business & economy

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Business & Economy Briefs

The various economic possibilities could support either optimistic or pessimistic projections

Panama Canal expansion:
the unknown financial factors
by Eric Jackson

The Torrijos administration's Panama Canal expansion plan, according to the Panama Canal Authority's figures, carries a $5.25 billion price tag. That's equal to about half of this country's current annual Gross Domestic Product. Central concerns of skeptics include whether the official cost estimate is accurate and whether the planned method of amortizing the construction price is realistic. As former deputy canal adminstrator Fernando Manfredo has famously and repeatedly warned, "we can't afford to make a mistake."

Because the studies that support the administration's plan are not, as promised, available to the public --- most of them 55,000 pages of studies are in English, a foreign language that most Panamanians don't understand, and to read them one must go to one of only a handful of official ACP information centers, because most of them are not online and many of those that are available through the authority's website are in the form of huge PDF files that all but the fastest computers as a practical matter can't quickly download --- the debate about the contents and validity of the studies has been delayed, although it's sure to unfold over the coming months.

The opening shots of this battle have been fired, though, with Manfredo, former President Jorge Illueca, industrialist George Richa, economist and Julio Manduley and attorney Enrique Illueca releasing a joint statement declaring that the ACP's proposal is "deficient, incomplete and bereft of truth." As an example, these critics said that the proposal does not include the true costs of dredging that will be necessary for the project. But the day that this charge was published, the ACP released a rebuttal by canal administrator Alberto Alemán Zubieta, claiming that its plan includes $820 million for the approaches to the new locks and $290 million for deepening existing channels. Alemán Zubieta called the criticism a "lie."

The experience with mega-projects worldwide, however, generally tends to back the skeptics on the cost question. Some 80 percent of large public works experience substantial cost overruns.

For example, though the Moscoso administration did various things to try to hide them, there were overruns in the cost of the Centennial Bridge, Panama's most recent major public project. Cutting the ribbon on a bridge for which the road surface and lighting had neither been installed nor paid for might have fooled some people, but the results of the 2004 elections and the former president's showing in public approval polls would tend to indicate that Mireya didn't pull the wool over all that many Panamanian eyes by the time she wielded those shears.

Some projects have become legends in their own time for costing more than projected: the tunnel under the English Channel cost so much that it has never been economically viable, and Boston's "Big Dig" freeway under the downtown area has been so expensive that it has destabilized state and local politics.

Moreover, all of the costs to the public sector won't be confined to the canal expansion project itself. Former President Endara has warned that the Torrijos administration's claims about the number of jobs that will be created --- the most optimistic of which are made to gullible foreign media, whose reports get back to Panama via the Internet without going through the filter of journalists who know a bit more about this country --- are themselves likely to be economically destabilizing. The ex-president figures that the promises will bring a flood of people from the Interior into the cities, seeking jobs that won't exist. A banker explained to The Panama News that on the average one should expect five applicants for every single job, and pointed out that the Panama City metro area and Colon are not set up to accomodate so many people, which in turn will lead to social problems that will also impose costs on the government.

Optimists, however, could argue that providing housing and services for a lot of newcomers to the canal area would create a new cycle of economic growth even if there are short term problems.

Many other financial aspects of the plan, however, depend on variables well beyond Panama's control. These are particularly the case when one considers the possible trends in the shipping industry over the next 20 years. The Torrijos administration and ACP say that they will double ship tolls over that time, raising them by 3.5 percent every year starting in 2007, but they have no certain way of knowing how many ships will be carrying how many tons of cargo through the canal.

The official projections, however, are that the sharp growth in traffic over the past few years will continue, and that the cost of the canal expansion will be paid off in 10 years or less. President Torrijos and the team he has sent out to promote the canal expansion plan have repeatedly pointed to the growth in exports from China to ports on the Gulf and east coast of the United States as a key element in the expected traffic growth.

But with higher tolls, will the world shipping industry have an incentive to start looking for alternative routes? "Who knows when the envelope will be pushed too far?" asked Michael Ross, the chief executive of the Norton-Lilly Panama shipping agency and former president of the Panama Maritime Chamber.

That said, Ross told The Panama News that the announcement of incremental toll hikes over a couple of decades is not a bad procedure, and would have been preferable to the sudden sharp toll increases passed a few years ago, because businesses that know well in advance can factor toll increases into their plans. He pointed to fuel prices as a key factor in shippers' calculations, because these drive up the price of taking longer routes around Cape Horn or through the Suez Canal as alternatives to paying increased tolls. A substantial reduction in fuel prices, he said, could drive shippers to revise their calculations.

Economist Mark Weisbrot of the Center for Economic and Policy Research in Washington expects that world oil prices will remain high as long as George W. Bush is president of the United States because his policies of war in Iraq and saber rattling against Iran will effectively keep prices up. But 20 years from now, oil prices are "anybody's guess."

Weisbrot was more definite about the trend in US imports from China. He believes that the current US trade deficit and large-scale borrowing from the rest of the world are unsustainable trends. While he's not predicting an apocalyptic collapse of the US economy, he says "there's going to be an adjustment" that will be accompanied by a lower standard of living in the United States. "For sure, within the next decade the US import market will shrink."

But that shrinkage might be offset by prosperity elsewhere that maintains canal traffic. Will Brazil take off as a major world economic power? It may or may not happen, and if it does the amount of new business that will bring to the Panama Canal would depend on a number of factors. But Weisbrot expects that China will continue its economic growth and that it will become "a huge market for imports from all over" as part of that process. Again, how much of such an increase in imports would pass through our canal would depend on a complex set of factors.

Add unknown future technologies that could affect shipping, the unknown strengths and weaknesses of the competition Panama that will have from old and new routes and other imponderables, and we have parts of the cases for both the skeptics' caution and the proponents' optimism about financing the improvements with higher ship tolls.