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23 January 2019

Locking in with the Panama Canal

Infrastructure, Transport
The Panama Canal is one of the wonders of the world. Jonathan Bell charts its course.

Last weekend I experienced one of my lifelong ambitions – the transit of the Panama Canal. Yeehaw! This was a daylight crossing from south to north, in other words from the Pacific to the Atlantic. And, just to make you even more envious possibly, I transited in a three-masted barque – a wonderful unique tall sailing ship some 117 metres in length with a gross tonnage of 3,849 tonnes. Naturally, we weren’t under sail during the transit! It takes an average of around 8-9 hours to transit the 50 miles (80 km) of the canal.

Undoubtedly this was one of the most unusual vessels to transit the canal in many months. The cost to take that vessel through the canal using the old locks was around $70,000 – so roughly $750 each for the 92 package holiday passengers on board. Yes, a very glorified package holiday as I celebrated my 30th wedding anniversary. But as a comparison, take into account that the most expensive vessel (a 14,000+ TEU container vessel) to have transited the canal in 2018 is understood to have paid $1.8 million.

So why am I telling you about this? Well, the numbers got me thinking about the bigger picture – and that is, just how much does the Panama Canal Authority generate annually in terms of tolls and fees for vessels using the Panama Canal, and what has the recent expansion of the canal done for global seaborne trade?

We will get into more detail on these questions shortly, but it is important to first of all recognise the immense importance of the Panama Canal historically and strategically. Just why the canal has never been recognised as one of the wonders of the world – or even put forward for such an honour – is beyond me!

There are masses of very good books on the history of the construction of the Panama Canal, but here I will try to paint a very potted history. Back in the late 19th century, the French, led by French engineer Ferdinand de Lesseps, got the first Panama Canal project underway.

From 1880 to 1893 that initial project tried to carve out the canal with the idea that it could be done removing earth and rock to take the canal to sea level across the isthmus (obviously, they had taken no notice of the extensive canal system in England at the time – which employed locks to deal with the elevation variations). Such a project was always doomed as the geology and topography of the Isthmus of Panama made the French plan ludicrous. Combined with this, some 22,000 workers died in the first eight years of the project from malaria, yellow fever and dysentery – and the French only recorded the deaths that occurred in hospital.

It is said that the French spent around $287 million (1893 dollars) on the project before throwing in the towel in 1893. One historian has estimated this to be probably equivalent to around $9.8 billion in 2016 dollars. Inevitably this caused a scandal in France, with many reputations lost and investors being made bankrupt through the losses.

So, the USA, which had been considering a canal in Nicaragua some years earlier, stepped in to buy what the French had left behind and embark on a newly engineered project. The French initially asked for $100 million, but in 1902 a deal was struck with the US purchasing the semi-completed 11 miles of canal and remaining equipment for only $40 million. Good deal guys! US President Theodore Roosevelt was a major driver of the project which began in 1904. The immense effort put in by the US engineers and workers should never be underestimated.

The canal – which had been constructed with locks at the Atlantic and Pacific ends to be gravity fed by the man-made Gatun Lake - was completed in 1914. A further 6,000 died during the years of the US construction – despite the advances made in medicine during this time. The cost to the US for their work was $352 million (1914 dollars). Unfortunately, with the outbreak of World War One, the opening of the canal went largely unnoticed!

The opening of the canal shortened the route for vessels travelling from say the US east coast to the US west coast from 13,000 miles (21,000 km) to only 5,000 miles (8,000 km) and has revolutionised global seaborne trade ever since. The maximum size of commercial vessels using the canal became known as Panamax – being the size of ships able to fit in the old locks. Roll this on and the world’s shipping fleets have changed dramatically – with mega container vessels and VGLCs unable to use the Panama Canal. Hence the need for an expansion of the canal.

Financing for the canal extension was secured in December 2008 – in the midst of the global financial crisis! The Panama Canal Authority (ACP) signed agreements with five multilateral institutions to procure financing of up to $2.3 billion debt required for the $5.25 billion expansion programme. The bulk of the cost of the project is being paid by the ACP from transit tolls. In total, loan agreements were signed for $800 million with Japan’s JBIC, $500 million with the EIB, $400 million with the IADB, $300 million with the IFC and $300 million with CAF. Mizuho was financial adviser to the ACP.

It is understood that the ACP will pay an average effective interest of 5.48%, with spreads over Libor on the different loans in the package of 48bp-120bp, stepping up to 140bp. These loans are over 20 years which includes a 10-year grace period. In negotiating the loan, the ACP took legal advice from Shearman & Sterling in the US and Galindo, Arias & López in Panama. Clifford Chance acted for the IFC.

Work on the expansion was dogged by delays which added to the cost. It is now estimated that the expansion cost around $5.5 billion. The new locks opened in June 2016, enabling the canal to now take Neo-Panamax ships carrying up to 14,000+ containers – nearly three times as many as the previous ships, and enabling significant economies of scale.

The expansion included the construction of a new set of locks on the Atlantic and Pacific sides of the waterway, creating a third lane of traffic and doubling the cargo capacity of the waterway. While the expanded locks are 70 feet wider and 18 feet deeper than those in the original canal, they use less water due to water-savings basins that recycle 60% of the water used per transit. The new locks do not use the engine ‘mules’ as in the old lock system, but instead use tugs to centre the vessels through the locks.

Back to the issue of tolls and fees. One of the first Neo-Panamax vessel to use the new locks in 2016 was MOL Benefactor with 10,000 containers. On a northbound transit Mitsui OSK Lines paid $829,468 in tolls for MOL Benefactor to transit.

There are many ‘extra’ charges or fees for vessels using the canal, beyond the initial toll. For instance, the advance reservation fee is $25,000 to be sure you have a slot and to guarantee a daylight transit you have to add another $30,000.

And, as one former employee of ACP wrote in an online blog in September 2017: “My last job with the Panama Canal was to calculate tolls for the vessels passing the canal. The minimum fee right now is $2,000 which applies to small yachts. The present highest toll is about $1.2 million including tug fees and other things. For some vessels, (mainly smaller ones) the tolls are the same, with or without cargo. With others, it varies with every transit. The rules are complex and constantly changing as the canal tries to maximise profits without killing the goose that lays golden eggs and the shippers do the same.”

To date the CMA CGM Theodore Roosevelt is the largest capacity vessel to ever transit the expanded locks, with a capacity of 14,863 TEUs.

In October 2017, the ACP revised the toll structures. To see various examples of toll calculations visit the ACP website: www.pancanal.com However, unless you are a shipping person, you may find these rather confusing. I did! Anyway – these guidelines suggest an average of $781,000 for an 11,000 TEU container vessel in category 4 using Neo-Panamax locks (there are various savings depending on which loyalty category a vessel sits within – this is related to use regularity). In an example of a laden LNG vessel carrying 174,000 cubic metres, it cites $439, 800 as the toll. Costs of course vary immensely depending on type of vessel, type of cargo, direction of transit, and many other factors.

Incidentally, the lowest toll ever paid was by adventurer Richard Halliburton who paid 36 cents to swim the canal in a publicity stunt in 1928.

There is no doubt that Panama, which has the fastest growing economy in Central America, is generating immense benefits from the earnings from the Panama Canal. Many other infrastructural developments are now taking place around the canal – including the new bridge at the Atlantic end of the canal, and the development of the new 5.3 million container terminal in the Corozal region adjacent to the canal on the Pacific side.

For ports on the US Eastern seaboard, the expansion has allowed many of these to significantly expand their services – in particular Norfolk, Baltimore, New York/New Jersey and Miami. Others are following. In addition, for US exporters of shale-based gas the expanded canal gives those operators a massive boost to export their product to Asian-based customers as they ship from the Gulf of Mexico refining ports.

Naturally, the US keeps a very close eye on what goes on in Panama and the surrounding region. US naval vessels have a special arrangement for use of the canal in terms of cost and priority. Back in 2014 the news that a Hong Kong-based group (KKND Group) was discussing with Nicaragua the construction of a new estimated $50 billion 280 km canal through Nicaragua will have sent serious concerns through Washington. Currently, it appears as though this plan has been mothballed.

Of more immediate concern perhaps is the need to ensure that the lock-feeding Gatun Lake always has enough water to feed the canal’s lock system. Deforestation and climate change have, at times, seriously impacted the ability of the canal to take all vessels. Lack of rainfall in late 2018 meant that vessels of a certain size were unable to use the canal.

That said – the Panama Canal, is one of the most amazing engineering and construction projects on the planet. It is still on my bucket list, maybe this time for a southern transit!

As a footnote to all this, David McCullough in his excellent book ‘The Path Between the Seas’, wrote:  "The creation of a water passage across Panama was one of the supreme human achievements of all time, the culmination of a heroic dream of over four hundred years and of more than twenty years of phenomenal effort and sacrifice.  The fifty miles between the oceans were among the hardest ever won by human effort and ingenuity, and no statistics on tonnage or tolls can begin to convey the grandeur of what was accomplished.  Primarily the canal is an expression of that old and noble desire to bridge the divide, to bring people together.  It is a work of civilisation."


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