The Expansion of the Panama Canal

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The Expansion of the Panama Canal (Third Set of Locks Project)  is a project that will double the capacity of the Panama Canal by 2014 by allowing more and larger ships to transit. Then-Panamanian President Martín Torrijos presented the plan on April 24, 2006 and Panamanian citizens approved it in a national referendum by 76.8% of the vote on October 22, 2006.

The project creates a new lane of traffic along the Canal by constructing a new set of locks. Details of the project include the following integrated components:

• Construction of two lock complexes—one on the Atlantic side and another on the Pacific side—each with three chambers, which include three water-saving basins;
• Excavation of new access channels to the new locks and the widening of existing navigational channels; and,
• Deepening of the navigation channels and the elevation of Gatun Lake's maximum operating level.

On September 3, 2007, after approval by the Cabinet, National Assembly and referendum, the Panama Canal expansion project officially started. Panama's then-president Martín Torrijos stated that the Canal will generate enough wealth to transform Panama into a First World country. The project is also expected to reduce poverty by about 30%, resulting in an 8% poverty rate in Panama afterwards.

Background

The capacity of the Panama Canal is determined by a number of factors, of which the most important is the size of the locks that raise and lower ships as they pass through the canal. The smallest dimensions of the locks are 110 ft (33.53 m) wide, 1,050 ft (320.04 m) long, and 85 ft (25.91 m) deep. Because of clearance issues, the usable sizes are somewhat smaller (for example, the maximum usable length of each lock chamber is about 1,000 ft (304.8 m). The maximum size of the ships that can transit the canal is known as the Panamax.

Since the 1930s, all of the Canal widening studies have determined that the most effective and efficient alternative to enhance Canal capacity is the construction of a third set of locks, with bigger dimensions than those of the locks built in 1914. In 1939, the United States initiated the construction of locks designed to allow the transit of commercial and war ships, whose dimensions exceeded the size of the existing locks. In 1942, after advancing the excavations significantly, the Americans suspended the third set of locks project because of the outbreak of World War II. In the 1980s, the tripartite commission formed by Panama, Japan, and the United States took up the issue again, and like the Americans in 1939, determined that a third set of locks with larger lock chambers was the most appropriate alternative for increasing Canal capacity. Today, the studies developed by the Panama Canal Authority (ACP) as part of its Master Plan, with a horizon to the year 2025, confirm that a third set of locks, larger than those existing now, is the most suitable, profitable and environmentally responsible way to increase Canal capacity and allow the Panamanian maritime route to continue to grow.

Throughout its history, the Canal has continually transformed its structure and adjusted to trade requirements and international maritime transport technologies. In this manner, the Canal has managed to increase its competitiveness in a sustainable manner.

Then-President Torrijos in his speech on April 24, 2006, announcing the project, said that "…to say it in a graphic manner, [the Canal] is like our 'petroleum'. Just like the petroleum that hasn't been extracted is worthless, and that in order to extract it you have to invest in infrastructure; the Canal requires to expand its capacity to absorb the growing demand of cargo, and generate more wealth for Panamanians".

Cargo volume

On the basis of ACP's projections, during the next 20 years, cargo volume transiting the Canal will grow at an average of three percent per year, doubling 2005's tonnage by the year 2025. As such, providing the Canal with the capacity to transit larger vessels will make it more efficient by allowing the transit of higher cargo volumes with relatively fewer transits and less water use.

Historically, the dry and liquid bulk segments have generated most of the Canal's revenues. Bulk cargo includes dry goods, such as grains (corn, soy and wheat, among others), minerals, fertilizers, coal, and liquid goods, such as chemical products, propane gas, crude oil and oil derivatives. Recently, the containerized cargo segment has replaced the dry bulk segment as the Canal's main income generator, moving it to second place. On the other hand, the vehicle carriers segment has become the third income generator, replacing the liquid bulk segment. Shipping industry analysis conducted by the ACP and top industry experts indicate that it would be beneficial to both the Canal and its users to expand the Canal because of the demand that will be served by allowing the transit of more tonnage.

The question is, however, whether the trend upon which the Panama Canal Authority makes those projections can continue for a generation.

The growth in Panama Canal usage over the past few years has been almost entirely driven by increased U.S. imports from China passing through the canal en route to ports on the U.S. East and Gulf Coasts. But it is increasingly recognized in both the United States and China that this imbalance in trade is unsustainable and will be reduced in some sort of adjustment in the coming years, though it is important to note that any such imbalance need not be made up by physically shipped goods, but could be made by other trade such as intellectual property as China upgrades its intellectual property protection laws. The ACP, however, presumes that it will not only not be adjusted, but will continue to grow for a generation as it has for the past several years. One of the central points of the canal expansion proposal's critics, most prominently made by former canal administrator Fernando Manfredo, is that it's unrealistic to attempt to predict canal usage trends over a generation, most improbable to expect that U.S. imports from China will continue to grow as they have the past few years over a generation, and irresponsible to bet Panama's financial future on such a projection.

Competition

The most direct competition to the Canal is from alternative routes which present options for the transport of cargo between the same geographical points of origin and destination.

The opening of the Northwest Passage to commercial traffic could pose an alternative to the Canal in the long term. It is thought that global warming is likely to open the passage for increasing periods of time, making it attractive as a major shipping route. However the passage through the Arctic Ocean would require significant investment in escort vessels and staging ports. Therefore the Canadian commercial marine transport industry does not anticipate that this route will be a viable alternative to the Panama Canal within the next 10 to 20 years.

The two main current competitors of the Panama Canal are the U.S. intermodal system and the Suez Canal. The main ports and merchandise distribution centers in these routes are investing in capacity, location, and maritime and land infrastructure to serve Post-Panamax container ships and handle their cargo volumes. According to the ACP, the growing trend to use such ships in transcontinental routes competing with the canal is irreversible. If so, by the year 2011, approximately 37% of the capacity of the world's container ship fleet will consist of vessels that do not fit through the current canal, and a great part of this fleet could be placed in routes that compete with Panama.

The proposal states that strengthening its competitive position will allow the canal to accommodate demand and serve its customers. If the canal were to have the capacity to serve the growing demand, Panama could be transformed into the most important connectivity hub in the continent by joining together at the isthmus the north–south continental routes with the east-west transcontinental routes. Accordingly, the canal will continue to be viable and competitive in all of its routes and segments, and contribute significantly to Panama's development and growth while maintaining its position as one of the main world trade routes.

Predictions

According to the ACP, the canal will reach its maximum sustainable capacity between the years 2009 and 2012. When it reaches this capacity it will not be able to continue to handle demand growth, resulting in a reduction in the competitiveness of the Panama maritime route

As approved by the Panamanian people, construction for the expansion project is slated to conclude by 2014. All creative means will be employed by the ACP to stretch capacity until the construction is done.

The proposed expansion of the canal by the construction of a third set of locks will allow it to capture the entire demand projected through 2025 and beyond. Together, the existing and new locks will approximately double the capacity of the present Canal.

Critics such as former legislator Dr. Keith Holder, co-author of the legislation that created the ACP, point out that canal usage is seasonal and that even during the few months when it is most crowded the bottleneck that slows traffic is not the locks but the narrow Culebra Cut, in which there is a limited capacity for large ships to pass one another.

Although the Canal is reaching its maximum capacity, the ACP clarifies that this does not mean that ships will be unable to transit the Canal. However, it does mean that the Canal's growth capacity will stagnate and that it will not capture additional cargo volumes.

The former head of the Panama Canal's Dredging Division, Thomas Drohan, who is a critic of the expansion plan, discounts allegations that this is a problem in the short term—he argues that if the supply of any good or service becomes short, any business can raise its price for it and this would apply to Panama Canal tolls as much as it does to petroleum.

The project

Locks

The Canal today has two lanes each with its own set of locks. The proposal consists of adding a third lane through the construction of lock complexes at each end of the Canal. One lock complex will be located on the Pacific side to the southwest of the existing Miraflores Locks. The other complex will be located to the east of the existing Gatun Locks. Each of these new lock complexes will have three consecutive chambers designed to move vessels from sea level to the level of Gatun Lake and back down again. Each chamber will have three lateral water-saving basins, for a total of nine basins per lock and 18 basins total. Just like the existing locks, the new locks and their basins will be filled and emptied by gravity, without the use of pumps. The location of the new locks uses a significant portion of the area excavated by the United States in 1939 and suspended in 1942 because of the start of World War II. The new locks will be connected to the existing channel system through new navigational channels.

The new lock chambers will be 1,400 ft (426.72 m) long, by 180 ft (54.86 m) wide, and 60 ft (18.29 m) deep. They will use rolling gates instead of miter gates, which are used by the existing locks. Rolling gates are used in almost all existing locks with dimensions similar to those being proposed, and are a well-proven technology. The new locks will use tugboats to position the vessels instead of locomotives. As in the case of the rolling gates, tugs are successfully and widely utilized for these purposes in locks of similar dimensions.

Navigational channels

According to the plan, a 3.2 km (2.0 mi)-long access channel will be excavated to connect the new Atlantic locks with the existing sea entrance of the Canal. To connect the new Pacific-side locks with the existing channels, two new access channels will be built:

• The north access channel, which will connect the new Pacific-side lock with the Gaillard Cut, circumventing Miraflores Lake, and which will be 6.2 km (3.9 mi) long; and,

• The south access channel, which will connect the new lock with the existing sea entrance on the Pacific Ocean, and which will be 1.8 km (1.1 mi) long (see figure 5). The new channels will be at least 218 meters (715 ft) wide, both on the Atlantic and Pacific sides, which will permit Post-Panamax vessels to navigate in these channels in a single direction at any time.

Gatun Lake raised 1.5 feet (0.46 m)

All Canal elevations are referred to Precise Level Datum (PLD), which is close to Atlantic and Pacific entrance mean sea level. The maximum operational level of Gatun Lake will be raised by approximately 0.45 meters (1.5 ft) — from the present PLD level of 26.7 meters (87.5 ft) to a PLD level of 27.1 meters (89 ft). Combined with the widening and deepening of the navigational channels, this component will increase Gatun Lake's usable water reserve capacity and will allow the Canal's water system to supply a daily average of 165,000,000 US gal (625,000,000 L; 137,000,000 imp gal) of additional water. This additional water volume is enough to provide an annual average of approximately 1,100 additional lockages without affecting the water supply for human use, which is also provided from Gatun and Alhajuela Lakes.

Construction timeline

The construction of the third set of locks project is slated to take between seven to eight years. The new locks could begin operations between fiscal years 2014 and 2015, roughly one hundred years after the canal first opened.

Finances

The main purpose of the Canal expansion program is to increase Panama's ability to benefit from the growing traffic demand. This growing demand is manifested both in increased cargo volume and vessel size that will use the Panama route. In this sense, the Canal, with a third set of locks, will be able to manage the traffic demand forecast beyond 2025, and total revenues for that year, adjusted for inflation, will amount to over USD $6.2 billion.

Estimated cost

The cost to construct the third set of locks is estimated by the ACP at approximately US $15 to 25 billion. This estimate includes design, administrative, construction, testing, environmental mitigation, and commissioning costs. Additionally, this cost includes contingencies to cover risks and unforeseen events, such as those that might be caused by accidents, design changes, price increases, and possible delays, among others. The most relevant program cost is that of constructing the two new lock complexes – one on the Atlantic side and the other on the Pacific side – with estimated costs of approximately US $1.110 billion and US $1.03 billion each, plus a US $590 million provision for possible contingencies during their construction.

Opponents contend the project is based on uncertain projections about maritime trade and the world economy. Prof. R.N. Mendez, an economist who works for the University of Panama, alleged that the economic and financial projections are based on manipulated data. Independent engineers, most notably Humberto Reynolds and Tomas Drohan Ruiz, the former head of Engineering and Dredging of the Panama Canal, say that the project will cost much more than currently budgeted and that it is too risky for Panama.

M.A. Bernal, professor at the University of Panama, thinks that confidence in the budget of the Panama Canal Authority is undermined because of engineering and consultancy firm Parsons Brinckerhoff's involvement. Parsons Brinckerhoff is best known for the Big Dig in Boston, which ended up costing three times the estimated amount with several structural and safety concerns.

Estimated profit

According to the ACP, the third set of locks is financially profitable, producing a 12% internal rate of return. The third set of locks project is self-financed and its financing will be separate from the Government's financing. The state will not guarantee or endorse any loans undertaken by the ACP for the project's execution. With tolls increasing at an annual average rate of 3.5% for 20 years, and according to the most probable traffic demand forecast and construction schedule, the external financing required will be mainly temporary and on the order of USD $2.3 billion to cover peak construction activities between 2009 and 2011. With the cash flows generated by the expanded Canal, investment costs will be recovered in less than 10 years and financing could be repaid in approximately eight years.

What "self-financing" actually means, however, is disputed. At least half of the money needed for the canal expansion project will have to be borrowed, and the ACP does not calculate the interest on that as part of the project's costs.

The ACP's revenue projections are based on suppositions about increase in canal usage and the willingness of shippers to pay higher tolls instead of seeking competing routes, both of which critics question.

Environmental Impact

The ACP claims in the proposal that the third set of locks project is environmentally viable. It has been found that all possible adverse environmental impacts can be mitigated through existing procedures and technology, and no immitigable or permanent adverse impacts on the population or the environment are anticipated. There are no elements within the scope of the project that will compromise its environmental viability, such as communities, primary forests, national parks or forest reserves, relevant patrimonial or archaeological sites, agricultural or industrial production areas, or tourist or port areas. The project will not cause permanent or irreversible impacts on water or air quality. The proposed water supply program fulfills the objectives of maximizing the water capacity of Gatun and Alhajuela Lakes, and applies the most efficient water utilization technology at the locks so no new reservoirs will be required. Consequently, it will not be necessary to relocate communities. The entire area directly affected by the project is located within ACP operational and administrative areas.

Critics to the project contend there are a lot of environmental topics to be considered. For example: link between El Niño (ENSO) and global warming threat to water supplies. The ACP has commissioned a number of studies by a number of consultants about water supply and quality issues, and some like Eric Jackson (editor of the Panama News internet newspaper), Gonzalo Menendez(former head of the National Environmental Authority or ANAM by its Spanish initials), Ariel Rodriguez (University of Panama biologist), former Vice Minister of Public Works Grettel Villalaz de Allen and others are some of the most prominent critics of the canal expansion plan from the point of view of water quality issues. Jackson contends that ACP's public statements often do not match the findings of their studies. He says that the Delft Hydraulics, WPSI Inc, and DHI studies all say that no matter what is done to mitigate the problem, the water saving basins feature of the proposed new locks would increase the intrusion of salt water into Gatun Lake, from which about half of Panama's population takes its drinking water. The chosen method to partially mitigate this problem is to "flush" the new locks with fresh water from Gatun Lake — but that tends to defeat the proposed new locks’ water saving feature and raises questions about the security of the urban water supply.

However, one of the leading environmental organizations in Panama, ANCON (National Association for Nature Conservation) says that the studies and projections of operation of the Third Lock, including the water saving basins, state in a credible manner that there will be very low levels of salinization of waters of Gatun Lake and that these levels would preserve the biologic separation of the oceans with the safekeeping of the biodiversity and water quality for human use.

Employment generation

According to the ACP, the Canal expansion's impact on employment will first be observed in the jobs directly generated by the economic boom experienced during the years of its construction. Approximately 35,000 to 40,000 new jobs will be created during the construction of the third set of locks, including 6,500 to 7,000 additional jobs that will be directly related to the project during the construction's peak years.

However, officials state that the most important impact on employment will be medium and long term and will come from the economic growth brought about by extra income generated by the expanded Canal and the economic activities produced by the increase in Canal cargo and vessel transits – all of these contributing to fully leverage the advantages of Panama's geographic position.

The labor required for construction of the third set of locks will, in its vast majority, be done by Panamanians. To ensure the availability of Panamanian labor necessary for the third set of locks project and its connected activities, the ACP and public and private authorities will work jointly to train the required workforce with sufficient lead time, so that it has the necessary competencies, capabilities and certifications. The amounts necessary to carry out these training programs are included in the cost estimates of the project.

Critics dismiss this as pure demagogy, noting that by the ACP's own studies at the peak of construction there will be fewer than 6,000 jobs created and that some of these will be highly skilled posts filled by foreigners because there are no Panamanians who are qualified to fill them.

Among those who oppose the canal expansion proposal is Panama's construction workers' union, SUNTRACS. The union's secretary general, Genaro Lopez, argues that while some construction jobs would be created by the project, the debt that Panama incurs to build a third set of locks would not be defrayed by increased canal usage and thus an increased part of canal revenues would go toward paying the debt, reducing the waterway's contributions to the national government's general fund and in turn reducing money for road projects, public schools, police protection and all other government services.

Critics also claim the project lacks an accompanying social development plan. Then-President Torrijos has since accepted the request to develop one with the mediation of the United Nations Development Programme.

Voices supporting the project

ANCON (National Association for Nature Conservation) has given its approval of the environmental studies of the proposal and stated some recommendations if the project is approved. The following have also endorsed the proposal:

• The Nature Conservancy
• La Prensa newspaper, in an editorial note.
• Chamber of Commerce, Industries and Agriculture.
• The government-aligned CONATO (National Council of Organized Workers).
• Former presidents Martin Torrijos (project was approved under his leadership), Mireya Moscoso and Ernesto Pérez Balladares.
• President Ricardo Martinelli (took office after construction of the project commenced, but before it ended).
• Panama City's former mayor Juan Carlos Navarro.
• Ruben Blades, the politician, lawyer, singer and actor.
• Singers including Mach and Daddy, Karen Peralta and others.
• Stanley Heckadon, the former director of the INRENARE agency that was the predecessor of the National Environmental Authority.
• Panamanian boxing world champions Roberto "The Spider" Vásquez, Celestino "Pelenchín" Caballero and legend Roberto Durán.
• Panama athletes including Carlos Lee, Mariano Rivera, Roberto Vasquez, Vicente Mosquera, Maestrito Córdoba and Danilo Pinnock.
• Former Miss Universe Justine Pasek, writer Rosa María Britton and painter Olga Sinclair.
• Canal customers, many in the maritime industries and in Panama's and the world's business communities.
• 76.8% of Panamanian voters in a referendum; the turnout was 43%.

Voices against the project

Former President Jorge Illueca, former sub-administrator of the Panama Canal Commission, Fernando Manfredo, shipping consultant Julio Manduley and industrial entrepreneur George Richa M. say that the expansion is not necessary; they claim that the construction of a mega-port on the Pacific side would by itself be sufficient to meet probable future demand. The logic behind this is that said port would be the second port (the first being Los Angeles) deep enough in the American Pacific capable of handling post-panamax ships. As Panama is already a natural trading route, it would be able to handle the movement of containers from the Pacific to the Atlantic side via railroad, where containers would be reloaded to other ships for worldwide distribution. In addition, the following organizations and people oppose the project:

• The Council on Hemispheric Affairs (COHA) stated in a press release that under the Torrijos government, the expanding Panama Canal will not likely serve the needs of the vast majority of Panamanians. Much of the benefits will be tied to the commercial interests of the country's accountants, bankers and lawyers, as well as their U.S. counterparts, and world trade. They also say that the administration's rampant corruption and other flaws raise questions about Panama's capacity to supervise such an enormous project. COHA has received some letters which point out factual errors and plans to modify its statement to reflect this.
• Former President Guillermo Endara and his Vanguardia Moral de la Patria Party,MOLIRENA, a conservative, business oriented party that normally gets about 10 percent of the vote.
• Most of the Panamanian left and most of the labor movement, including for example CONUSI(National Independent Syndicate Union) and FRENADESO (National Front for the Defence of Social and Economic Rights).
• Most members of the nationalistic Panameñista Party (Grettel Villalaz de Allen and Gonzalo Menendez, mentioned above, and former legislator Gloria Young are prominent examples).
• Some environmentalist leaders and groups: Biodiversidad Panama, whose principal leader is University of Panama biologist Ariel Rodriguez, and former National Environmental Authority director Gonzalo Menendez.
• Proponents of Liberation Theology, in part because they suspect that poor farmers among whom they have a social base would be adversely affected. The canal expansion issue has aggravated the breach between this mainly Catholic strain and the Catholic hierarchy. This group has chosen the radical Catholic priest Father Conrado Sanjuras as its principal spokesperson for relations with the Electoral Tribunal.