they (the shipping companies) feel the tolls are reasonable, then they will start ordering post-Panamax ships for the Panama route. It will take about 15 years of canal losses in order to have enough post-Panamax ships available to start making some money. If cost overruns cause high tolls, then Panama will absorb losses forever.”

Bernal wonders why, before embarking on expansion, the PCA has not secured an endorsement deal with the industry similar to the ten-year agreement signed in January by the Virginia Port Authority and the Grand Alliance, which includes giants like NYK Line, Orient Overseas Container Line (OOCL), CP Ships and Hapag-Lloyd.

“No shipping line has signed a throughput agreement with the PCA accepting a 3.5 percent annual increase,” says Drohan. “If there is a cost overrun, then the increase will be even higher. Since the canal customers have no money at stake, while Panama takes all risks, shippers have all the advantages in future toll negotiations with the PCA. Panama would be foolish to build this project until user nations put their own money at risk too.”

The International Monetary Fund (IMF) says the overall effect of the project will be positive. But the IMF also says in a report published January this year that “there is no firm evidence at this stage to judge whether markets would be willing to finance the PCA without an explicit government guarantee.”

Given the canal’s macroeconomic importance, “an implicit government guarantee…may not be ruled out in a hypothetical worst-case scenario, such as a natural catastrophe,” it adds.

The master plan for the canal specifically says that the state will not endorse any loan negotiated by the PCA. Bernal notes that “the PCA has been trying to appear an independent agency, but in fact it isn’t. Any loan requested by the PCA has to be backed by the government.”

With Panama already burdened by a public debt of more than 9 billion dollars, the construction cost would saddle the country with a heavy debt to GDP ratio index. Debt is currently estimated at 64.9 percent of GDP; comparatively Chile’s is 7.5 percent.

For Panama, the social, financial and engineering challenges start now.

*Miren Gutierrez is Editor-in-Chief of IPS. From 1996 to 2001 she was Business Editor of La Prensa in Panama.