Panama Canal readies for post-Panamax ships

Next year the world's largest shipping artery will be able to accommodate ships of a new type. Deputy Administrator of Panama Canal Authority Manuel Benitez has told in an interview with the IAA PortNews correspondent about the Canal expansion plans.

Shipping has become a factor in global politics. The redivision of economic spheres of influence, the struggle for new markets, emergence of new technologies - all this causes changes on the global map of economic geography. Those players, including the countries, who look to the future and calculate, are trying to find adequate transportation and logistics solutions long before the economy begins to stall unable to “digest” sharply increased flow of goods or raw materials.

This was the main topic in a conversation of Deputy Administrator of the Panama Canal Manuel Benitez with our special correspondent. In 2014 the Panama Canal celebrates 100 years since the transit of the first ocean-going vessel. However, our conversation was devoted not to anniversary events, but to the future of the world's largest man-made artery.

- Before Panama launched the expansion project in 2006, you had held a referendum in which citizens were asked whether the country should embark on such a major construction project. What arguments did you find that convinced the Panamanian people that the expensive infrastructure project is really needed?

- We outlined a vision of the future to the people of Panama. The point is that the global economy shows rapid development along with the shipping sector. Today, the vessels sailing the sea are of larger tonnage than a few years ago. So, we explained to the people we need to keep pace with the global trend and that the expanded Panama Canal will become an important player in the global maritime infrastructure.

We have calculated specific parameters of the project, including the number of jobs that might be created. The project total cost is valued at $ 5.2 billion.

- Well, this is an awful lot. Where did you find sources of financing?

- Indeed, this is a substantial amount of money, especially taking into account that the country's GDP at the time when the project was planned, was $15 billion.

Panama Canal is an independent organization according to Law No 28 of 2006. At that time, the Panama Canal Authority managed the Canal quite successfully, i.e. it had no debts, the current activities were conducted smoothly and without interruption, allowing ACP to invest part of its own funds. We also raised funds from international companies, such as the European Investment Bank, the Central American Bank for Development

- Were the loans raised under state guarantees?

- No, there were no state guarantees. The loan was taken for ten years and was expected to be repaid from the proceeds that will be generated by operation of Panama Canal after its expansion. Once the Canal expansion is completed, the traffic of vessels will increase and we will get the funding source for the loan and interests repayment.

- Panama Canal Administrator Jorge Quijano said that in 2013 the Canal generated about $ 1 billion, which is about 20% of the country's budget receipts. How much Panama Canal's revenues may increase upon completion of the expansion project. Some media outlets reports said it might be 2 to 3 times higher?

- This is true, but actually we expect to receive the proceeds in 2016, and it will be increasing gradually.

As you know, the project completion was initially scheduled for mid-2014, but today I can say that the remaining 12 lock gates will be delivered only in December 2015. The facility completion deadline was missed because of the position of the Contractor, an international consortium GUPS (Grupo Unidos por el Canal consisting of four leading construction companies: Sacyr Vallehermoso, Spain, Salini Impregilo, Italy, Jan De Nul, Belgium and CUSA, Panama – IAA PortNews). In early 2014 the Contractor suspended work and demanded compensation of $ 1.6 billion in cost overruns. Earlier, the consortium also slowed pace of work, which had led to overall project schedule delay.

- Can you disclose, how ACP succeeded in reaching an agreement with GUPS, forcing the opposing side to back down?

- We just insisted on respecting all clauses of the contract, and decided to postpone the consideration of disputable issues and its resolution in the international arbitration courts. It should be noted that in this conflict we were supported by trade unions, public sector unions such as the Maritime Chamber, by various industry businesses, as it was clear for everyone that the delay in the commissioning of the third set of locks will entail shortfall in revenues across the country, as well as in foreign ports. It's worth noting that many U.S. ports have implemented their own expansion, dredging and construction of longer piers in anticipation of an expansion of Panama Canal. The entire industry, not just the channel, has prepared to work with the larger vessels.

- Will the range of transported cargoes, as well as the size of ships that transit the canal be changed?

- Of course, in the structure of the fleet passing through the canal from the Atlantic to Pacific Ocean and back, there will be vessels that now can not utilize this shipping lane because of their size. I'm talking primarily about large tonnage tankers carrying liquefied gas, shale gas (which the U.S. started to produce in large-scale) and crude oil produced in the Gulf of Mexico, about bulk carriers transporting raw materials from Chile and Brazil to Europe and China. The commissioning of the new lock gates will allow post-Panamax ships to transit the canal, which differ not only in size, but feature a length-to-width ratio of 7:1, making them more stable.

We also hope to attract Suezmax tankers and Capesize bulk carriers, the vessels that are now using Suez Canal to move goods between Europe and Asia.

Today, 65% of total seaborne trade here account for the U.S. exports, on the route linking the country with China. The second key player is China, followed by Chile, South Korea and Japan.

- As for the size of vessels that will be able to transit the expanded Panama Canal, the figures reported by media vary considerably. Could you give our readers a more accurate information on the matter.

- Containerships of up to 13200 TEU and fully loaded will be able to transit our canal's new lock gates. Therefore, the locks with a depth of 18.3 meters will allow vessels with draft of 14.8 meters to pass by. The chamber dimensions of the new locks will be 427 meters long and 55 meters wide.

- The designed dimensions after expansion allow the canal to take  13,200-TEU ships, which is twice the size of existing containerships, passing through the canal today. But the global fleet has been expanded with container ships of a capacity exceeding 18,000 TEUs...

- To be honest, when we started the project, we could not foresee that the shipbuilding industry will be developing at such a rapid pace. However, in the longer term we have a plan for the construction of the fourth set of locks.

- Will the lightering be necessary in future, the operation now carried out in the canal with the help of the canal's railroad, which is utilized to haul containers transferred ship-to-shore to reduce the vessel's draft?

- Actually the project of modernization of Panama Canal is expected to produce a double dividend, both from the transit of larger capacity ships and also through the creation of a transportation and logistics center. Some vessels coming, say, from China, will be able to discharge and leave some of their cargoes here in Panama and take on board other goods, for example, from Chile or Peru, to deliver them to the East Coast of the U.S. So, the project envisages the expansion of available infrastructure that will allow the country to become a global logistics hub. Look at the port of Balboa (you can see it outside the window) - it has been stretched beyond its capacity. We have an idea to expand the port, which is located on the other side of the Isthmus of Panama. Last year a Singapore based company won in a tendering process for the contract for the port's modernization and now the company will have to find funds for the project. Currently the port is handling 500,000 TEUs. The modernization will help increase this figure to 1.5 million TEUs. The port expansion project will be implemented under a concession agreement with the government. The Panama Canal Authority does not participate in it.

- Given the small size of the country, is the government ready to allocate parcels of land for new projects?

- Well, there is no problem with this. For example, last year, when we needed to expand the area in the port of Corozal, encompassing at the time 56 hectares, we easily purchased a new plot of the same size, bringing the port area to 112 hectares.

For the last eight years the country's economy has seen a remarkable growth. The state seeks to attract to the country private businesses, understanding that it gives an impetus to the development of Panama.

- Will the ACP tariff strategy be overhauled upon commissioning of the Third Set of Locks?

- Yes, we plan to to implement the new tall assessment different from the effective measurement system, according to which tolls and fees for the transit of ships are defined depending on the nominal tonnage of a vessel. That is, for example, today a container ship of capacity of 5,000 TEUs pays just for those five thousand 20' equivalent units, although the ship may not be fully loaded. In the future our tariff structure will take into account only the number of loaded containers. That is, if the vessel has 3,000 TEUs of loaded and 2,000 TEUs of empty containers on board, the shipowner will not pay charges for empty ones. According to our calculations, it will encourage shipowners and charterers to utilize their ships more efficiently, to include the canal in their routes. At the same time we expect that increased traffic through the canal will generate total revenue growth.

- Today, the Panama Canal is a monopolist in this region of the world. What is your opinion about the feasibility of Nicaragua canal project, as well as about the opportunity of opened Northwest Passage along the coast of Canada?

- The main difficulty of building the Nicaragua Canal is a technical one. To build the canal with its planned length of 286 km (vs Panama's 81 km) the contractor will have to perform a huge volume of earthworks, to build lock gates in an area located at above sea level which is higher than Panama. We believe that all this will last for years and years.

Regarding the Arctic Ocean route along the coast of Canada, I think that this way is still unreliable, as it is seasonal and requires the ice-breaking support and is unlikely to become a very busy shipping lane.

Finally, I would like to say that we are keeping an eye on latest trends in global shipping industry, but we are still optimistic about the future. The Panama Canal will retain its value as the most strategically important shipping artery.

About Panama Canal

Construction of the Panama Canal began in 1904. The first ocean-going vessel passed through the canal in 1914. Prior to 1999, the canal was managed by the U.S. and then according to the 1977 Torrijos-Carter Treaties was handed over to Panamanian jurisdiction. To control the Canal, an autonomous and self-funded government agency the Panama Canal Authority (ACP) was created. The Panama Canal traffic account for just 4% of world trade. Each year, about 14,000 ships pass through the Panama Canal, or an average of 38 ships per day.

The canal cuts across the Isthmus of Panama from north-west to south-east from the port of Cristobal, Colon on the Atlantic coast and the port of Balboa in Panama City on the Pacific Ocean. It takes a ship about eight to ten hours to pass through the whole Panama Canal, taking into account waiting in line 26 to 28 hours. The canal operates round the clock. The Panama pilots take control of the vessel during its transit through the canal.

The Panama Canal charges US $74 per a 20ft equivalent unit (FEU), or a $25 growth from 2007.

The Panamanians say their country is the bridge of the Americas. And they strive to receive dividends from both the famous Panama Canal and generally from their exceptionally advantageous geographic location enabling the country become a continental logistic platform. Russian ambassador in Panama Alexey Ermakov covers this issue for IAA PortNews.

- The Panama Canal is a ‘country-forming’ complex. Every year 14,000 vessels carry 300 mln t of cargo: grain, crude, oil products, containers. USA, China, Japan, S. Korea and Chile use it most of all.  This year, Russia is only the 30^th in terms of cargo turnover. In 2010, it slightly exceeded 2 mln t. About 40 vessels flying the flag of Russia pass the canal every year. However, Russia’s shipping business is represented much wider in the region as the majority of its vessels fly the ‘convenient’ flag of Panama. 

By the way, the number of applications to the Russian Embassy from the seafarers is very low. The most usual cause is the loss of documents through various events. More serious situation is related to labor disputes when a ship owner holds back wages. In this case, the Embassy employees assist in solving the problem like it was in the situation with M/V Pituit abandoned by the ship owner in 2009. 

In general, our data says that about 20% of the global fleet, or over 8,000 vessels of different displacement fly the flag of Panama.  

How could the Panamanian fleet establish itself as a leader?  First of all, owing to the status of the open shipping which allows registration for all vessels regardless the owner’s citizenship and the place of residence. Besides, the registration procedure in Panama is not costly and simple. It can take one day. Financial component plays a significant role – the vessels are exempt from the tax on profit from foreign activities and sales tax. It should be also noted that the preferences are granted with the use of well the developed port and bank infrastructure. Minimal tonnage and maximum age are applied in the industry. Transport exceeding the age of 20 years should be additionally inspected, safety certificate is accepted without any additional inspections.

Panama currently implements a package of activities aimed at modernization of the Panama shipping register through introduction of computer networks and data bases for coordination of activities between the head office and the regional representative offices.

Juridical base of Panama’s commercial shipping is being permanently improved through ratification of the related international conventions and agreements and bringing the existing contractual basis to conformity with the recognized standards. For example, implementation of the National Maritime Strategy of Panama is aimed at ensuring the country’s leadership in marine shipping. Under the Strategy, the year of 2008 saw the adoption of four framework documents: on commercial fleet, on ports, on maritime commerce and maritime procedural code. All of them meet all the principal international requirements and the national interests are taken into consideration.

Asian ship owners prevail in the fleet of Panama today and Panama now tries to attract vessels from Europe.

As a leader in global maritime shipping, Panama tries to develop related industries that strengthen the country’s economy in general. 

Parallel to the large-scale project on the Panama Canal expansion the country is busy with modernization of the entire transport infrastructure including port and storage facilities, construction of new highways, commissioning of the second terminal at the Tocumen International Airport. Local ports Balboa and Cristobal are still the largest ports in the Latin America. The government of Panama created the Special Economic Area Panama Pacifico and there is a Colon Free Zone (ZLC) on on Panama's Caribbean coast.

Panama is a very stable country. It is a significant financial area attractive for foreign businessmen. Unfortunately, Russian business is far from being active here.  KamAZ trucks and Lada cars used to be sold well but it has come to nothing. Over the 9-year period of my work in Panama I have seen Russian businessmen eager to set up operations here ‘with a swoop’ but they failed because of the high level of the environment competitiveness. You know, people here are saturated with commerce, law practice and financial feeling since berth.  Business is supported with privileges and preferences but one should fight for this. 

The position of China is very strong here. There are 300,000 Chinese people in the state with the population of 3.5 mln citizens. They are engaged in different businesses. People from Germany, the US, the Netherlands, Japan, India also have strong positions here.

Russia-Panama trade is not high, neither is the range of goods. Major goods exported to Panama are fertilizers, rolled metal and vodka. Marine fleet, commercial mission and Aeroflot used to have representative offices in Panama. 

The Embassy strives to expand business and humanitarian relationship between the two countries. It assists in arrangement of forums and round table meetings for businessmen, exhibitions etc.  For example, Expocomer 2014 was held in Panama on March 27 and the international investment forum Russia - Latin America will take place in Moscow in mid-April.

The year of 2014, is to see the signing of a bilateral agreement on introduction of visa-free regime for citizens of Russia and Panama. It is to give an impetus to the development of the trade and economic relations of the two countries. 

Editorial note: right before saying goodbye, Mr Ermakov told that the countries’ international relations are sometimes quite peculiar. In 2014, the Panama Canal celebrates its centenary (since the first ship sailed via the Canal). On this occasion, Russian choreographer Vasily Medvedev was invited to stage a dedicated choreographic composition at the National Ballet of Panama. The music has been composed by Pavel Ovsyannikov. The two counties, so to say ‘ahead of the curve’ in their own areas, have found a surprising but a very nice way to introduce the world to their achievements.