A question of economics

A question of economics

Much like its construction in the early 1900s, the Panama Canal's expansion would be one of the most momentous engineering feats of the 21st century. But whether it will actually happen remains an open question.

No issue is more important for the Panama Canal, or indeed for the country of Panama. The canal is reaching capacity at a time when a growing percentage of containerized trade is moving on post-Panamax ships - those too large to transit the 50-mile waterway.

But whether it is economically feasible to enlarge the canal, at an estimated cost of $5 billion or more, is a question for which no firm answer yet exists. Expanding the canal would involve building a new series of larger and deeper locks to lift ships from sea level into the fresh water passages that carry vessels across the continental divide.

To enlarge the canal, authorities first have to convince Panama's citizens, as expansion would likely be put to a nationwide referendum. Then they would have to look beyond Panama to multilateral lending institutions for financing. Because the canal now operates on a for-profit basis, it would likely have to increase tolls on the shipping industry to pay off the debt. If those tolls are too high, cargo would be diverted to other routes such as the Suez Canal, undercutting the justification for expansion. "In the end, if it is not profitable, if the studies say it's not realistic, it won't be done," said an official at the Panama Canal Authority.

The question is reaching a critical stage. Currently some 120 different feasibility studies relating to the canal's expansion are under way and are scheduled to be completed by the end of this year, according to Alberto Aleman Zubieta, Panama Canal Authority administrator.

The results will be analyzed in 2004, though the ultimate decision could end up being made in a national referendum, with ordinary Panamanians having the final word. Under the most optimistic projections, the project could begin as early as 2005 and would not be completed before the end of the decade.

Getting to this stage has been a massive effort with every possible issue relating to expansion studied. Canal engineers have investigated technology from as far away as Germany, the location of some of the world's largest locks, and have intensively studied other issues such as fresh water availability. Each ship transit currently requires 52 million gallons of fresh water, and more water supplies would have to be found to operate the larger locks.

"They have done a huge amount of work looking at this project," said Richard Wainio, executive director of the Port of Palm Beach. Wainio served as director of executive planning at the Panama Canal Commission from 1990 through 1998. "Will it get done? It's a tossup at this point, but there is a lot of momentum."

Some believe the canal will ultimately find a way to proceed with the expansion. They reason that the project is inevitable because world trade flows make the canal a natural transit point for containers - the fastest growing segment of ocean shipping - and the shipping industry is constantly seeking efficiencies through larger ships.

Today, the canal is reaching capacity, with around 13,600 ships transiting the waterway every year, thanks in part to recent channel-widening projects. But the canal's earning power is restricted by its inability to handle many vessels. Currently, no vessels with a draft of more than 39.5 feet (12 meters) or a length of 1,000 feet can make it through the canal's locks. Giant oil tankers heading for the U.S. East Coast from Asia must transport their loads around the southern tip of South America, an additional 6,820 miles, or take the westerly route through the Suez Canal and across the Atlantic.

But according to some, an expansion of the canal would be largely intended for post-Panamax container ships, not bulk or petroleum carriers.

Wainio said there is not much additional dry or liquid bulk cargo such as coal, iron ore or petroleum that the canal could attract with a new set of locks. "It is being built for post-Panamax container ships, and the question is, is that trade by itself really sufficient to support a project of many billions of dollars?"

The canal expansion also takes on an added importance, analysts say, given possible emerging competition from Nicaragua, which plans to create a "dry water" canal. Nicaragua would transport cargo from ships across the Central American nation by high-speed rail and on to awaiting vessels at the Atlantic coast, cutting the transit time for cargo moving from the U.S West Coast to the east-

ern seaboard when compared to Panama.

Some of the initial signs favor an expansion in Panama. Wainio said it is likely that the population would support the project, given its huge potential economic benefits.

The InterAmerican Development Bank has said it is willing to assist with funding and is already working with the canal on studies to recycle the fresh water used to lift ships through the canal's lock system. Chile, China, Japan and the U.S, all major users of the canal, have expressed interest in financing the canal expansion because they all see benefits to their international trade from a bigger canal.

But the biggest obstacle to a canal expansion may come from an overlooked source: those living in communities with land that could be swallowed up by the wider waterway.

An 822-square-mile area is home to some 35,000 small landholders and cattle ranchers west of

Panama City, where the construction of three large reservoirs could be built. The reservoirs would flood a rural area larger than Manhattan island, displacing some 8,500 people.

While the canal authority said it will compensate anyone affected by the expansion, many of the landowners in the area have already held street protests and attacked canal installations in the current watershed. They threaten further violence if Panama moves ahead with expansion of the canal.

Peter M. Tirschwell contributed to this report.