Identifier
Created
Classification
Origin
06PANAMA1292
2006-07-03 22:25:00
UNCLASSIFIED
Embassy Panama
Cable title:  

PANAMA CANAL EXPANSION HURDLES

Tags:  ECON ETRD 
pdf how-to read a cable
VZCZCXYZ0001
RR RUEHWEB

DE RUEHZP #1292/01 1842225
ZNR UUUUU ZZH
R 032225Z JUL 06
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 8484
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHGV/USMISSION GENEVA 0266
UNCLAS PANAMA 001292 

SIPDIS

SIPDIS

DEPT FOR WHA/CEN-SCHIFFER

E.O. 12958: N/A
TAGS: ECON ETRD
SUBJECT: PANAMA CANAL EXPANSION HURDLES

This Part II of a two part series on the canal expansion.
Part II discusses the legal, financial and economic
implications of the referendum.

UNCLAS PANAMA 001292

SIPDIS

SIPDIS

DEPT FOR WHA/CEN-SCHIFFER

E.O. 12958: N/A
TAGS: ECON ETRD
SUBJECT: PANAMA CANAL EXPANSION HURDLES

This Part II of a two part series on the canal expansion.
Part II discusses the legal, financial and economic
implications of the referendum.


1. SUMMARY (SBU) Financing the canal expansion is premised
on increasing tolls an average of 3.5% per year. Panama
Canal Authority (ACP) officials are concerned that countries
will use Article 5 of GATT (Freedom of Transit) and Article 3
of the Panama Canal Neutrality Treaty to oppose the planned
toll increases. While there is no jurisprudence on the
matter, the ACP faced objections to toll increases based on
Article 5 of GATT in 2002 from a variety of countries. The
objections were eventually withdrawn. The proposed budget and
benefits of the expansion continue to be questioned by a
former ACP administrator. The GoP continues to sell the
expansion as a cure all for Panama's social and economic
problems. END SUMMARY.

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New Legal Hurdles Uncovered
--------------


2. (U) The ACP seeks to double its tolls over the next 20
years. The current plan is to begin toll increase
immediately following approval of the referendum by 3.5% per
year. Frontloading the toll increases to as much as 8.0% per
year in the first few years is also under consideration. As
in the past, the increases will be instituted through a
30-day consultation period with the canal's users.


3. (SBU) Article 5 (Freedom of Transit) of the 1947 GATT
Treaty (incorporated by reference into the 1994 GATT Treaty
which is now part of the WTO system) provides that all
charges and regulations imposed by contracting parties on
traffic in transit to and from the territories of other
contracting parties shall be reasonable, having regard to the
conditions of the traffic. GATT Article 5 further provides
that all transit duties or other charges imposed in respect
of transit shall be limited to charges for transportation or
those commensurate with administrative expenses entailed by
transit or with the cost of services rendered. In short, ACP
officials believe certain countries, such as Ecuador, Chile,
the United States and various European countries, believe
GATT Article 5 prohibits the ACP from raising tolls to fund
the canal expansion or to fund GoP expenditures through the
ACP remittances. According to ACP lawyers, there is no legal
precedence on this issue. ACP lawyers told members of the

Panamanian Association of Business Leaders (APEDE) at a
meeting EconOff attended on June 27 that they believe that as
a practical matter GATT Article 5 would not impede toll
increase because they could be cast in a different light.
However, ACP lawyers said that when the ACP previously
announced toll increases many countries referenced GATT
Article 5 as a prohibition against raising tolls beyond the
costs of rendering the service. Eventually, according to ACP
lawyers, most countries withdrew their objections, except for
Chile and Ecuador.


4. (SBU) Article 3 of the Panama Canal Neutrality Treaty
provides that all tolls and other charges for transit and
ancillary services shall be just, equitable and consistent
with the principles of international law. The Understandings
section of the Neutrality Treaty states that before any tolls
can be increased the effect on the trade pattern of the
United States and Panama must be given full consideration.
Again, according to ACP lawyers, this is an area with little
legal precedent. Despite various toll increases, certain ACP
officials and business community members are concerned that
the USG or U.S. companies may use the Neutrality Treaty as a
way to halt or reduce any toll increases.


5. (SBU) ACP lawyers admitted to EconOff that there is no
study of the legal ramifications of the expansion project.
While prior toll increases were largely unnoticed, in light
of the increased media attention surrounding the expansion,
APEDE members expressed concerns over the possibility that
governments might use the Neutrality Treaty for bargaining
leverage or political gain The Panamanian business sector is
aware of this issue. One member of APEDE said in the meeting
attended by EconOff, "We have to be careful. The Americans
tell us not to worry about the treaty but that was their
excuse for the invasion".

--------------
Financing the Expansion
--------------


6. (U) The proposal provides that the project be paid from
canal operations and increased tolls. The canal itself can
neither be pledged as collateral nor serve as a guarantor.
Any debt financing will be by the ACP without any GoP
guarantee or obligation.


7. (U) The proposal provides that during construction the
ACP shall remit to the GoP an amount no less than that
remitted during 2006. During 2005 the ACP remitted $488
million and is estimated to remit over $500 million during

2006.


8. (U) Doubts about the $5.25 billion budget exist. Former
Canal Administrator Fernando Mandfredo expressed to the press
that the expansion will cost at least $7.8 billion. He says
the ACP has not accounted for many additional expenses such
as reinforcing the bridges to carry heavier payloads,
additional navigational systems and various administrative
expenses. He believes the ACP will have to borrow over $4.6
billion not the $2.3 billion the ACP has budgeted.

--------------
Canal Expansion as Cure All
--------------


9. (U) The GoP claims the expansion will create 7,000 direct
and 35,000 indirect jobs during the construction phase and
add an additional 1% annually to GDP growth. This higher GDP
growth rate will in turn result in an additional 150,000 to
250,000 new jobs. The expansion will result in 1,100 new
permanent jobs at the ACP.


10. (U) Due to the skilled labor shortage, the GoP has begun
a process to train people in the needed skills such a heavy
machinery operations, masonry, plumbing and various forms of
engineering. However, the limitations of this effort were
seen when the GoP began receiving job applications for
instructors, the majority were unqualified to teach.


11. (U) A former Minister of Labor expressed in the press
concerns over an influx of Colombian and Dominican skilled
workers and a migration of poor unskilled Panamanians from
the interior to Panama City.

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COMMENT
--------------


12. (SBU) While the expansion presents immense opportunity
for GDP growth and job creation, if poor unemployed
Panamanians witness many of the expansion jobs going to
foreigners there is a potential for social unrest,
particularly between Panamanians and Colombians. The GoP
seems to be promising more than the canal expansion can
deliver.
EATON