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Canal expansion debate at the Hotel Caesar Park
by Eric Jackson

It appears that there are some people in the government and the Panama Canal Authority (ACP) who would like to limit discussion about the Panama Canal expansion proposal to press releases, rehearsed PowerPoint speeches and paid advertising; and on the other hand there seem to be certain opponents of the plan who would confine the discourse to slogans chanted at street demonstrations or pasted or spray-painted on walls. However, there is a large element of Panamanian society, mostly middle class and well educated, that insists on a more enlightening conversation than that.

It's sometimes hard to tell who's who. There are "forums" designed to promote one side or the other while pretending neutrality. There are hardly any individuals who are truly neutral, but plenty of folks willing to set aside their leanings to organize a fair debate. But then at a fair debate the partisans will always show up. Still, there are still some academic institutions trying very hard to get all the issues involved before the public. USMA, Panama's Catholic university, is one of these. So, apparently, is ILDEA, the Latin American Institute for Advanced Studies.

On Monday, May 15 ILDEA hosted a debate about the issues of the marketing assumptions on which the canal expansion plan is based, and upon the plans for financing the project. There will be other debates about the environmental impacts and other issues.

On this night, ACP marketing chief Rodolfo Sabonge and ACP architect Francisco Miguez would speak for 20 minutes each in support of the marketing aspects of the proposal, while brain surgeon and former legislator Keith Holder would have 40 minutes to present the skeptics' side of this. Then the finances of the proposal would be discussed by economist Roberto Méndez and sociologist Marco Gandásegui for the "no" side (20 minutes each), while ACP economist José Barrios Ng would have 40 minutes to defend the plan's monetary aspects. The plan was to have time for questions afterwards, and some back-and-forth debate.

Sabonge, who has degrees from Notre Dame, Miami and the University of Panama, went first. He used PowerPoint and explained the history of canal usage, the way that tonnage is calculated and the different market segments that the ACP serves. A lot of his presentation was essentially an argument in favor of globalization according to neoliberal economic theories, with a warning that the Panama Canal has competition that it needs to take into account.

Container ships, the roll-on, roll-off vessels that transport automobiles and passenger cruisers, Sabonge noted, are market segments that are sensitive to time, and also the most profitable segments of the Panama Canal's business. Grain and ore carriers, on the other hand, are more sensitive to price than time. What that means, he explained, is that the most profitable parts of the ACP's business are likely to find it worthwhile to pay higher tolls in order to get to where they are going more quickly by using the canal, whereas only some of the more marginal segments might be attracted to use the Suez or go around Cape Horn to avoid higher tolls. ("Might," because with today's high fuel prices it's not cheaper to avoid tolls by taking the long way around.)

The big question raised by Sabonge's presentation was on the PowerPoint projections, which showed the steep rise in shipping of goods from East Asia to the East Coast of the United States continuing long into the future. But given that the current imbalance in trade between the United States and China is considered a problem as it is, would it be realistic to project that it would not only continue but grow indefinitely?

Then came Holder's turn to speak. He didn't use graphics, and started out in a roundabout way, noting that his mother was the first non-American teacher in the Canal Zone schools and she taught him to read.

Dr. Holder, who as a legislator helped draft some of the laws by which Panama set up its canal administration, and who held administrative posts with the Social Security Fund and the IFARHU educational scholarship institute, noted that the canal's first major competition was the development in about 1970s of the intermodal sea and land container movement system, which decreased Panama's share of worldwide shipping from 5.6 percent back then to 3.6 percent now.

He noted the history of canal demand and its growth, both in terms of the number of ships and the tonnage of cargo, and how at the 1997 Panama Canal Congress experts estimated that the canal as it then was configured would reach full capacity by 2010. But at that point, he noted a program of more than $1 billion in modernizations was begun to expand the canal's capacity.

Widening the canal is one thing, but a third set of locks is another, Holder argued. He said that the big bottleneck now is that large ships can't pass one another on the curves in the Culebra Cut. "This is what holds back the passage of [Panamax] ships," he said, "and a third set of locks doesn't resolve this."

Holder noted that on the average a bit more than 36 ships transit the canal in a day, and that 3.2 of these on average are Panamax sized. If all the most optimistic predictions that the ACP makes about demand on the East Asia - US East Coast route come true, he argued, that cargo could be carried in just 19 Panamax ships per day, which could be accomodated by straighening and widening the cut.

Holder complained that for years he has been asking the ACP for their projections of how many post-Panamax freighters they would expect to pass through a larger set of locks. "Up to this moment, there has been silence," he said.

He also argued that the Asia to the US East Coast route has competition and with global warming opening arctic routes will likely have more, and that toll increases to pay for the third locks will lead some of this business to choose other, cheaper routes.

Next came Francisco Miguez, whose degrees are from the University of Virginia and Stanford. After a few moments getting his PowerPoint display to work, he argued that the East Asia - US East Coast route is the most important part of the canal's business and it will grow. If the canal doesn't add a third set of locks, he warned, we'll lose 50 percent of this market."

For this he got an ovation --- a large part of the crowd was composed of ACP employees, they mainly sat toward the back of the room, and they were there to cheer their team.

"This project can produce enormous wealth," Miguez told the crowd. He went on to explain the basics of the third locks design, and pointed out that a lot of the excavation has already been done because the Americans started a third cut in the late 1930s. (The project was discontinued as the arms buildup for US entry into World War II became a more pressing American budget priority.)

Miguez then clicked his PowerPoint presentation to the cost figures. "How much will this investment cost?" he asked. It's $5.25 billion, a figure that "includes all costs, including inflation --- absolutely everything." But here Miguez and the ACP display on the screen clearly erred.

Everyone who has dealt with large-scale construction in any capacity will know that the movement of the heavy equipment for such a project wreaks havoc on the roads. Yet there was nothing in the ACP's cost estimate to repair this damage.

But Miguez went on to praise the abilities of the ACP's team of in-house experts and hired consultants and their "scientific methodology" and "serious analysis."

There was a time for interchange between the yes and no sides, which Holder started out by criticizing the ACP figures as "unreal." He criticized the ACP for buying new lights to make the locks more efficient at night, but neglecting to install them. He questioned the Torrijos administration's and ACP's argument that a decision is needed immediately.

At this point Holder was shouted down. A man toward the front got up shouting "point of order" the ACP people in the back all clapped and cheered, and the microphone was given to Sabonge.

Sabonge fired up his PowerPoint, talked about linear systems and saturation models, said that the expansion plan was "validated with real facts," promised that the project would create jobs and complained that he only got 20 minutes to Holder's 40. (Conveniently ignored was the time that Miguez got.)

Part two of the debate began with a 40-minute PowerPoint projection by ACP finance director José Barrios Ng, who described himself as "a Panamanian worried about the future of the country."

"There are many books about projects that failed," Barrios Ng pointed out, "because books about successful projects don't sell.

He noted that there are criticisms, and promised to answer them. He clicked onto a photo of ships lined up outside the canal's entrance --- failing to mention that the current backlog is in large part due to a pilots' "work to rule" slowdown rather than any sharp increase in demand for canal transits.

He played to the crowd in back. "Honor this army of Panamanians" who have been conducting the studies, he urged.

Barrios Ng criticized those who attack the ACP proposal "without having read it." (This reporter tried to download the studies on saltwater infiltration into Gatun Lake cause by locks that have retaining tanks. After more than half an hour on the computer at a very fast Panama City Internet cafe, the first of these PDF documents had not finished downloading. In addition to being mostly in an English language that most Panamanians do not understand, the ACP has essentially blocked access to the 55,000 pages of studies backing the canal expansion proposal by putting them in a computerized format that hardly anybody can download. To attack anybody for not having read 55,000 pages in the 20 days since they had been released to the public was even without the language and access problems created by the ACP a cheap shot, but nevertheless Barrios Ng got cheers from the ACP section when he took it.)

"These numbers have life," the ACP finance director said, putting the cost estimates up on the screen. But again, nothing for road repairs, or if Gatun Lake becomes so brackish that the urban water treatment plants have to be upgraded, or the costs of accomodating a large new temporary construction work force on the Atlantic side where the housing and infrastructure for these people does not exist.

Don't think of this project like the financially disastrous English Channel tunnel or Boston's never-ending "Big Dig," Barrios Ng urged. Think of it instead like China's Three Gorges dam and locks project on the upper Yangtze River.

"We have been conservative" about revenue projections, he said. "It's a good project by a solid enterprise"

Barrios Ng spoke of the cash flow that the new locks would generate for the ACP: "It's a money making machine!"

Turning to the risk factors, the ACP financial chief said that for this project the traditional methods of risk estimates were not used. Instead, he said, the authority used a "probabalistic" method that's a "powerful tool." He compared the ACP to NASA in the risk managment field.

"We don't claim that this project will resolve all of this country's problems," Barrios Ng admitted, but he warned that the country would face disaster if it's rejected. He compared a future Panama that didn't approve the project to the current situation in Cambodia.

Barrios Ng received lots of applause, especially from the back of the room.

Roberto Méndez, the Oklahoma-educated University of Panama economics professor, stepped to the podium to represent half of the "no" side in this part of the debate.

The choice is not this project versus disaster, Méndez argued. The true choice, he countered, is between a third set of locks and rational economic development.

The economist warned against "pilfering" the canal's profits for use in an ill-advised project. He blasted the ACP for not maximizing tolls to what the market will bear, siphoning off too much for privileges for top management and excess bureaucracy, and for retaining hundreds of millions of dollars in cash accounts that he said legally should be turned over to the national government.

Méndez then committed the skeptics' main blunder of the night, trying to make the argument that the third locks is largely for the benefit of the United States. The argument is that the US Navy would be able to get warships that are too big for the current locks through the canal. It's true that the canal expansion would change some US naval equations, but with US warships in all of the world's oceans the Panama Canal is just not the military asset that it was earlier in the 20th century. The argument that Méndez used is something that might be useful to make to student radical groups, to energize them to work hard on the campaign, but the US government's favorable attitude toward this project is based on perceived benefits for American companies in the shipping, ports, construction and financial services sectors, not military imperatives. Moreover, the anti-American card wasn't what people in this crowd wanted to hear, and Méndez got some jeers for his effort.

The economist then went on to address the ACP's profit projections. Accepting the authority's 12 percent figure at face value for the sake of argument, he said it was too low.

Why? Because, Méndez argued, 12 percent is what a Standard & Poors 500 company gets for an intermediate risk investment, but we are Panama and we pay about two percent more in interest on our government bonds, and this is a high risk rather than an intermediate risk proposition.

High risk? How's that?

Méndez referred to the traditional risk assessment techniques that the Barrios Ng said that the ACP didn't use. First, he argued, the cost of the investment has been underestimated. Second, he argued, the ACP's management and the advisors upon whom they rely have conflicts of interest that drive the risk up.

At this second point people in the back started heckling, calling the argument insulting.

The economics prof smiled and began to look a bit more relaxed.

ACP administrator Alberto Alemán Zubieta came to his post from his family company, Constructora Urbana SA, and Méndez said that this and other ties between members of the ACP board of directors and construction or financial services companies is a clear conflict of interest that would be taken into account in any traditional risk analysis. Moreover, he pointed out that as well qualified as the credentials they carry may indicate, experts tend to adjust their analyses to satisfy those who pay them. He cited Arthur Andersen's relationship with ENRON, and all the bad advice that stockbrokers gave to inflate the dot-com bubble as notorious examples.

Closer to home, Méndez brought up the experience of the French Canal. Ferdinand de Lesseps lowballed the cost of that project by 50 percent, he pointed out, "and we all know what happened with the French Canal."

The professor argued that if the ACP is just as wrong as is common in big projects, and the canal expansion costs $7 billion instead of $5.25 billion, then profits go down to three percent "and this isn't acceptable for any investment project."

He went on the attack the heart of the "yes" side's economic argument, predicting that there will be an adjustment in China-US trade in which the Americans will reduce their imports from the Chinese. He predicted that new arctic routes will open and the US intermodal system will be expanded.

A $7 billion price tag and only two-thirds of the growth in usage that the ACP projects, Méndez argued, means that the canal expansion would become a money-losing proposition.

Then came Marco Gandásegui, who like Francisco Miguez before him, had trouble starting his PowerPoint graphics. Once that got resolved, he came out swinging.

"From 2000 to 2006, we received $2 billion" from the canal, the sociologist pointed out. "So what --- what did we do with this money?"

Gandásegui argued that without a rational economic development plan, even if the canal expansion proves to be profitable the added income will be frittered away to a small elite and won't benefit most Panamanians. Befitting someone whose profession is studying a society in which boxing is the national sport (rather than specializing in the the dismal number crunching study of economics like some of the other speakers) he got pugnacious about it.

As any ring fan will tell you, if the opponent is cut above the right eyebrow, the competent boxer will start jabbing away at the wound, trying to aggravate it. Similarly, Gandásegui took Barrios Ng's "It's a money machine!" remark to be a serious self-inflicted wound, and began taunting him about it, much to the displeasure of some in the audience.

Launching into an analysis of Panama's social divisions and history, Gandásegui argued that most Panamanians live at the margins of economic productivity, and that even if the canal expansion works as its proponents say it will, there is neither a plan nor any intention to change this reality. "Under the traffic lights," he said of the informal economic activity that the current government now counts as gainful employment, "there is no future."

Against the Torrijos - Alemán Zubieta canal expansion project, the sociologist counterposed the president's father's opinion that once Panama regained the canal it should use the asset for the best collective benefit of Panamanians. "Some of you criticize this is irresponsible, as populist, but this is what the Panamanian people want to hear," he told the free market fans in the audience.

Gandásegui said that the Panama can trace a lot of its troubles to first the old Interoceanic Regional Authority, and now the ACP, putting the market in control of the country's economic fate.

"So what? For what? For whom?" he asked. "Where are the benefits for Panamanians?" He questioned, moreover, the ACP board of directors: "Who do these people represent?" To Gandásegui, the whole canal expansion project is designed to benefit shipping companies and the financial sector, and has very little to do with creating jobs.

He counterposed a plan to invest the money we get from the canal in education, in our road system and in our urban infrastructures to the canal expansion plan.

Becoming a First World country is not, Gandásegui argued, primarily a matter of bringing more money through the isthmus. "The First World doesn't exist only by producing wealth, it's based on a social pact," he opined.

Gandásegui's presentation ended with some hard shots at the powers that be. He blasted the ACP management's pressure on canal employees to work for the "yes" side and said that "it's up to the President of the Republic to defend this proposal."

"You can't hand the canal over to a few speculators hiding behind the ACP board," the sociologist told the absent president.

Then came more back-and-forth arguments. There was never any time for questions.

Barrios Ng claimed eight errors on Méndez's part, and the debate bogged down to a technical argument about things like whether canal usage would grow three percent per year (Barrios Ng) or only two percent (Méndez). The upshot of that was a sense that if there's only a one-point difference, Panama's development dream could turn into a nightmare of eternal debt (or vice versa).

Barrios Ng claimed that the current building boom that's going on in Panama City's Costa del Este area involves greater sums that the canal expansion project, but Holder countered that with all the investment in that upscale part of town Panama hasn't seen anything remotely close to the general economic stimulus and resulting job creation that the Torrijos administration and ACP say will result from a big investment in canal expansion.

Miguez weighed in with a blast at Méndez and Gandásegui for "defeatism" and disrespecting the ACP's experts.

Sabonge fired up his PowerPoint and clicked to the famous Nicaraguan volcano stamp, which convinced the US Senate to support Panama rather than Nicaragua as a canal route.

"The train is in motion, and you have to get on or be left behind," Sabonge warned.

He quoted Deng Xiaoping, about how it doesn't matter whether a cat is black or white, so long as it catches mice. He quoted Confucius, on how "obedience to authority" is the proper way to act. He pointed to Singapore as an example of what Panama ought to be, and to China's Three Gorges project as something that this country ought to emulate.

Méndez concluded with parting shots at Barrios Ng about the ACP's cash reserves and criticized the way that the ACP calculates inflation.

Gandásegui had the last word, and first commented on how Sabonge referred to other countries as if they were the same as Panama. He then allowed that Sabonge might make a good planning minister, but quickly added that "the problem in Panama is that there is no minister of planning --- Pérez Balladares eliminated it. In Panama, there is no planning of any sort." And without that, he concluded, it would be foolish to undertake a construction project of the magnitude proposed.

Also in this section:
Panama Canal expansion debate
Most mainstream media slanting canal expansion story toward government side
Bus strike averted
Business & Economy Briefs