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Article Courtesy from
Business Panama
Panama Canal Expansion
Context – Cost & Benefit Analysis - Proposals
by Maurice Bijo, M.Sc. Management Science
Economic and Market Research Consultant
Situation 1 – Positive Trends in Maritime Commerce
With trade liberalization and the rise of international maritime commerce in the
past 20 years, increased trading volumes of a wide range of products, and the
advent of containerization, shipping lines and stevedoring providers have
increased their investments in vessels and ports to provide increased capacity
for their customers. The Panama Canal is currently coping with rising trade
volumes between East Asia and the U.S. East Coast, its main trade route. Because
it is unable to accommodate vessels of capacity greater than 5,000 TEU’s (20’
equivalent units), the Panama Canal is in the process of losing market share to
other trade routes such as the Suez Canal in servicing this trade route.
Vessels that are too large to transit the Canal use
alternative routes to travel form Asia to the East Coast of the U.S. Some will
cross the Suez Canal and traverse the Mediterranean to reach the Atlantic Ocean.
Others will unload their merchandise in the West Coast ports where trucks and
trains will transport them across the country. Growth in Asian exports to the
East Coast has created bottlenecks in the U.S. Pacific ports and stimulated
increased commercial flows via the Panama Canal. Shipping companies are exerting
pressure on Panama to increase the width of the passageway and the size capacity
of the locks in order to allow the transit of larger size boats.
Situation 2 - PCA Coping with Increased Demand- Canal
Reaching Maximum Capacity
In an interview with the Financial Times in December 2004, Alberto Alemán
Zubieta, the Administrator of the Panama Canal Administration (PCA), noted the
Canal is currently working at around 93% of capacity and making investments to
increase its capacity. In 2003, there were more than 13,000 canal transits with
approximately 260 million tons of goods. Other than the program to build new
bigger locks, the PCA will increase capacity in the short term by allowing
larger vessels to transit in the dark via illuminated lock chambers and
deepening some channels. Investments to date with a price tag of $1 billion
include widening of the Gaillard Cut, hydraulic lock systems, and satellite and
navigational technology and should result in a capacity increase to 42 vessels
per day. To date, approximately 38 vessels can transit the Canal in a day and
the average ship pays $32,000 in tolls. The administration plans a traffic
increase to 51 vessels per day by 2020 given an expansion of the waterway.
Situation 3 - Increase of Larger Vessels in World Fleet
The maximum size vessels that can transit the Panama Canal, Panamax vessels,
generally reserved for big bulk carriers like oil tankers, account for at least
one third of the boats crossing the Canal per year. According to the Fairplay
Ship Register, an estimated 600 vessels exist that are larger than Panamax
requirements, amounting to approximately 10% of the world’s active fleet. At the
same time, approximately 31% of the 646 new vessel orders in 2003 are Post-Panamax
and should be ready for service in 2006.
Plan for Panama Canal Expansion
A plan for the expansion of the Panama Canal via the construction of a new set
of locks would decrease the incidence of bottlenecks, lower average transit
times by providing increased capacity and allow for transit of Post-Panamax
vessels.
Multiple studies have been commissioned to compare expansion schemes and select
the most appropriate. Under the most recent plans, a new lane of locks would be
built alongside the existing six pairs, using a water-recycling system in the
medium term in order to manage the raising and lowering of vessels and avoid the
flooding of areas to create reservoirs.
Modus Operandi
A final expansion plan has to be approved by the board of
directors of the PCA, and then face decision by Panama’s cabinet, followed by
approval by the legislative assembly and national referendum. Currently the PCA
is investing heavily in promotional campaigns to inform the populace of the
benefits of increased development of the waterway in order to ensure national
acceptance. Many farmers from the areas of Cocle del Norte, Capira, and Colon
have organized under the group Campesinos en Contra de los Embalses and exerted
strong pressure on the authorities to disclose the plans and studies to date.
Following public sector reforms and public discontent due to the income tax
reforms and CSS reforms, the referendum may be delayed to 2006. A Dichter-Neira
poll taken in August cited a 65% public approval rate for the expansion project.
Good faith and open routes communication are key elements in ensuring the
long-term acceptance and success of this large-scale project.
In order to finance the project, the Canal administrator had
ruled out equity participation from the users (shipping lines and commercial
nations) and increased borrowing by central government from international
financial institutions. Commercial bank credits, bond emissions and increased
canal tolls would be among the principal methods to cover this investment. In
the following section, the benefits, costs, and the funding arrangements of the
project are assessed.
Potential Costs of Panama Canal Expansion –
Increased Public Debt Issuance, Displacement of Farming Communities,
Deforestation
The estimated financial cost of the expansion project is currently in the range
of $6-$10 billion with time to completion of about 10 years. At this cost range,
the expansion project would entail expansive canal deepening to allow for
passage of larger vessels, digging of a channel for locks, design and
construction of lock gates, locks construction, and dams and hydro-electric
operations expected in the Cocle del Norte, Cano Sucio, and Indio Rivers.
The maximum cost of this unique investment in terms of required cash inflows per
year and time to completion should be set taking all variables into account. At
the same time, the repayment period should be estimated in order to evaluate the
financial sense of the investment.
But what of the ecological and social costs that this project
will engender? The water requirement necessary to operate the massive new locks
may in the final analysis require the creation of a new artificial lake by
damming Atlantic-side rivers west of the Canal. This would result in large areas
of farm land being flooded and the transfer of thousands among the estimated
20,000 residents of the Western Watershed as well as deforestation and massive
excavation of lands. For the creation of an Eastern Watershed Area, an estimated
210,000 additional hectares would be required in the province of Cocle,
representing 7% of the national surface area.1
Potential Benefits of Panama Canal Expansion -
Increased Transits, Faster Average Transit Times, Greater Average Vessel
Size→Enhanced Route Competitiveness
In five years, the PCA has already implemented important changes that have
brought benefits to its users and added contributions to its government. For
instance, through various initiatives such as the widening of the Gaillard Cut,
an increase in the locomotive fleet from 80 to 100 units, and the acquisition of
more robust tugs, the PCA had been able to decrease average “canal waters time”
from 31.4 hours to 26.2 hours in the 2002 fiscal year. Users are willing to
absorb higher fees as a result of these improvements. In fact, the PCA increased
fees income on several occasions without suffering great losses in demand. In
the first quarter of 2003 tolls collected by the PCA reached US$171.6 million,
15.8% higher than a year earlier. This reflected the increase in tariffs
introduced in September 2002 and a 4% rise in the volume of commercial cargo
traffic. Also a 4.5% increase in fees for tugboat and line handling services by
4.5% came into effect in July 2003. Finally in terms of contributions, for the
fiscal year ended September 30th 2004, the Canal reported income of more than
$60 million and generated fiscal contributions of $183.7 million.
Canal expansion would additionally provide for increased
daily transits and hence increasing toll revenue significantly in the course of
a year. In an environment of growth of U.S.-China trade and an estimated annual
growth of container cargo commerce of 8.4%, increased capacity will directly
translate into an increase in the number of transits. Also, faster transit times
will translate into preference for the Panama Canal route and increased fees for
given its level of cost effectiveness. Finally, in the case of transporting
goods from the Far East to the Eastern seaboard, the competitiveness of the
Panama Canal route would be enhanced with respect to the multimodal route, the
Cape Horn Route, or the Suez Canal especially in the case of large cargo
vessels. Hence, many international shippers would retain the Panama Canal route
and a great deal of maritime commerce would be rerouted through the Panama Canal
improving the strategic importance of Panama and spurring increased economic
activity. These factors of increased daily transits, faster transit times and
route preference, and allowance of larger vessels would ultimately boost the
annual toll revenue of the PCA through a combination of growth in annual transit
capacity, augmented demand for the route, appropriate toll-raising, and increase
in the average vessel size.
The infrastructure enhancement would also bring about
multiple positive externalities to the commercial and trans-shipment services
sector. It would indeed fortify Panama´s position as the leading handler of
container traffic in the Americas and produce multiplier effects for the ports
and other sectors of the maritime industry.
Funding Arrangements: Accounting for the Negative Externalities of the Project
The argument that the Canal expansion should not be financed in large part with
foreign investment because the canal is inalienable property of the Panamanian
people should be re-examined. Let us note that the very user nations of the
United States and France had financed the dredging and building of the Panama
Canal in order to improve the efficiency of their strategic and trading maritime
routes. The Panama Canal is the property of the Republic of Panama however the
facts that it serves the entire world benefiting all countries and that its toll
revenues are constantly reinvested in Canal maintenance and improvements make it
international in nature.
Currently the top user nations include the United States, China, and Japan,
industrialized and commercially active nations with ample resources for funding
large investment projects. These user nations already invest heavily in large
projects in defense and local infrastructure and have shown a great deal of good
faith in foreign aid programs for social and infrastructure development. There
should be a limited degree of financial participation from the user nations in
the form of grants. The expansion project will already cost the Republic of
Panama, a heavily indebted developing nation in various ways. The costs include
a significant reduction in its territory due to Watershed expansion,
expropriation of an estimated 8,000 campesinos from their productive lands, a
significant decrease in jungle territory and biodiversity, and a possible
lowering of its sovereign ratings category for increased debt emissions (higher
debt service costs). These are all significant negative externalities for the
nation and citizenry in general.
Proposals Re Project Financing and Externalities
Accounting for Cost Overruns and Externalities
• The possibility of cost overruns, damages to the public good, and other
externality costs of Canal development can be factored into all cost estimates
of this large-scale public works project.
Social Responsibility to Displaced Rural Communities
• In the case where the Canal expansion is approved by plebiscite, the PCA can
find ways to properly plan and phase in the migration of the affected
communities to alternative fertile lands, arrange for construction and
infrastructure development and provide monthly income stipends for a minimum
two-year period. Public benefits like better road access, clean and abundant
water, and electricity can be provided to the residents of the Watershed with
the construction of a massive water facility.
Fiscal Contribution Dedicated to Rural Indigent Inhabitants
• A portion of the augmented revenue stream due to increased Canal capacity
could be earmarked for other sustainable development needs of the poor rural
residents in areas like the Indio within the Canal watershed. Most pressing
needs for these communities include health care facilities and treatment,
electricity, school repairs, teachers, potable water supply, phone lines, and
road improvements.
User Funding to Cover Share of Canal Expansion Project
• As it competes with multimodal routes, the Cape Horn Route and the Suez Canal
for merchandise and commodities transport to the East Coast, financing a
large-scale investment solely via increased transit fees may price the Panama
Canal route out of the market. The PCA can allocate user funds and funds or
grants from multilateral institutions to the phased cash inflows required for
the project. Perhaps the PCA could charge large predetermined annual membership
fees over a 10-year period to the users of the new locks according to use of the
facility in order to cover the investment costs.
Increased Toll Revenue from Canal Expansion→ Sustainable Development &
Environment
• The PCA can implement an externality toll to cover the displacement costs,
fund its sustainable development programs and provide ecological reparation
programs to compensate for the damage to the local communities and ecosystem
1 La Prensa, El Post Panamax y el Tercer Juego de Esclusas, September 10, 2004
Article Courtesy of Business Panama
The American
Chamber of Commerce (AMCHAM)
and Deal Inc.
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