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Last Updated: Tuesday, 4 April 2006, 23:00 GMT 00:00 UK
Panama Canal set for major overhaul
By Jane Monahan
Panama City

A container ship in the Panama canal
The Panama Canal was opened in 1914

For nearly 100 years the Panama Canal has been a key link in international shipping routes, handling an estimated 5% of world trade each year.

The recent rapid growth of Asian economies like China and India has led to a surge in shipping worldwide and the canal is now operating at near full capacity.

The state body which runs it, the Panama Canal Authority (ACP), has now decided that it is about time the waterway had a major refit.

Its plans to widen the canal are due to be presented to the government imminently.

The International Monetary Fund estimates the cost of the project could be $4.5bn, while the Inter American Development Bank says it could be as high as $7.5bn.

Two new 3-chamber locks are to be built at the Pacific and Atlantic ends of the canal, creating a third lane of traffic capable of handling large container ships and tankers that have previously been too wide .

Workers will also prepare new approach channels and dredge existing ones, ensuring that the canal can take the biggest cargo vessels.

Should it be approved, the project could take about seven years and employ up to 8,000 people.

Main shipping route

"For 80 years we set the standard," said Jorge Quijano, director of maritime operations for the ACP, which has operated the canal since the US withdrew in 1999.

"That's why the first container ships were called Panamax vessels, meaning the maximum size for a ship to pass through the Panama Canal.

"But in the 1990s Post Panamax vessels were built, ships up to 160 feet wide and too big to pass through the canal's existing lock system."

The canal has missed out on the potentially lucrative revenues from oil tankers, LNG (liquefied natural gas) carriers and bulk carriers, which are more profitable in terms of tolls and fees for services, but most of which are too big to use the waterway.

A container ship passing through the Pedro Miguel locks
Many of today's bulk carriers are too wide for the canal

The US - currently 68% of all cargo going to or from the United States passes through the Canal - will also "benefit enormously" from the enlargement, Quijano said, as it will free up congested US ports and railways.

He said that the canal's position on the main shipping route between the east coast of the US and rapidly growing Asian markets underpinned the decision to enlarge it.

"As soon as China joined the World Trade Organisation in 2001 the final flag went up for us to do something," Mr Quijano said, admitting that the project was delayed for several years because "it is such a costly investment".

Funding the project

Both the IMF and the Inter-American Development Bank's (IDB's) representative in Panama, Jeremy Gould, estimate that the cost of the enlargement will be at least $5-7.5 billion, equivalent to 35-50% of Panama's GDP.

So how will the PCA finance such a colossal project?

Ricaurte Vasquez, who is Panama's Economy and Finance Minister as well as Minister for Canal Affairs, has said part of the costs will be covered by increases in canal fees.

Handles an estimated 5% of world trade
The main goods shipped are oil products, grain and container cargo
Last year the canal handled 14,000 transits, shipping 200 million tonnes of cargo
Traffic between Asia and the east coast of the US accounts for more than 40% of shipping

Fees for container ships - the fastest growing segment of canal traffic - will go up in 3 stages, to reach $54.00 a container in May 2007, from the equivalent of $31.00 a container at the end of 2004.

Money may also be raised by selling future transits as if they are bonds. For instance a shipping company could buy 6 transits for use in 2012, but at 2008 fee prices, Quijano said.

But much of the project will be paid for with borrowed money.

Job well done

The IDB's Mr Gould and many others do not think the PCA will have any difficulty with lenders because it is recognised as having run the canal well since 1999.

A container ship and tug boat in the Panama Canal
The Panama canal is 50 miles long

There has been a decline in the number of accidents, increases in the number of vessels and tonnage passing through, a reduction in the average crossing time and a significant increase in the contribution the canal makes to the government.

Because the PCA is financially autonomous (its revenues cannot be used to finance central government deficits) Mr. Vasquez, Panama's Economy and Finance Minister, also thinks the PCA should obtain a very good credit rating.

This would enable the PCA to access more specialised capital markets and obtain better rates and tenures when it needs to borrow.

Ordinary debt markets could be more of a challenge, as the PCA could be "crowded out" by the Panamanian government, which frequently uses them to service the country's public debt, which amounted to a whopping 67% of the country's GDP, or about $10.5 billion, at the end of 2005.

Compared to these financial issues the political requirements for the canal's enlargement are simpler.

It is generally expected that the PCA's plan will be approved by President Torrijos' Cabinet and by the National Assembly, the country's parliament, where his government has a majority.

Then the National Assembly will call a national referendum on the matter, probably in the second half of this year, in accordance with the country's constitution.

Test of time

President Torrijos has political capital to draw on for an affirmative vote: he is the son of Omar Torrijos, a national hero because he forged the treaties with the US in 1977 that led to its withdrawal from the canal in 1999.

In a January survey the approval rating for the referendum was 67%, the IDB's Mr. Gould said.

Two tug boats in the Panama Canal
The US withdrew from operating the canal in 1999

The fact that the Panama Canal has withstood the test of time, without any significant alteration, is a testimony to how advanced the engineering was when it opened in 1914.

But the enlargement also highlights the extent to which international shipping has now changed.

"It's no longer the canal that comes first and dictates the size of the ships," said Bozo Plazonic, the Croatian captain of cargo ship Ville D'Orion.

"What's driving the shape of ports, ships, maritime insurance and even the Panama Canal itself now is containers.

"I've been everywhere in the world, but all the world over containers look the same. The romance has gone out of the business."

Country profile: Panama
06 Jan 06 |  Country profiles
Bush ends regional tour in Panama
08 Nov 05 |  Americas
Builders threaten Panama forests
23 Mar 05 |  Americas
Panama's new president sworn in
01 Sep 04 |  Americas

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