PANAMA CANAL AUTHORITY EYES TOLL INCREASES

UNCLAS PANAMA 000047

SIPDIS

SIPDIS

FOR WHA/CEN TELLO

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

REF: A. PAMAMA 2374

B. PANAMA 2375


1. SUMMARY. On December 18, 2006, DCM and EconOff met with
Panama Canal Authority (ACP) Administrator Alberto Aleman
Zubieta and ACP Chief of Planning Javier Sabonge to discuss
the ACP's planned toll increases. The ACP has not yet
determined the magnitude of the toll increases. Aleman
hinted that the increases could be as high as 8.0% per annum
over the next five years. Concerned about potentially
adverse USG reaction to any toll increases, Aleman sought to
soften possible opposition by suggesting such increases
should be of no concern to the USG. Aleman said the
Miami-based cruise industry will complain as they did after
the 2002/2003 toll increases. END SUMMARY.


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ACP May Front-Load Canal Toll Increases
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2. (SBU) On December 18, 2006, DCM and EconOff met with
Aleman and Sabonge to discuss the ACP's planned toll
increases. Aleman told EmbOffs the ACP has not yet
determined the magnitude of the toll increases. Aleman said,
however, that the increase would be in excess of the 3.5%
discussed during the runup to the October 2006 referendum on
the $5.25 billion Panama Canal expansion project (Project).
He also hinted that the increases could be as high as 8.0%
per annum over the next five years. While never committing
to an actual toll increase figure, the ACP's public discourse
during the Project debate was that annual toll increases
would be between 3.5% and 8.0%. ACP Project Manager Jorge de
la Guardia separately told EmbOffs that the ACP plans on
implementing toll increases during the first quarter of 2007.
See reftel A.


3. (U) Since the start of the Project debate in April 2006,
the ACP has consistently stated that its goal was to (i)
raise tolls 100% by 2025 (hence the 3.5% annual toll increase
figure) and (ii) finance the Project through a combination of
toll increases and debt. Aleman said the ACP may raise tolls
higher than 3.5% in the short run in order to incur less
indebtedness. Publicly, the ACP has stated that $2.3 billion
of the $5.25 billion Project costs would be financed with
debt. ACP Chief Financial Officer Jorge Barrios Ng told
EmbOffs in a December 6 meeting that the ACP might boost the
Project's debt to $2.5 billion. See reftel B.

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ACP Girds for Pushback by Users
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4. (SBU) The ACP is concerned about potential adverse USG
reaction to any toll increases. The December 18 meeting was
part of the ACP's efforts to keep Post apprised of the toll
increases situation in order to avoid, or soften, USG
opposition. Aleman said he expects significant protests from
countries such as Japan, Ecuador, Peru and Chile, as each
country protested the 2002/2003 toll increases. In
preparation for such protests, Aleman is saying the ACP is
paying for the Project, not the users. He said the users are
simply paying for the services rendered by the canal. Aleman
argues that the ACP is assuming all risk in the Project since
the users are under no obligation to use the canal once
expanded. To date, the GOP and ACP assuaged public concerns
over who would pay for the Project by saying it would be
partially funded by the users through increased tolls.


5. (SBU) Aleman said the toll increases should be of no
concern to the USG. Aleman added that canal tolls are the
lowest costs in shipping goods. Aleman said it costs $600 to
transport a container across the U.S. The ACP charges $54
per container. Even if the price doubles to $108 overnight,
Aleman says the incremental cost per item transited is minimal


6. (SBU) Aleman said the Miami-based cruise industry will
complain as they did after the 2002/2003 toll increases.
Aleman believes the cruise industry will simply pass the
costs through to the passengers. Aleman said the canal is the
second most popular cruise destination after Alaska and the
cruise industry cannot afford to curtail cruises to Panama.
Aleman said he is willing to work with the cruise industry to
time the toll increases in such a manner which will
facilitate the industry passing the costs to the passengers.

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ACP Toll Pricing Philosophy
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7. (SBU) Aleman said the ACP's pricing philosophy is to
charge what the canal is worth to each user and to charge
based on a ship's cargo carrying capacity. Unlike during the
USG administration where tolls were applied more uniformly,
the ACP seeks to price each user based on the price
elasticity of that user. Therefore, the ACP will, for
example, charge liner services (cruise, container and vehicle
ships) which operate on tighter schedule more than grain
ships which have a more flexible timetable. Aleman said if
oil prices continue to rise, the canal's value will increases
and he will be able to raise tolls even further. However, he
said he realizes that once he charges "one penny more than
the value received by its users, they will go elsewhere."
Aleman also said the ACP will not disclose the uses of any
toll increases. He said that the cost to operate and expand
the canal is no concern of the users. Under USG
administration, the toll structure was geared towards
covering operating costs and capital expenditures,
accordingly any toll increases were justified to the users by
disclosing the uses of such toll increases.

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Comment: Toll Hikes Driven by Politics, Not Just Market
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8. (SBU) Aleman and the ACP officials have an encyclopedic
knowledge of the shipping industry. They have extensive
research on the costs of structure of the canal users and
understand the dynamics of any toll increase. Aleman also
knows that with global trading increasing, particularly
containerized traffic, and with increased fuel costs, the
canal services are in great demand. He knows he is in an
excellent bargaining position. However, he also understands
that either changes in the world economy or extraordinary
events (such as a drought which would limit the number of
possible transits) could adversely effect the canal's
financial situation. Aleman's stated rationale of increasing
tolls by as much as 8.0% annually in order to lessen the debt
burden is contrary to matching the duration of the Project or
the canal's operation with the duration of its long term
debt. The ACP's return on assets was 18.8% during 2006. The
yield on GoP's most recent long term bond issuance was
6.729%. From a strictly financial point of view, it would
make more sense for the ACP to incur more long term debt, not
less. The real reason for the hesitancy to incur greater
debt appears to be political. The ACP needs to assuage the
public's concerns about increased public debt. The ACP's
real reason for higher toll increases appears to be market
driven. The ACP knows the canal's services are currently in
great demand and it therefore has pricing power. The higher
toll increases will also limit the increased financial risk
imposed on the canal by the Project. By increasing tolls 8.0%
annually beginning in 2007, the ACP would double tolls by
2015 instead of 2025. Increasing tolls by 8.0% annually for
five years and 3.0% thereafter would double tolls by 2020.
The higher toll increases in the early years would increase
the present value of the future cash flows which will help in
lowering the interest expense on any Project debt financing.
Eaton