Publish in Analysis - Monday, June 27, 2016
The COSCO Shipping Panama inaugurates the expanded Panama Canal on June 26, 2016. (Photo: Panama Canal Authority/ACP)
Diagram of the water-savings basins in the newly Expanded Panama Canal locks. (Image: Panama Canal Authority/ACP)
Panama Canal inaugurates expanded $5.4 billion waterway.
BY LATINVEX STAFF
As much of the world’s attention was focused on the fallout from the planned UK exit from the European Union, Panama made its own global history.
On Sunday, it inaugurated an expanded version of its canal that links the Atlantic and Pacific Oceans. The new waterway doubles the Panama Canal’s capacity and could lead to a 50 percent increase in tonnage by 2025, according to projections from the Panama Canal Authority (ACP). The new locks will handle larger, Neopanamax vessels with a capacity of almost 13,200 TEUs, nearly three times the capacity of Panamax vessels, thereby supporting greater economies of scale.
The expanded canal is likely to increase revenues to up to 40 percent (from the current $1 billion a year to $1.4 billion) in the one-year outlook and increase cargo transit to up to 388,000 tons, according to global consultancy IHS.
It also will provide a boost to Panama’s GDP growth – already among the leaders in Latin America -- and improve the country’s sovereign rating, Fitch points out.
“The Expansion Program is truly an innovative and landmark project,” Shearman & Sterling partner Cynthia Urda Kassis said in a statement. Shearman advised ACP on the complex $2.3 billion loan transaction that partially financed the new locks as well as the $450 million bond offering to finance a new bridge crossing the Atlantic end of the Canal. “The Panama Canal transformed global trade at its opening over a century ago and is expected to do so once again with this new expansion.”
The Panama Canal was opened in 1914 and is considered one of the world’s leading engineering marvels, basically using the same concept and technology from its opening until today.
“It became one of the world’s most significant and massive engineering feats, with enough earth removed to circle the earth four times at the equator in railroad cars,” former Panama Canal Commission Chairman Robert McMillan writes in his book Global Passage.
The $352 million expenditure was below-budget in dollars, but the project was very high in terms of human life, with the loss of over 5,000 construction workers during the process, he points out.
The expansion fortunately did not involve the loss of human life, but did go seriously over budget and was nearly two years delayed.
Originally the waterway was to have seen its expanded version ready for the 100 year anniversary in August 2014, but the project was impacted by disputes involving the main construction firm, Spain-based Sacyr.
In 2011, there was a seven-month halt on work after disagreements between the ACP and the Sacyr-led consortium Grupo Unidos por El Canal (GUPC) over cement quality. Then in February 2014, there was a two-week suspension of works over cost overruns. Meanwhile, several strikes staged by construction workers' union SUNTRACS also caused delays.
Even more damaging though, are the disputes over costs which have resulted in a protracted legal war between ACP and Sacyr. The cost overruns could be up to 65 percent higher than the current $5.4 billion price tag for the expansion, IHS says.
“Pending judicial decisions, including a dispute resolution panel created to intervene in differences between the ACP and GUPC over cost overruns estimated at around $3.5 billion, are expected in the two-year outlook,” IHS Senior Latin America Analyst Diego Moya-Ocampos wrote in a recent commentary. “The main issue will be how to offset these costs with the expected revenues and benefits from the expanded canal.”
The good news is that those revenues are expected to increase substantially.
“The expansion ensures that the Canal will continue to have a tremendous impact on maritime traffic across the vital international lanes that connect the Pacific Ocean, the Atlantic Ocean and the Gulf of Mexico,” Manuel Orillac, a Shearman & Sterling partner who focuses on Latin America financing and was involved in both the Panama Canal expansion loan and the bond offering for the Canal bridge, said in the statement from the firm.
The project will enable passage of larger New Panamax container ships, particularly those carrying merchandise from Asia to the US East coast, through the 80-kilometre waterway, while US producers of LNG will also be able to ship directly from Gulf coast ports to markets in Asia, including Japan and South Korea, Moya-Ocampos points out.
“Their investments in improved export capacity aim to benefit from the expanded Panama Canal shortening voyage distances to Asian buyers, therefore reducing LNG transport costs,” he says.
In preparation for the Neopanamax ships, ports in the United States and elsewhere have been expanding their facilities the past few years.
“The expansion has already had a positive effect throughout the world, as ports are expanding their facilities and competing for the additional activity that will result from the larger ships that will soon use the Panama Canal,” Orillac says.
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