UNCLAS PANAMA 000181

SIPDIS

SIPDIS

FOR STATE WHA/CEN TELLO

E.O. 12958: N/A
TAGS: ECON FCSC EFTA ETRD EWWT PM
SUBJECT: PANAMA PROPOSES CANAL TOLL INCREASES

REF: A. PANAMA 00047

B. PANAMA 2374

C. PANAMA 2375

THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE
ACCORDINGLY.


1. (SBU) SUMMARY. On February, 2, 2007, the Panama Canal
Authority (ACP) announced its proposed toll increases for the
Panama Canal. The proposed toll increases run through 2009.
The ACP is holding a public comment period through March 12,
2007 and a public hearing on March 14, 2007. The full text,
in English and Spanish, of the proposed toll increases can be
found on the ACP's website, www.pancanal.com. Under the new
proposal, tolls on containerized shipping will increase by
33% by May 1, 2009. Tolls on passenger ships will be subject
to a new regime based on berths. Tolls on other ships will
increase by 16% to 24% by 2009. The ACP's rationale for the
toll increases is based on the value of the Panama Canal to
its users given the savings to the users and the better
service to be provided as a result of the canal expansion
project. The proposed toll increases are more than double the
anticipated 8% increases the ACP had previously signaled.
The Panama Canal continues to experience increasing demand
for its services. END SUMMARY.
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Toll Increase Announcement and Information
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2. (U) On February 2, 2007, the ACP announced its proposed
toll increases for the Panama Canal. The proposed toll
increases run through 2009. The ACP is holding a public
comment period on the increases which ends at 4:15 pm (Panama
time) on March 12, 2007. All comments must be submitted in
writing. On March 14, 2007, the ACP will hold a public
hearing at which any party who participated in the public
comment period may appear. The full text, in English and
Spanish, of the proposed toll increases can be found on the
ACP's website, www.pancanal.com.

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ACP Proposes Hefty Toll Increases
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3. (U) Under the new proposal, tolls on containerized
shipping will increase an additional 33% by May 1, 2009 over

the May 1, 2007 rate. Pursuant to toll increases announced
previously in 2003, tolls on containers are scheduled to
increase from $49.00 to $54.00 per laden containers on May 1,

2007. Under the new proposal, toll will increase to $63.00
per laden container on May 1, 2008 (a 16.67% year over year
increase) and $72.00 per laden container on May 1, 2009 (a
14.3% year over year increase). Tolls on ballast containers
will increase from $43.20 per ballast container as of May 1,
2007 (under the previously announced 2003 increases) to
$50.40 on May 1, 2008 and $57.60 on May 1, 2009.


4. (U) Containerized shipping is the fastest growing segment
of the ACP's market, having more than doubled over the past
ten years. During 2006, containerized ships accounted for
38% of the total tonnage transited through the Panama Canal
and 49% of total toll revenues.


5. (U) The ACP proposes to charge passenger ships based on
maximum berth capacity instead of the current tonnage system.
Under the new proposal, large vessels will be charged on a
per berth basis and smaller vessels will continue to be
charged under the current tonnage system. This would mean
that large passenger ships would be charged $100.00 per laden
berth and $80.00 per empty berth as of October 1, 2007. The
tolls increase to $115.00 per laden berth and $92.00 per
empty berth on October 1, 2008 (a 15% year over year
increase) and $120.00 per laden berth and $96.00 per empty
berth as of October 1, 2009 (a 4.3% year over year increase).
Passenger traffic through the Panama Canal represented only
2.3% of the North American cruise market during the 2005/2006
cruise season.


6. (U) General cargo ships, refrigerated cargo ships, dry
bulk ships, small passenger vessels, and vehicle transport
ships will continue to pay based on tonnage. Tolls on
general cargo ships will increase 19% by 2009. Tolls on
refrigerated cargo ships will increase 12% by 2009. Tolls on
dry bulk ships and small passenger vessels (less than 30,000
registered tons) will increase by 16.5% by 2009. Tolls on
vehicle transports will increase by 19.4% by 2009. Tolls on
all other types of ships will increase by 24% by 2009.

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Neutrality Treaty Considerations
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7. (U) Article III, Section 1(c) of the Neutrality Treaty
provides, in pertinent part, that tolls and other charges for
transit and ancillary services will be fair, reasonable and
equitable and consistent with the principles of international
law. In the Understanding to such treaty, it states that
Article III, Section 1(c) of the Neutrality Treaty shall be
construed as requiring, before any adjustment in tolls, that
the effects of any such toll adjustment on the trade patterns
of the U.S. and Panama shall be given full consideration.
Among the factors requiring consideration are the costs of
operating and maintaining the Panama Canal, the competitive
position of the Panama Canal, the interest of the USG and GoP
in maintaining domestic fleets, the impact of increased tolls
on the various geographical areas of both parties and the
interests of both parties in maximizing international
commerce.

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Rationale for Toll Increases
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8. (SBU) The ACP's rationale for the toll increases focuses
on the value of the route offered by the Panama Canal to each
user market segment, the cost and benefits of the $5.25
billion Panama Canal expansion project, the relative value of
the route in comparison to the Suez Canal and other routes
(such as the multimodal system in the U.S.), the effects of
the toll increases adjusted for inflation, and greater
transparency of tolls which will allow to user to more easily
pass along costs. The ACP maintains that higher fuel costs,
higher shipping costs, the demands of just-in-time inventory
management and increased international trade make the service
offered by the Panama Canal more valuable than before. The
ACP believes that the time and distance savings offered by
the Panama Canal and the improvement in service to be
provided through the canal expansion project merit the
proposed toll increases. Valentine Lynch, the ACP's Tolls
and Rates Manager, told Econ Chief on February 4, 2007, that
even with the toll hikes, the Panama Canal is still a "great
deal" for shippers.

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Proposed Increases Higher Than Expected
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9. (U) The ACP has publicly stated that it wants to double
tolls by 2025. The proposed toll increases get them 30% of
the way on containerized traffic and 20% of the way on all
other transits. The toll increases are more than double the
anticipated 8% increases the ACP had previously signaled. See
reftel A.

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Canal Demand Continues to Grow Strongly
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10. (U) The Panama Canal continues to experience increasing
demand for its services. During its first fiscal quarter
ended December 31, 2006, the ACP reported quarter over
quarter increases of 8% in total transits, 11.7% in tonnage
transited, 14% in Panamax ship (the largest ships that can
transit the Panama Canal) transits and 7% in refrigerated
ship transits. Additionally, the ACP reported an earlier
start to the high season, indicating increased demand. The
historical high season runs March through May. The ACP
reported that during 2006, the high season began in February
and that it appears the high season this year began in
mid-January. During the its first quarter, the ACP reported
unseasonably long wait times to transit the Panama Canal of
up to five days.

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Comment
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11. (SBU) The higher than anticipated proposed toll increases
are likely to generate protests, especially among users from
Japan, Chile, Peru and Ecuador (reftel A). However, the ACP
feels the toll increases are completely justified and, when
confronted, will challenge the shipping industry to
specifically demonstrate how they are adversely affected by
these increased tolls. To do so, the ACP believes the
shipping industry will be required to reveal certain
operating financial information the shipping industry has
historically refused to disclose. In the end, we expect
there will be protests but no backing down by the ACP on the
proposed toll increases. The ACP is confident that they are
providing a service whose value is increasing and which is in
ever increasing demand. The ACP is seeking to capitalize on
its ability to exercise pricing power, knowing full well that
demand is dependent on international trade and global
economic growth, none of which is guaranteed in the future.
Eaton