PANAMÁ CANAL EXPANSION PROJECT
Panamá City, Panamá, Saturday, September 26, 2009

The only thing most foreigners ever associate with the Republic of Panamá is, of course, the Panamá Canal. It opened in 1914 just as the First World War was beginning and has remained essentially unchanged in concept and construction ever since. In the era of globalisation and mega-ships, all the preconditions for an expansion, indeed a doubling of Canal capacity, have been met: the design and build-contracts have been let; and, preliminary excavations and dredging already begun.

Prior to the Panamá Canal, ships, both naval and merchant, were required to round Cape Horn, so a mid-continental canal would shorten shipping distances and therefore shipping times and costs. The choice of the Isthmus of Panamá appealed because it is the narrowest part of the Western Hemisphere. The Atlantic and the Pacific are separated here by only 50 miles (80 Km). But, it was and is not necessarily the only location for such a canal. An alternative route is (still) through the lakes of Nicaragua. The travelling distance between the oceans are longer there, but there would have been far less digging to do. A Nicaraguan canal would have also have been significantly closer to US harbours (such as New Orleans, and Mobile as well as San Francisco and San Diego) and ports in Europe.


The idea for a canal across the isthmus had been around for centuries. One of the big motivating factors in mid-nineteenth century was the California Gold rush and the great U.S. drive into Central America (e.g. Texas and Mexico) and towards the Spanish Pacific coast, particularly California, and the Oregon Territory. At one point a railway was built to transport cargo and passengers across the Isthmus of Panama; this was in itself a great engineering challenge.

De Lesseps’ Canal 1881-1888

The Panamá Canal as we now know it was initiated by the famous French engineer and builder of the Suez Canal, Ferdinand de Lesseps. The Panamá Canal was to be his second great opus vita. Although there was much to recommend the Nicaraguan route and although the U.S.A. supported that one, de Lesseps was the first into the canal-building fray and his tremendous reputation helped to raise the necessary private funding. Work was begun in 1881.

Unfortunately, his concept proved to contain major miscalculations. Contrary to de Lesseps original beliefs, Panamá was no sea-level channel across a flat, easily-excavated, sandy dessert. Critically, it was not after all possible as advertised to investors and governments to build a canal between the Atlantic and the Pacific Oceans without first constructing locks to carry ships over the Continental Divide.

The sheer size and difficulty of the project was also completely underestimated by the French engineers. Especially the so-called ‘Culebra Cut’, i.e., the portion of the Canal to be excavated through the moderately-high range of hills (maximum 110 metres/361 feet) that make up the Continental Divide in the Isthmus. The highly unstable soil mechanics (slippery mud in places, various rock formations in others) combined with the enormous amounts of rainfall proved insurmountable challenges for de Lesseps. Moreover, they did not have the equipment heavy enough to handle the job. In the rainy season the Chagras River flows so intensely that it would have been a serious hazard to shipping if allowed to flow through the Canal. It would have to be diverted. Finally, the French also had no concept of how to deal with such devastating tropical diseases as malaria, yellow fever and dengue; the science here was simply not available when they began. The death rate amongst the largely Caribbean and Southern-European workers was high. By all measures therefore, Suez was a snap by comparison to Panamá. The French were simply not up to it as engineers, equipment manufacturers, scientists, doctors and managers.


The result was that, although it was actually begun physically, the whole French effort collapsed under the weight of its own deficiencies. By 1889, after eight years of work, construction costs had far exceeded the funds available. The bankruptcy exposed not only the inadequacies of both de Lesseps and his management; it also threw light on the many national politicians who were corruptly involved with the Canal. A huge scandal with strongly anti-Semitic overtones was unloosed in France. Work on the Canal ground to a halt with only about two-fifths of the project completed and after expenditures of a little over one quarter of a million dollars.

A re-structured company raised more money and re-designed the project to include lift locks and dams. But the French bolt had been shot. Under the pretext of continued work in order to prevent a Nicaraguan alternative from gaining the upper hand and to keep the Columbian concession alive (Panamá was an integral part of Columbia back then), a buy-out were being secretly canvassed. The new engineering studies were useful for the U.S.A. when it bought the assets for $40 million in 18XX and of course the French had actually done a lot of digging already.

The American Canal Project 1904-1914

The ascession of Theodore Roosevelt to the presidency in 1901 changed the U.S.A.’s attitude to Panamá. Roosevelt was an imperialist at heart and viewed Latin America as strategically vital to the U.S.A.’s economic and political future. He blocked the Nicaraguan alternative, the preferred route in America until then, and pushed for Panamá. Negotiations were conducted with Columbia leading to a concession treaty. Meanwhile, however, Washington secretly encouraged local Panamanian-independence advocates and offered them U.S. Navy assistance if they revolted. When Columbia sent troops to suppress the rebellion, the USN blocked their landing. In return and for a payment of $10, a now independent Panamá granted the U.S.A. the Canal Zone in 1904.

It was in May 1904 that the U.S.A. took control of all the French canal assets. The whole project required a complete re-think. Washington wanted a lock-free canal, but the chief Army engineers convinced him that locks were essential. These however required a huge system of dams and artificial lakes. Despite much pressure for civilian contractors, Roosevelt, always strongly behind the project (he even visited Panama in 1906), himself wanted project design and management left solely in the hands of the U.S. Army Corps of Engineers, in other words, it was to be a completely government/military job. In addition to superior design and engineering, better management (e.g. it was completed $23 million under budget, perhpas because the project did not have to pay corporate taxes, dividends or obscene bonuses to senior management) and extremely solid financing (the American taxpayer, after all), a critical success factor was also the victory over tropical diseases. American equipment was much stouter in build and therefore up to the job. In August 1914, just as World War I was breaking out in Europe, the SS Ancón became the first vessel officially to transit the Panamá Canal.

It cost the taxpayer $375 million including the $10 million paid to Panamá and the $40 million paid to the French. On the other hand, a further $12 million was later spent on fortifications. More than 75,000 persons worked on the project, at the peak 40,000. 5,609 workers died from disease and accidents.

The Panamá Canal was not only a technological marvel, it was a very important strategic and economic asset for the U.S.A. The Canal saves about 7,800 miles (12,500 Km) on a voyage between New York and San Francisco. In World War II it was an important naval and military asset. The Canal became and remained a major military and naval base for the USA until the handover at hte end of the twentieth century.

In the face of increasing demands by Panamanians for control of the Canal and despite tough conservative resistance in the U.S.A., President Jimmy Carter finally signed a highly controversial treaty in 1977 whereby control of the Panamá Canal would pass to the Republic of Panamá at the end of 1999. Since then the Canal has been run by the Panamá Canal Authority (ACP). (Professional management of the two ports, Colón and Balboa, was awarded competitively to a Hong Kong harbour-management company, Hutchinson Whampoa. This caused conservatives to suspect Chinese Communist intrigue.)

At the time, many Americans were also contemptuous of Panamanian management ability and of the rampant political corruption: a fiasco was therefore predicted. In fact however, ACP has run the operation exceedingly well. Average transit time is still at about 30 hours but income has doubled; profits have increased disproportionately; traffic has increased; accidents are down. Obviously, much of this improved income has to do with buoyant world markets, the increase in the China-and Far East-trade to the eastern-American seaboard and Europe. This has permitted ACP continually to increase tolls. The Canal represents, dircdtly, about 12% of Panama's GNP and is the source of another similar amount indirectly. Without the Canal living standards would be much lower. Indeed there would be no Republic of Panama at all.

The Panamá Canal Expansion Mega-Project

The structure of global trade and worldwide shipping has forced a new look at the Panamá Canal. More and more trade is being conducted with the Far East and marine architects are designing and building ever bigger ships for all purposes (container and bulk carriers, huge tankers, car carriers, etc.) The old alternative route through Nicaragua was being discussed again.

As result, a new project has been approved by the Panamanian Government, the National Assembly and the people (by means of a referendum carried in 2006 by 77% of the voters) designed to accommodate the super carriers of which there are already some three or four dozen in operation and many more on the books. Two new locks,which will double the size of ships permitted, and a new traffic lane are to be completed by 2014 (100th anniversary of the opening in 1914).

In July 2009, the design and build contract was awarded to a Spanish-led consortium (Sacry Vallehermoso/Spain, Impregil/Italy and Cusa/Panamá; dredging is by Jan de Nul of Belgium) beating out groups led by companies like Bechtel. The project will cost $5.25 billion, all of which must be financed by Canal tolls. The government of Panamá is providing neither funding nor guarantees. Borrowings will total about $2,3 billion and is to be provided by a consortium of quasi-government lenders , mainly various development banks (World Bank, IDB, etc.)with a tenor of twenty years and a grace period of ten years (final repayment by 2029).

There are risks, of course, and critics are keen to point them out.

1.
Faulty design. Bechtel, who admittedly lost out on the bidding, has made this claim in a letter to ACP.
2.
Unreliable forecasts of toll revenues. Revenues and tolls are calculated on tonnage and not Canal passages. ACP’s pro forma cash flows assume a steady increase of income at 3.5% until 2025 both from higher tolls and increased usage once the new locks come into operation. An internal rate of return of 12% has been forecast. Despite a world recession and declining traffic, Canal tolls were in fact raised again in June of 2009. However, ACP has announced that traffic has been stagnating since 2007, a record year. While still insisting on the new tolls, ACP has actually been cutting side deals with individual shipping lines. No one really knows how long the recession will last and its overall impact on the China Trade. Ship-hire stats show a serious decline in demand and many container ships are now being laid up (80 in number as of last January). Worldwide orders for raw materials are off significantly too. New ships under construction are due to come online this year and next and the world’s fleet is expected to increase by 13% over 2008.
3.
Cost overruns. Mega projects have a terrible propenisty to become a lot more expensive than forecast.
4.
Critics say the financing costs (e.g. interest) have not been included in the cash flow forecasts. They (including leading labour unions) also claim that the increased employment figures for the construction ignores the fact that many of the better-paid jobs will go to foreigners. The ACP employs currenlty 35,000 - 40,000. Only 6,000 new positions are to be expected in total.
5.
As fuel prices rise once again after the recent price slump, shippers are looking at different routes round-the-world. Shiplines are beginning to re-route even Panamax-sized carriers (i.e., ships that fit into the present locks) more fuel-efficiently around the Cape of Good Hope on the way back from Asia. Returning to the U.S.A. from Asia via Suez is also an alternative. Even a Northwest (i.e., Arctic) Passage is not out of the question: with global warming now increasingly likely, it would shave 5,800 miles (9,300 Km) off the trip between Asia and Europe. Further increases in fuel prices will only exacerbate this trend. Nicaragua is still talking about a post-Panamax canal costing approx. $20 billion and shaving a day and 800 miles off the NYC-SF run (not to mention that it would double the GDP of Nicaragua and create transiting over-capacity in Central America). The bottom line is that the Panama Canal may not be able to realise toll increases or even keep up the necessary traffic to pay off the debt and make the profits forecast.
6.
Already shipbuilders are bringing new super-carriers - tankers and container ships, bulk carriers - into service that already exceed the new lock sizes. This seems to be a trend. An construction of even bigger locks then now planned would require removal of the current high-level bridges over the Canal and require more dams.
7.
The new double-sized locks are designed to use a minimal amount of freshwater. Nevertheless, freshwater-lake levels are scheduled to go up by 1.5 feet. Ecological critics claim that this brings with it a serious risk of saltwater contamination of Lake Gatun, Panamá's premier source of drinking water. El Niño and global warming will also have impacts, say critics. This year (2009), for example, rainfall is half of normal. Is this a longterm trend?

Conclusion

It looks like the mega project will now go forward whatever the risks. If the world recession carries on or oil prices or some other risk increases, it should be possible to stretch the project; repayment of the $2.3 billion in borrowings does not actually begin for ten years in any case. Borrowings are only half of the projected costs, the remainder being ACP's equity. Of construction costs can be containeed, the project is fairly soberly calculated (less than 50% borrowings). Interest rates down the road are an open question; they are very low at present. AS the original French version of the Canal showed, privately financed mega-projects are inherently riskier and there ususally needs to be a government backer somewhere. Time will tell. Certianly, the Panamanian government would not likely have the resources by itself to pull the ACP's nuts out of the fire in an emergency.

The Nicaraguan card is now highly unlikely to be played given the uncertainties surrounding demand for global shipping and the NW Passage is still along way in the future, one would think. A greatest variables presenting risks to the Panama Canal's financial viability will be the price of oil versus Canal charges and whether the trend to ever-larger sea-borne carriers continues.