GOP WINS BIG AGAINST CHINESE-OWNED PANAMA PORTS

C O N F I D E N T I A L SECTION 01 OF 02 PANAMA 002004

SIPDIS

DEPT FOR WHA/CEN, EB/TRA/OTP AND EB/TPP
USTR FOR RVARGO AND AMELITO
USDOC/MAC FOR GAISFORD

E.O. 12958: DECL: 10/03/2015
TAGS: EWWT ETRD ECON PREL PM CH ECONOMIC AFFAIRS
SUBJECT: GOP WINS BIG AGAINST CHINESE-OWNED PANAMA PORTS

Classified By: Classified by Ambassador William A. Eaton for reasons 1.
4 (b and d)


1. (C) Summary: The GOP and Panama Ports Company (PPC)
agreed on September 8 to reverse a highly questioned move by
the former Moscoso administration in 2002 that freed PPC from
its contractual obligations to pay $22.2 million annually
plus a variable annual payment of 10% of its gross annual
income to the GOP. Moscoso,s action would have cost Panama
more than $1.3 billion in lost revenues during the remaining
45 years of PPC,s concession. Spearheaded by Minister of
Trade & Industry Alejandro Ferrer, the GOP overcame PPC,s
hardball tactics and forced PPC (owned by Hong Kong-based
Hutchison Port Holdings) to drop $40 million in counter
claims and to pay $102 million in back rent, avoiding a
prolonged legal fight. Whatever the reason for PPC,s
agreement to settle, the GOP showed its clear readiness to go
the mat with the world,s leading port operator and a
powerful Chinese-owned company. Looking ahead to the GOP,s
future solicitation on a proposed $300 million &megaport8
at the Pacific end of the Panama Canal, Ferrer told the
Ambassador September 19 that &the Chinese already have
enough ports here.8 End summary.

PPC,s 1997 Deal for Ports at Both Ends of the Panama Canal
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2. (U) In January 1997, PPC signed a 25-50 year concession to
develop terminals at the GOP,s previously existing Balboa
and Cristobal ports at the Pacific and Atlantic ends,
respectively, of the Canal. PPC agreed to pay the GOP $22.2
million annually in fixed rent as well as 10% of gross
revenues. Among other financial considerations, PPC also
agreed to pay the GOP $10 million for all existing equipment
currently at the port facilities, and give the GOP a 10%
stake in PPC. Through this deal, PPC took control of more
than $700 million worth of docks, land &portico8 cranes,
equipment, buildings, and other assets.


3. (SBU) As PPC is a subsidiary of Hong Kong,s Hutchison
International Port Holdings, its winning bid sparked worries
over potential Chinese influence in the Canal,s operations.
Hutchison Port Holdings, itself a wholly-owned subsidiary of
Hutchison Whampoa, Limited (HWL),is the world,s leading
port developer and operator, with 236 berths in some 40 ports
around the world, along with a number of
transportation-related service companies. The 1996 bidding
process was marred by controversy, as one competitor, Cooper

T. Smith Kawasaki Shipping Partnership, complained that the
GOP had awarded them a ports privatization contract on two
occasions, only to take it away each time in favor of other
competitors, Bechtel and Hutchinson Port Holdings.


4. (U) The GOP sought to resolve the controversy by using
offers of fixed rent as the determining factor to award the
concession. Bechtel dropped out after falling short with an
offer of $5 million per year. Kawasaki,s $10 million per
year bid also fell far short of Hutchison Port Holdings,
winning $22.2 million offer. Complaints from Bechtel and
others about irregularities in the bidding process sparked
concerns in Washington that increased Chinese influence over
the Canal could enable China to deny passage to U.S. ships.


5. (SBU) In 1996, many believed that HWL,s primary interest
in bidding on the Panamanian ports was to establish a Pacific
Ocean hub for its shipping interests. Two major sites,
Balboa and the former U.S. naval base at Rodman, are worthy
of investment necessary to develop a major port on the
Pacific side of the Canal. HWL obtained the rights to Balboa
on the east bank, and the right of first refusal to the
Rodman facilities. At the GOP,s insistence, HWL also agreed
to develop a port on the Caribbean side at Cristobal to
obtain the Balboa concession.

Moscoso Let PPC Off Hook for $22 Million in Annual Rent
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6. (U) Each port concessionaire in Panama has an
&equiparacion8 (&make whole8) clause in its contract with
the GOP, ensuring that each is afforded the same benefits
under Panamanian law, i.e., to maintain a level playing field
for port operators. In 2001, PPC sought to modify its
concession agreement, claiming, inter alia, that it was
paying more per TEU movement than Manzanillo International
Terminal (MIT) and the Colon Container Terminal (CCT). In a
highly controversial move in 2002, the Moscoso administration
repealed two clauses in PPC,s port contract, effectively
freeing PPC from its $22.2 million in annual fixed rent and
other payments, representing about $1.34 billion over the
remaining 45 years of the concession.

GOP Reverses Moscoso Action ) PPC Will Pay $102 Million
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7. (U) As part of his 2004 campaign, President Torrijos
promised to overturn Moscoso,s 2002 deal with PPC.
Following months of difficult negotiations that began in
September 2004, the two sides appeared far apart as recently
as the beginning of September, particularly as PPC pressed
for some $40 million in claims against the GOP for
non-performance of certain aspects of the original contract.
As the GOP,s lead negotiator, Ferrer was unyielding and on
September 8, the GOP and PPC announced a surprise
breakthrough. PPC agreed to pay $102 million in back rent
and committed to invest some $1 billion in facility upgrades
at Balboa and Cristobal between 2008 and 2015. PPC expects
this will create 5,000 jobs in Cristobal and 7,500 in Balboa,
and increase annual TEU movements from 1.5 to 4 million.


8. (SBU) Ferrer told the Ambassador on Sept. 19 that he held
firm because he was &fighting for a just outcome for the
Panamanian people.8 He said he thwarted PPC,s hardball
tactics, including blackmail, by telling PPC that &you,ve
got nothing on me, but you don,t want me to come out with
what I have on you!8 In the end, Ferrer said, he could not
have prevailed without President Torrijos, strong backing,
as the president twice rejected PPC,s telephone calls aimed
at going over Ferrer,s head during the negotiations. He
believed PPC ultimately capitulated because it saw little to
gain from a protracted legal battle. Second Vice President &
Maritime Authority Director Ruben Arosemena told the
Ambassador on Sept. 15 that he believed PPC settled because
it was falling behind other MIT and CCT in carrying out their
projects.

Comment
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9. (C) The GOP,s victory over PPC gave an embattled Torrijos
Administration a sorely needed win, as it continues to
struggle with its fiscal and social security reform agendas.
President Torrijos expressed great pride in the PPC outcome
during the Ambassador,s September 9 presentation of
credentials. Whatever the reason for PPC,s decision, the
GOP showed its clear readiness to go to the mat ) and
prevail ) in its battle with a powerful Chinese-owned
company. Looking ahead to the GOP,s future solicitation on
a proposed $300 million &megaport8 at the Pacific end of
the Panama Canal, Ferrer told the Ambassador that the
&Chinese already have enough ports here.8


EATON