If Panama builds it, they may come

Friday, December 02 2005 @ 06:35 PM UTC

Contributed by: Don Winner

Panama is wrestling with the biggest decision in its history - build a new canal at a cost that may be not much less than the value its annual output, with all the risk that implies, or do nothing, and let the existing waterway deteriorate, along with the country’s ports and terminals. Within a few years, much of the world’s cargo fleet will be too big to pass through Panama, unless the country accepts the huge risk involved in building a new canal. The first big hurdle would consist of financing the project, which will cost at least $5 billion and maybe twice as much. This money would have to come from foreign investors. But the annual value of Panama’s output is only around $14 billion, and the country already owes national and foreign creditors close to $9 billion. As a result, few investors would want to lend more money to the Panamanian government, especially since it will take ten years before the new canal produces any revenue.

Private investors might be willing provide funds specifically for a new canal, including the right to seize it if Panama defaults on the loan.

On the other hand, it is hard to imagine Panama agreeing to surrender sovereignty over part of its national territory.

In the end, Panama and a consortium of lenders - possibly including the port authorities of New York, Norfolk and Miami, which would like a new canal built, along with the World Bank - might agree on a creative compromise.

But many complex issues would remain, including competition from other routes.
Hong Kong-New York via Panama is only 1,000 miles shorter than Hong Kong-New York via the Suez Canal, through which even the biggest new cargo ships can easily pass.

Currently, there is little direct freight traffic between China and the United States east coast.

But traffic on the Suez route is likely to grow over the next few years, along with the number of big cargo ships.

Because North American west coast ports are already operating at near capacity, they cannot unload much more Asian freight and transfer it to trains for delivery to the eastern United States.

But Panama has no control over west coast ports in the United States, Canada and Mexico, which could at any time invest in new facilities and compete for a bigger share of trans-Pacific traffic.

To these risk factors, Panama must add a possible slowdown in United States-China trade, possible cost overruns in building a new canal, and environmental problems associated with building additional dams, which would supply water for the new locks.
Considering that the existing canal only produced $180 million in profits in 2004, its best year ever, it may be hard to justify building a new one.

On the other hand, doing nothing is also risky.

During the past decade, Panama, in association with some of the world’s leading port developers, built big, modern container terminals on both its Pacific and Caribbean coasts, along with a high-speed rail corridor that connects them.

Panama also has Latin America’s biggest free trade zone, to which buyers from all over the continent come to buy Asian imports.
If canal operations are allowed to decline, so will the ports and free zone, along with revenue from tourists, for many of whom the waterway is a major draw.

Besides, there is no reason to think that the project would cost more than its budget, that environmental issues cannot be solved, or that Asia-United States trade would dry up.
In the right conditions, a new canal would be a major option for shippers, as well as a continuing source of pride and profit for Panama.

Now we only need to know how much it will cost.

Posted under English at December 1, 2005 02:42 PM

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» A new and improved Panama Canal? from In Search Of Utopia
This could be major news over the next couple of years... Panama is wrestling with the biggest decision in its history - build a new canal at a cost that may be not much less than the value its annual... [Read More]

Tracked on November 29, 2005 07:30 AM

» Is A New Panama Canal in the Works? from Conservative Thinking
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