Canal Expansion
Jane Bussey | Jun 01, 2009 | Comments 0
For the United States, completing the Panama Canal marked one of the most daring engineering feats of the early 20th century. Now, nearly 100 years later [click for a timeline], Panama has launched the boldest canal expansion of its history in the midst of a grim global recession.
In an effort to accommodate the new “supersize” ships, the Panama Canal Authority is building new sets of locks on each end of the canal, deepening the entrances and adding access channels. Canal administrators hope to complete the US$5.25 billion project in time for the 2014 centennial celebration of the 50-mile inter-oceanic passageway.
But with global trade expected to plunge 9 percent this year and the world economy forecast to contract an unprecedented 1 percent, Panama is gearing up to accommodate giant container ships and tankers just as global ocean carriers are mothballing vessels, rerouting others to longer routes and consolidating services.
The decline in world trade is raising concerns about the canal’s long-term revenue prospects, since the small nation of Panama is taking on mammoth debt to fund the expansion.
Nevertheless, the boom is underway.
Dry-excavation contracts have already been awarded; three construction groups recently bid to design and build the locks; and proposals are pending for the dredging of the Atlantic entrance.
Alberto Alemán Zubieta, the chief executive of the Panama Canal, expressed confidence that the canal would ride out this financial storm – much like it survived earlier disruptions in world trade and transportation that have included two World Wars and the Great Depression. He also dismissed concerns that higher tolls – which can cost a large ship as much as US$350,000 – were affecting demand.
“The proof that the modification of the transit tariffs has not affected business at all is the volume of ships that transit the canal each day,” Alemán said earlier this year. “It is important to mention that the expansion project will inject a strong sum of additional revenue.”
An estimated 14,000 vessels pass through the canal each year. Toll revenue is crucial to financing the expansion project and the canal raised rates annually since 2007 a total of more than 30 percent. The canal authority has forecast that cargo volume would increase by 3 percent a year, reaching a projected 560 million tons by 2025, double the amount that passed through in 2005.
However, 2009 has proven thus far to be an unprecedented year for trade. The World Trade Organization estimates that global trade will fall 9 percent this year as exports by countries like Japan plunge by more than 30 percent. Given the drop in demand for the goods they transport, carriers are looking to compensate by pinching every penny, sometimes taking longer routes to take advantage of lower fuel costs and avoid tolls in the Panama or Suez canals. In February, the French line of CMA CGM announced it would bypass the Panama Canal on one leg of its service from Asia to the Caribbean, taking the cheaper but longer route around Africa’s Cape of Good Hope.
Still, the number of vessels using the canal has declined only slightly since January. Total canal transits edged down by 1.4 percent in the second quarter that ended on March 31, to 3,914 transits from 3,971 transits in the second quarter of 2008. Transits by larger ships declined further, by almost 3 percent, to 1,815 in the second quarter of 2009 compared to 1,869 in the same period a year ago.
Canal executives have responded. Citing the need to “mitigate the impact of the crisis on the Canal’s clients,” the Panama Canal Authority on May 1 temporarily rolled back tolls on ships transporting empty containers and slashed the cost of pre-transit reservations.
Richard A. Wainio, director and chief executive of the Tampa Port Authority, called it an unusual move but a good one. “Ocean carriers are suffering immensely right now,” said Wainio. “It is an indication that the Panama Canal Authority is recognizing that situation.”
But Wainio, former chief economist at what was then the Panama Canal Commission, said he does not see the current downturn altering the project, although it might slow it down. “It’s a long-term project and they need it,” he said.
Alemán, who has shepherded canal affairs for more than a decade, has conceded the financial crisis presents challenges, but noted the economic slowdown has resulted in savings on construction costs given the lower prices for materials like cement and steel.
Canal authorities secured financing for the expansion in December by signing a series of loan agreements totaling US$2.3 billion with lending agencies such as the European Investment Bank, the Inter-American Development Bank, the Bank of Japan, the International Finance Corp. and the Andean Development Corp.
The expansion is not just vital to the port but also to Panama, where the waterway is both the main engine of the economy and an economic stimulus during this recession.
The project has already spurred on business as contractors rush to Panama to bid for a stake in the construction. CILSA-Minera Maria, a company partially owned by Mexican telecommunications mogul Carlos Slim, won the contract for dry-excavation.
On March 3, three international consortiums submitted technical and price bids to design and build the two sets of locks and access channels, which is the largest piece of the project. Over the next few months, the canal authority will choose among the bids from Consorcio C.A.N.A.L; Consortium Bechtel, Taisei, Mitsubishi Corporation; and Consorcio Grupo Unidos por el Canal, looking at both the technical proposals and competing prices bid.
The new locks will use some of the pre-World War II excavations on the Atlantic side and partial excavations on the Pacific side. Among the innovations: the extra water needed to fill the locks will be recycled through shallow basins, eliminating the need to build new dams.
“This is an exciting time for the Canal and for Panama as we move forward with the single most important expansion project,” Alemán said when the three bidders were announced.
Click here for a timeline of the history of the Panama Canal.
ADDITIONAL READING
Books
The Path Between the Seas: The Creation of the Panama Canal, 1870-1914
How Wall Street Created a Nation: J.P. Morgan, Teddy Roosevelt, and the Panama Canal.
Panama Canal Authority, official site www.pancanal.com
Filed Under: Main Articles
