economy

Nothwithstanding ACP denials, conflicts of interest a risk factor

On May 15, 2006, an audience packed with Panama Canal Authority (ACP) employees who had been told that their job prospects would be affected if they did not support the government-financed "yes" side in that year's Panama Canal expansion referendum booed and heckled University of Panama economist Roberto Méndez when he argued that ordinary commercial banks would not give the ACP preferential lending rates because the expansion project was "high risk."  Méndez argued that it was high risk because there were conflicts of interest, and specifically cited the construction and banking interests represented on the ACP board of directors.

One of the ACP team arguing against Méndez that night, ACP finance director José Barrios Ng (at the time --- now he's the number two man on the Panama Canal organization chart), was and is a moonlighter. He's rector of the private, and not well rated by those who compare Latin American educational institution, Universidad Latina. One of the very first things that the ACP --- and then Minister of Canal Affairs Ricardo Martinelli --- did when Panama took full control of the canal at the end of 1999 was to abolish its apprenticeship program. Subsequent independent analyses have found that the ACP has trouble recruiting and keeping qualified employees --- they used to train in-house, but they privatized that function, effectively giving business to institutions like Universidad Latina.

Accuse the ACP of conflict of interest, and they will deny, and shout down, and remove from press lists. Anyone suggesting such a thing becomes a non-person to the state within a state that's the Panama Canal Authority.

So it was NOT a conflict of interest that Constructora Urbana SA (CUSA), the construction company of which the number one man at the ACP, Alberto Alemán Zubieta, was CEO before he came to his current job, is part of the Grupo Unidos por el Canal consortium that won the contract to design and build the new set of Panama Canal locks. CUSA is owned by relatives and now run by a cousin of the ACP director. According to Alemán Zubieta, he sold his stock in the company in 2005. It's NOT a conflict of interest because --- because the ACP took out paid ads in Panama's corporate mainstream media to say it isn't a conflict of interest.

It was, after all, a bidding process with three competing groups. Curiously, however, the two losers got $15 million each just for taking part in the contest.

Outside of Panama, the most scrutiny that the $3.118 billion contract has received has not been about junior partner CUSA and its relationship to the ACP administrator. It has been about the bid itself and the lead company in Grupo Unidos por el Canal, 40 percent stakeholder Sacyr Vallehermoso SA. (In addition to Sacyr and CUSA, the consortium also includes Italy's Impregilo SpA civil engineering and construction company and Belgium's Jan de Nul dredging and construction company.)

The main comment about Sacyr? It is widely reported that the company made some $600 million in profits for the first part of this year. However, it is just as widely reported in the international press that Sacyr has a debt in excess of $16 billion.

How did Sacyr Vallehermoso SA run up this debt? Several are the ways. First, in 2006 it bought a 20 percent stake in the Spanish-Argentine Repsol-YPF oil and gas company, and then fuel prices went down. Then, it took losses in a failed bid to take over the French construction group Eiffage. Sacyr owns some eight percent of BBVA bank, which has taken its hits in the global financial crisis. Most of all, however, Sacyr was heavily invested in a Spanish construction bubble, particularly in and around Barcelona, and that speculative binge turned to panic in the second quarter of 2007 and the downward trend has not turned around.

So might the Panama Canal job be Sacyr's salvation? It might, especially because the company is so large that the Spanish government will do things to prevent its failure. Earlier this year it was thought that Sacyr might sell off its stake in Repsol to pay down its debt, but then the Zapatero administration declared that it was a matter of state policy to keep Repsol under Spanish control and shortly after the Sacyr won the  canal locks contract this past July it announced that its Repsol shares were no longer for sale.

But what about that $3.118 bid on the locks job? It beat its competitors by $1.067 billion and $2.863 billion respectively, and multiple European observers concurred with Panamanian economist Marcos A. Mora Rangel that it was an unrealistic "lowball bid" that would be thrown out in most contests for large European public works projects.

And so what if it is a lowball bid? Sacyr might be too deep in debt to eat the cost overruns. Spain, or the European Union, might cover the difference --- or might not. Or else what prompted the ACP hecklers to disrupt the "no" campaign's presentation at that May 2006 debate --- the suggestion that the canal expansion will be a financial boondoggle plagued by conflicts of interests and underestimated costs --- may turn out to have been prescient.

Any major cost overrun in the Panama Canal expansion that gets eaten by the ACP or the Panamanian government would most likely mean a heavier national debt and less money in the national government's general operating fund. A lesser finacial disaster would just mean that the canal expansion deal that Martín Torrijos, Alberto Alemán Zubieta, Ricardo Martinelli et al sold to the Panamanian people --- and was bought by 78 percent of the 43 percent minority who voted in the referendum --- will turn out to just be another rabiblanco bait-and-switch, another deal that's not as good as was advertised.

And then of course, there is the possibility that the project will cost about as much as predicted by the ACP.

On the revenue side of the ACP pitch, the financial numbers are already shot. Mr. Barrios Ng got in front of that packed crowd that evening in May of 2006 and told the people that traditional methods of risk estimation don't apply to the ACP. Canal publicity flack Rodolfo Sabonge showed the crowd a powerpoint display that indicated that the rate of increase in the sharp upward trend in US imports from China that prevailed between 2000 and 2005 would continue through 2025. Of course, that US-China trade volume has dropped, as has canal traffic in absolute terms. Higher canal tolls have hidden some of the lost business, but all across the world the shipping business is severely hurting and the canal has begun to price itself out of the market on some routes.

The bright spot, so far, on the finances of the Panama Canal expansion is the credit. Whether or not private banks would consider the project high risk became moot because the ACP got a line of credit from a group of international financial institutions, rather than from private banks. Costs that run way over that line of credit could possibly happen, but it seems that Panama got a relatively good deal on financing. However, in 2006 the "yes" campaign kept chanting a mantra about how the project was "self financing." Only by playing the most deceptive semantic games could it be argued that this was ever truly contemplated. At the time the "no" campaign repeatedly challenged Mr. Alemán Zubieta's minions on this point and the "yes" campaign eventually admitted that outside financing would be needed but claimed that since the loans would be amortized from canal revenues that would be "self-financing."