Competition

The two main competitors of the Panama Canal are the U.S. intermodal system and the Suez Canal. The ACP notes that the growing trend in the use of Post-Panamax container ships in transcontinental routes competing with the canal is irreversible. The main ports and merchandise distribution centers on these routes are investing in

capacity, location, and maritime and land infrastructures Figure 7 ACP＇s competition rout. Source:

ACP proposal.

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to serve these vessels and to handle their cargo volumes. If this trend continues, by the year 2011, approximately 37% of the capacity of the world’s container ship fleet will consist of vessels that do not fit through the canal, and a great part of this fleet will be placed on routes that compete with Panama, such as the transpacific-intermodal route and the Suez Canal route (13).

The proposal identifies other potential routes for cargo ships between Northeast Asia and the U.S.

East Coast as possible intermodal connections between ports on the Pacific Coast of Mexico or Canada and the U.S., and the development of intermodal systems through the Central American Isthmus. There are additional potential routes that do not have much chance of materializing as competitive routes, such as a hypothetical route through the Arctic.

source: Canadian Geographic Magazine

Figure 8 Rout in the Arctic

On the other hand, hydraulic civil engineer Bernado Mendez and engineer Roberto Méndez, member of SPIA (Engineers and Architects Association of Panama) in “A bad business for Panama” (June, 2006) says that the hypothetical route through the Arctic will be important in a few years due to the influence of global warming. At the moment, the melting I ce caps in Canada's Great North already allow boat traffic in the Northwest Passage. Moreover, based on this global warming trend, it is predicted that by 2035, as the new route between the Atlantic and Pacific through the Arctic will become available, this will reduce the travel time between Europe and Asia by a third.

Furthermore, there is the possibility that there might even be two routes through to Europe and U.S (Figure 8). The advantages of these predicted routes is that they are 40% shorter than through the Panama Canal and, moreover, they require no fee (although icebreakers might be necessary)(14).

15 3.5. Demand opportunity

Figure 9 Maximum Sustainable Capacity Source: ACP proposal.

In an interview with the Financial Times in December 2004, Alberto Alemán Zubieta, the Administrator of the Panama Canal Administration, noted that the Canal is currently working at

around 93% of its capacity and the ACP is 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 Mega Project to build new bigger locks, the Panama Canal Administration will increase the current working capacity in the short term by allowing larger vessels to transit outside daylight hours 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 to increase traffic to 51 vessels per day by 2020 by expanding the waterway (15).

Moreover, the maximum size vessels that can transit the Panama Canal, Panamax vessels, generally reserved for big bulk carriers, such as 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 exit which 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.

Based on ACP's projections, the driving forces of containerized cargo growth are: (1) world trade growth; (2) growth of containerized cargo as a percentage of world trade; (3) manufacturing relocation to the northeast Asia, particularly to China; and, (4) regional and intraregional demand growth. Therefore, with a 3.5% annual increase in the Canal’s tolls would result in a doubling of present tolls by 2025. In the most probable scenario, Canal containerized cargo will increase at an average annual rate of approximately 5.6%, from 98 million PCUMS tons in 2005 to nearly 296

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million in 2025. In the highest growth scenario, containerized cargo volume would grow to reach 345 million PCUMS tons in 2025, and in the lowest growth scenario it would reach 279 million PCUMS tons in 2005 (13).

On the opposition’s side, Roberto Méndez, ( June 2006) says that these predictions, such as a Post-Panamax future preference for the Asia –Panama-U.S route, over the Suez route, which offers the advantages of commercial opportunities in India, Arabia, Italy and Singapore, are not reliable. This is reflect in the figure 10 by ACP – RK Johns & Association data about the Panama Rout and Suez Rout (14).

Figure 10 Information of Vessel through Panama and Suez rout. Source:

RK, Johns , Association

3.5. The capacity challenge.

According to the expansion document, the Canal will reach its maximum sustainable capacity between the years 2009 and 2012. Once it reaches this capacity it will not be able to continue to handle demand growth, resulting in a reduction in the competitiveness of the Panama maritime route. The proposed expansion of the Canal by the construction of a third set of locks will allow it to capture the entire demand projected through 2025 and beyond. Together, the existing and new locks will have approximately double the capacity of the present Canal (see figure). With the third set of locks, the expanded Canal will be able to transit over 600 million PCUMS tons annually. This represents approximately twice the capacity of the current Canal, and it is sufficient to meet demand beyond fiscal year 2025 (13).

Critics such as former legislator Dr. Keith Holder, co-author of the legislation that created the ACP, point out that canal usage is seasonal and that even during the few months when it is most crowded the bottleneck that slows traffic is not the locks but the narrow Culebra Cut, in which there is a limited capacity for large ships to pass one another (16).

Although the Canal is reaching its maximum capacity, the ACP clarifies that this does not mean that ships will be unable to transit the Canal. However, it does mean that the Canal’s growth capacity will stagnate and that it will not capture additional cargo volumes

17 3.6. Environmental and social aspects of the third set of locks project

Figure 11 Location of third set of lock Project Source: ACP proposal

ACP Master Plan made studies in a diverse area:

Flora and fauna, water quality, populated areas and infrastructures, paleontological resources, cultural and historical resources, excavated material disposition, water supply in function of the construction the new locks. The results of these ecological and social studies are 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. In conclusion, it makes the following blanket statement “It has been found that all possible adverse environmental impacts can be mitigated through existing procedures and technology and no immitigable or permanent adverse impacts on the population or the environment are anticipated”(13).

Those in opposition of the project say that there are a lot of environmental topics to be considered.

For example: the link between El Niño (ENSO) and global warming threat to water supplies. The ACP has commissioned a number of studies by a number of consultants about water supply and quality issues. Eric Jackson (editor of the Panama News internet newspaper) contends that ACP's public statements often do not match the findings of their studies. He says that the Delft Hydraulics, WPSI Inc, and DHI studies all say that no matter what is done to mitigate the

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problem, the water saving basins feature of the proposed new locks would increase the intrusion of salt water into Gatun Lake, from which about the chosen method to partially mitigate this problem is to "flush" the new locks with fresh water from Gatun Lake — but that tends to defeat the proposed new locks’ water saving feature and raises questions about the security of the urban water supply.

3.7. Profitability and benefits

According with the proposal, the cost to construct the third set of locks is estimated by the ACP at approximately USD $5.25 billion. The most relevant program cost is that of constructing the two new lock complexes — one on the Atlantic side and the other on the Pacific side — with estimated costs of approximately USD $1.110 billion and USD $1.03 billion each, plus a USD

$590 million provision for possible contingencies during their construction (13).

Moreover, the third set of locks is financially profitable, producing a 12% internal rate of return.

The third set of locks project is self-financed and its financing will be separate from the Government’s financing. The state will not guarantee or endorse any loans undertaken by the ACP for the project’s execution. With tolls increasing at an annual average rate of 3.5% for 20 years, and according to the most probable traffic demand forecast and construction schedule, the external financing required will be mainly temporary and in the order of USD $2.3 billion to cover peak construction activities between 2009 and 2011. With the cash flows generated by the expanded Canal, investment costs will be recovered in less than 10 years and financing could be repaid in approximately eight years(Figure 12).

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Figure 12 Finance structure of ACP expansion project. Source: ACP proposal, website: www.panacanal.com

What "self-financing" actually means, however, is disputed. At least half of the money needed for the canal expansion project will have to be borrowed, and the ACP does not calculate the interest on that as part of the project's costs, say the opposition.

The ACP's revenue projections are based on suppositions about increase in canal usage and the willingness of shippers to pay higher tolls instead of seeking competing routes, both of which critics question.

The argument by ACP says 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 property of the Republic of Panama however the facts that is 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 (13).

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On the other hand, several professionals with high positions in Panama are not confident in the budget of the Panama Canal Authority. They say, the budget the project is based on contains uncertain projections about maritime trade and the world economy. Humberto Reynolds and Tomas Drohan Ruiz, the former head of Engineering and Dredging of the Panama Canal, say that the project will cost much more than currently budgeted for and that it is too risky. Parsons Brinckerhoff is best known for the Boston Big Dig, which ended up costing three times the estimated amount with several structural and safety concerns. Moore Stephens S.A. Published February 16, 2007 – Panama say that “The cost of the project is one of the most controversial issues. The total estimated figure is US$5,250 million. However, the actual cost of the works as stated in the project is US$3,690 million, to which an estimated amount of UD$530 million is added for inflation and another US$1,030 million for contingencies.”(17)

According to the expansion document, in the year 2017 the Canal may be contributing to the State the amount of US$2,000 million therefore its value would be US$50,000 million. But this is not the final value of the Panama Canal. For the year 2025 when the expansion is complete and operating at its maximum capacity, its estimated contributions to the Panamanian State will be US$4,200 million thus having a value of around US$105,000 million (13).

As per the Proposal for the Expansion of the Panama Canal that the Panama Canal Authority (PCA) published in April 24, 2006, the need of external

financing for the expansion amount to US$2,276 million.

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. Figure 13 Labor Distribution at time ACP expansion Source: ACP information

3.8. Employment generation and economic benefit

Master Plan say that during the peak of construction, which will start in 2007 and end in 2014, as many as 7,000 directly-related and 40,000 indirectly-related jobs will be created. And by 2025, as

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many as 250,000 jobs will have been created. Critics dismiss this as pure demagogy, noting that by the ACP's own studies at the peak of construction there will be fewer than 6,000 jobs created and that some of these will be highly skilled posts filled by foreigners because there are no Panamanians who are qualified to fill them.

Moreover, the labor required for construction of the third set of locks will, in its vast majority, be done by Panamanians. To ensure the availability of Panamanian labor necessary for the third set of locks project and its connected activities, the ACP and public and private authorities will work jointly to train the required workforce with sufficient lead time, so that it has the necessary competencies, capabilities and certifications. The amounts necessary to carry out these training programs are included in the cost estimates of the project.

The opposition says, current labor force in Panama is about 1.4 million, out of a population of about 3.2 million. Assuming that the unemployment rate, currently at 8.9 percent, will stay the same or fall slightly, Panama would need a large foreign labor force to fill all the jobs created by the Canal expansion. Critics also claim the project lacks an accompanying social development plan.

3.8. Main Findings

3.8.1 Controversies of Panama Canal

In summary, by a group of Panamanian experts in opposition of expansion of Panama Canal, claims several consequences and problems in the mega project. Some of the reasons that will affect the project are: reduce the contribution from ACP around 20 years; this is going to affect the Panamanian economic on the needs and the resources to development the country. They say, this is going to have a direct effect in different aspects of the country, first, generate very low or negative yield rate, next, become indebted by thousands of million dollars and could aggravate the actual crisis of the National Social Insurance of Panama (CSS), and finally cause serious ecological and social damages. As the result, it will cause delays and interruptions in Canal traffic and cause the Panama route to become more expensive and affect Canal competitiveness(14).

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The opposition considerate ACP has a very optimistic prognosis. Because of that, the Chinese economy will decelerate next decade, the two new Arctic routes will absorb part of the transit. It is not sure will coming of post-panamaxes to panama canal, uncertain infrastructure availability for post-panamaxes in America cost in the future and Panama lose competitiveness with Suez route.

The low labor cost in China is ruining industries and generating unemployment in EU, Europe, and Japan. For this reason, the protectionist, (anti-China- OMC) is making growing political pressure. Moreover, the yuan dollars is going up from initiated to half of year 2005, that will increase the price of Chinese exports. It is grow partner-labor conflicts to internal it of China in farmers against industrial contamination, workers by higher wages, middle-class by democratic liberties and against corruption.

Global warming effects the Artic to create two new routes from Asia transit - EU - Europe that will absorb part of the Asia transit during the next few decades. These routes are 40% shorter than the route via Panama, and is free of tolls, although probably it would be necessary to use icebreakers.

After finishing the expansion of Panama Canal, it is not clear if the post-Panamaxes would prefer a route Asia - Panama – EU, there is no market study that demonstrates it because there is no written commitment (from shipping or the governments) that sustains it. Additional there is no infrastructure in the coast of the EU to be ready to receive Post-Panamaxes.

Using Post-panamaxes ships, the route of Suez offers significant commercial opportunities as they can pass via India, Arabia, Italy, Singapore, and other countries. That seems to demonstrate that in the past, panamaxes have not changed their routes even if there is a cheaper Panama Canal route(14).

Finally, they say that for other considerations, use of reserves of CSS to finance the project partially could aggravate crisis of the regime of CSS, generate employment for the project, on

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average, less than 6.000 direct temporary users per year, the GDP growth for the country is less than 2 percentage in the year for this project compared with the historical rate for Panama which is 4%. The social issue is the dams; thousands of families in that area, would be affected, as well as the ecology. The issues are the inundation of thousands of hectares of land for the construction and the risk of contamination of the lakes or insufficient water to supply bathtubs for the metropolitan sector.

The opposition claims that the only beneficiaries of the project would be some construction companies, banks, lawyers related to shipping; aside from them, shipping and the North American Navy.

3.8.2. Investment opportunities of FDI

The expansion will produce psychological optimism locally and internationally making Panama an important investment target. Under government procurement rules meant to ensure fairness and reliability, the ACP 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.

According to the ACP proposal, contracts related to the Panama Canal operation are:

provisions, equipment, material, construction and consulting. The total value of these

provisions, equipment, material, construction and consulting. The total value of these