Article Courtesy from Business Panama

EXPANSION OF PANAMA CANAL PRESENTS OPPORTUNITIES FOR INTERNATIONAL BUSINESSES
by Alvaro Aguilar Alfu


The Panama Canal is the best-known work feature from Panama. This is because of its reliability as a work of engineering as well as its importance as a gateway for shipment of goods between continents. The Canal is entering a new stage as its administration has passed to Panama and a massive expansion is being considered.

The Canal is a waterway with two lanes of locks built by the U.S. in 1914 able to handle 5% percent of world shipping, including cargo ships of 4,500 TEUs. 12,000 ships cross it every year. However, the number of post-Panamax ships, which size does not allow them to cross the Canal, has increased substantially. The Panama Canal Authority (PCA) embarked on a US$250m program to widen its central path (known as Culebra cut) which allowed 2 ships to cross the Canal and increased its capacity by 20 percent.

The PCA is in charge of running the sets of Canal locks, the waterways connecting them, and a number of power and dredging facilities for its maintenance. Under government procurement rules meant to ensure fairness and reliability, the PCA acquires goods and services from providers all over the world. Ports, facilities and land not directly related to the operation of the Canal have been entrusted by the government to the Interoceanic Region Authority (ARI), which seeks international investors interested in running and improving these assets.

Building improvements for the Canal

The cost of building a third set of locks is expected to run between $4 and $8 billion, according to unofficial estimates and depending on the plan approved. The PCA paid US$3.5 million for studies for the design of the locks conducted by a Belgian-French consortium (Tractebel Development Engineering, Coynet-Bellier, Technum N.V. and Compagnie Nationale du Rhone) under an international tender and the U.S. Army Corps of Engineers (builders of the original 1914 canal). The dimensions of post-Panamax locks would be 61m width by 427m length and by 18.3metres of clearance (compared to the existing 33.5m by 305m by 12.5m) but depending on the results of marketing investigation, post-Panamax locks dimensions might be adjusted.


Other studies have been awarded to international consultants for program
management and project assessment advisory services, as well as to evaluate the potential market for post-Panamax-size container ships, assess the value of the Canal route vis a vis alternate routes, train ACP personnel to forecast trends in maritime trade. An additional task is increasing the inflow of water into the Canal, for which studies conducted have recommended plans for use of reservoir tanks meant to recycle water used after each transit.


Once the PCA board approves a definitive expansion plan, it will be
presented to the President of Panama who will submit it to the Legislature for approval. Final approval would be given by Panamanian voters in a referendum expected to take place in November 2005. The expansion project is expected to last 10 years and require about 10,000 workers.

Financing the improvements

An important challenge for expansion plans is its financing. The main source of revenue for payment of an expansion are canal tolls, which have increased lately. As a government-owned organization dedicated to
operating the 51-mile waterway, neither the PCA nor its parent is capable of providing credit support, leaving little alternative than to take the
project finance route. Under a securitization plan, toll payments would be directed to a separate account controlled by lenders. Funds would be
released for repayment of debt and operating costs. Experts suggest
financing using facilities with volumes of $1 billion, possibly more, with maturities not exceeding 15 years. Multilateral institutions that may be asked to underwrite the expansion and bond take-out would be considered at a later stage.

International investment firms and banks which may have an interest in funding the expansion follow with interest the possible alternatives for financing.



Infrastructure in the Canal area

The Panamanian government has granted 25-year concessions for the
operations of several port and railroad facilities at the Atlantic and
Pacific entrances of the Panama Canal. The concessions have been granted to Stevedoring Services of America, Hutchison International Terminals, and Evergreen, with Kansas City Southern Railways rebuilding a railroad
interconnecting these ports. Foreign port operators have increased the
container transshipment capacity of Panama's ports and turned it into the
leading transshipment operation in Latin America. Goods and services from foreign and local firms have been contracted for expansion plans at US$360 million.

Opportunities in intermodal transportation exist with the opening a logistics center in Colon and the civilian use of the Howard airbase. Both have a landing strip able to accommodate international cargo flights, warehousing facilities, and access to maritime shipping routes. Approval of a new port at Farfan, on the Pacific side, is still pending, as the neighboring port of Balboa reaches its maximum capacity.

Port and railroad activities created new opportunities for companies involved in the logistics and cargo industries, and require services in the areas of telecommunications, engineering, ship repair and maintenance, banking, insurance, training and others.


Telecommunications and Tourism

Thousands of hectares remain available for development in the areas next to the Canal waterway. These were used as military facilities and many remain vacant, available for use by prospective investors. This real estate is managed by ARI, which must approve any feasibility study proposed by investors and agree to any sale or rent of land.

Among the projects under way by private investors we find:
- Manufacturing, warehousing and distribution of merchandise to/from the Americas
- Call Centers for handling of customer service and other telephone operations
- Development of housing real estate for foreign retirees and the local housing buyers
- Tourist centers for fishing, bird-watching, ecotourism and other activities

The fact that the main fiber optic cables connecting the Americas
interest at the Canal has attracted providers of data warehousing services which serve information technology companies and users worldwide. Most providers are located in the City of Knowledge complex, as part of the Panama Industrial Technology Park. Business projects at the Park are grouped into a Biological Sciences cluster (biodiversity, environment, marine and forest resources, aquaculture, tropical medicine and pharmacology, and a communications cluster (information technology and multimodal transportation).

Businesses in the City of Knowledge which serve clients outside of Panama have 25-year renewable exemptions from income taxes, capital tax and other taxes, as well as exemptions from customs duties on materials and equipment needed for their activities.


Alvaro Aguilar (aguilara_5389@yahoo.fr) is an attorney with the Panama law
firm of Fabrega Molino & Mulino, specializing in Business Law and Taxation.
 

Article Courtesy of Business Panama
The American Chamber of Commerce (AMCHAM)
and Deal Inc.

 

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