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Canal Alternatives
LatinFinance / March 2007

By Larry Luxner

Bidding is scheduled to begin in March for the initial stages of a mammoth public-works project that will enlarge the Panama Canal to accommodate the ever-larger containerships of the 21st century. The project is officially budgeted at $5.25 billion, although some financiers predict the final bill might top $10 billion.

On Feb. 7, the Panama Canal Authority announced it had named Japan's Mizuho Corporate Bank Ltd. as financial advisor to the expansion project, defeating 14 other companies for the contract.

"Right now, we are in the midst of defining the financial structure [of the expansion], so it is premature at this point to talk about how this is going to be structured," said Rodolfo Sabonge, director of corporate planning and marketing for the quasi-governmental Panama Canal Authority. Sabonge added that "we feel very comfortable with the cost estimates, which included inflation and lots of contingenciees. We're not going to be using new technology in any elements of the project. Everything is proven technology."

Some 14,000 vessels transit the canal annually, accounting for 5% of all world trade. In addition, 15% of US trade goes through the Panama Canal and 69% of vessels transiting the canal are either heading to, or coming from, a US port.

Currently the thoroughfare moves 290 million tons of cargo annually; the most it can handle is 330-340 million tons.

Yet each year, a greater share of the world's cargo is being carried on post-Panamax vessels, which are too large to go through the canal's locks. It's estimated that by 2011, post-Panamax vessels will represent 37% of the world's container transport fleet. That means nearly 670 ships wonít be able to make use of the Panama Canal route as currently designed.

Meanwhile, some of Panama's neighbors are exploring alternatives to the 93-year-old waterway.

Nicaragua, long the poorest country in Central America, hopes to become the wealthiest through construction of a canal large enough to handle post-Panamax ships of up to 250,000 tons. Last October, before handing power over to Daniel Ortega, outgoing Nicaraguan President Enrique Bolaños announced the country had sincere intentions of going ahead with the project, whose $18 billion price tag is four times bigger than Nicaragua's annual GDP of $4.5 billion.

The canal would take 12 years to build and use one of six possible routes through Lake Nicaragua. Any one of those routes would slash transit time from New York to California by one day and 800 kilometers. Construction alone would more than double Nicaraguaís GDP, not to mention create some 40,000 jobs.

It's unclear whether the leftist Ortega government supports the project, which has many critics both at home and abroad. Given the country's overwhelming poverty and serious environmental concerns associated with a trans-Nicaraguan canal, little beyond talk is likely to happen in the next few years.

Mexico is also in the fray, dusting off plans for a trade route across the 300-kilometer wide Isthmus of Tehuantepec, the country's narrowest southern point. The so-called Trans-Isthmus Megaproject consists of ports on the Atlantic and Pacific linked by an extensive network of highways and railroads. The project also envisions assembly-for-export factories, shrimp farms and related agro-export industries. The whole idea has met with widespread resistance by the local indigenous population.

A far more realistic alternative is the canal seco or "dry canal" proposed by El Salvador, Honduras and Guatemala. That idea is fairly simple. It involves building a modern container terminal in El Salvador, on the Pacific coast, and linking it via a superhighway to two upgraded container terminals on the Atlantic: Puerto Cortés in Honduras, and Puerto Barrios in Guatemala. Under the dry canal concept, shippers will be able to unload containers from ocean vessels on one side, truck them across the skinniest part of Central America and reload them onto similar ships at the other end.

"The canal seco will definitely lower vessel traffic through the Panama Canal," says Ana Carolina Sikaffy, an environmental consultant for the Central American Maritime Commission in Honduras. "This is a very viable alternative to the canal. Over the next 10 years, Asia is going to send a lot of containers to the Americas, and Panama will probably not be able to handle the increased volume even if they go ahead with their expansion."

The canal seco idea has been talked about for years, but now it's actually being implemented. Construction has started at the Port of Cutuco, on the Gulf of Fonseca along El Salvador's Pacific coast. The $172 million port is being built with a loan from the Japan International Cooperation Agency, and dredging is now underway. When finished, ships with capacities as large as 6,000 or 7,000 TEUs (20-foot equivalent units) will be able to call at Cutuco.

El Salvador's foreign minister, Francisco Lainéz, says land prices near Cutuco have already started to rise in anticipation of the coming business boom, while several factories have set up operations near the existing port.

"This port will be one of the most modern in all of Latin America and with the capacity to handle the largest ships," says Lainéz. "Once the port is finished and the road to Puerto Cortés is inaugurated, it'll take about six hours to get from one port to the other, which is much less than the time it takes to transit the Panama Canal."

The container port will be 340 meters long and 14 meters deep, covering an area of 15.5 hectares. An adjacent six-hectare multipurpose terminal will feature a 220-meter-long dock. In addition, the port complex will have a three-hectare vehicle and passenger terminal, and be equipped with two Panamax cranes, two tugboats and a lighthouse visible 15 miles away. In total, the terminals will cover 25 hectares, with 172 hectares of land set aside for future expansion.

Projections call for total cargo to reach 120,000 TEUs in the first year, 185,000 TEUs by the second and 275,000 TEUs by the tenth.

"We don't want to compete with the Panama Canal," says René León, El Salvador's ambassador to the United States. "Our vision is to be an alternative link between the Pacific and the Atlantic. The Panama Canal will still be the main gateway. Cutuco will be the deepest-water port between Mexico and Panama, and the dry canal will create a volume of cargo for maritime routes that now donít even exist."

There's another consideration, too. "What if thereís a terrorist attack against the Panama Canal?" ventures León. "Wouldn't it be nice to have an alternative?"

Current plans call for the port of Cutuco to be finished by late 2008 or early 2009. León says the project will foster economic integration within the region while transforming El Salvador into the logistics hub of Central America.

"We have now approved a 330-kilometer highway from La Unión to Anguiatí on the border with Guatemala," he says. "Honduras, under the Millennium Challenge Account compact, is building its own road from Puerto Cortés to El Salvador. Eventually, their volume of trade will grow so large they'll need to expand anyway. We're looking for modern ports and modern infrastructure that can support large volumes of trade."

The Salvadoran government claims the Cutuco port project will generate 400 construction jobs, 450 operational jobs and 2,250 jobs in related activities. A planned free zone at the port will eventually employ 10,000 people or more.

"I know of at least two US electric utilities interested in investing in power plants at the port of Cutuco," says León, estimating the value of such a facility at $300 million. "And Taiwanese companies want to link Cutuco by rail to Honduras and Guatemala. What we're building here is a vision where there is concrete action.

Panama doesnt seem concerned about the canal seco concept.

"None of these dry canals are economically viable alternatives to an all-water route," said the Panama Canal Authority's Sabonge. "To unload a container in a port costs $75 to $100. To move it by rail costs another $150 to $200, and to load it back again, yet another $75 to $100."

By comparison, it currently costs an average $49 to move a container through the Panama Canal, rising to $54 per container effective May 1.

"Everybody has the right to pursue new proposals, but our decision to expand the canal is not based on what other countries are thinking about doing," says Panama's ambassador to the US, Federico Humbert Arias. "We did it [moved forward with the Panama Canal expansion plan] because we have a responsibility to the maritime industry to provide safe and affordable passage through our canal," he adds. Part of the expansion costs will be covered by raising canal tolls by a proposed 4.5% a year over the next 20 years. The country also hopes to get a bridge loan of about $2.3 billion. The Panama Canal Authority expects to finance the project between 2009 and 2011 and assume all associated debt.

Panama's canal expansion got the green light in a nationwide referendum in October with approval from 80% of voters. A third set of locks will double capacity along the 51-mile-long canal while allowing significantly more traffic. Highlights of the project, which should be finished by 2015, include the construction of two lock complexes — one on the Atlantic and another on the Pacific — each with three chambers including three water-saving basins. In addition, the project foresees the excavation of new access channels to the locks, the widening and deepening of existing navigational channels and the elevation of the maximum operating level of Gatun Lake.

"The Panama Canal was supposed to run out of capacity between 2022 and 2025, but with the expansion of Asia's economies and trade with the US, it will now run up to capacity in 2014 or 2015," Humbert explains, adding that the actual canal will remain open throughout the whole expansion process.

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