Considered one of the most important public works projects in the world, the widening of the Panama Canal is much more than a source of national pride for Panama. The Canal is the principal economic engine in the Central American isthmus and a pillar of international trade, connecting the Atlantic and Pacific oceans – and, with them, commerce between Asia and Europe. Its importance explains the high profile that the project has had ever since it was begun in a referendum in 2006, when Panama’s population decided that it wanted to carry it out. In 2014, the Canal will open its sluices with a new series of locks, amid events commemorating its centennial. According to experts interviewed by Universia Knowledge at Wharton, a sea of economic numbers and other data support the critical nature of this infrastructure project for Panama and the region.

Vielka Vasquez de Avila, a professor at the University of Panama, notes that currently, “4% of world trade” passes through the Canal, and thanks to its widening, “we will be in optimal condition, starting from 2015, to deal with what could be a possible increase of up to 6% of world trade through the Isthmus of Panama.”

This increase is a response to various factors. On the one hand, the mere announcement of the widening project has already sparked an increase in the capacity of vessels. Ultimately, authorities expect a doubling in the number of tons that will pass from the Atlantic to the Pacific, to reach 600 million tons a year, compared with 340 million today. According to a report by the Panama Canal Authority (PCA), the governmental entity that runs the Canal, this spectacular increase will come thanks to the new series of locks that have been designed to handle the “Post-Panamax” generation of mega-ships, whose enormous dimensions enable economies of scale and, at the same time, reduce operating costs per ship by from 7% to 17%. (“Panamax” ships are the largest that can fit through the Canal as it currently exists.) Their length of 366 meters is equivalent to more than seven Olympic swimming pools, enabling the vessels to hold up to 12,000 containers.

One of the reasons that Panamanian authorities decided to go ahead with the widening project was the pending loss in the competitiveness of the current infrastructure, which cannot service Post-Panamax ships. Growing demand for these mega-ships will mean they will represent 37% of the global fleet of container ships in 2011, which explains the overwhelming need that the Isthmus had for adapting to them. After hundreds of studies, the Panama Canal Authority concluded that widening the canal would mean its market share in the Northern route from Asia to the Eastern United States would increase from 38% to 41%, compared to the decline that it would suffer if it continued with its current infrastructure. That would have relegated its share of the market to only 23%.

The Suez Canal and the U.S. intermodal system (where ships arrive in port and the cargo is shipped by land across the country) are the main rivals of the Panama Canal. In addition, there could have been new competitors interested in taking the attractive piece of the pie represented by the growing maritime traffic between the Atlantic and the Pacific. Juan Carlos Martínez Lázaro, a professor at the IE Business School who is an expert in macroeconomics, notes, “Mexico and Nicaragua also planned to connect the two oceans through their respective territories.” In Mexico’s case, the model would have been similar to the current U.S. intermodal network. In the case of Nicaragua, the country analyzed the possibility of connecting the two coasts by river canals, with an infrastructure similar to what Panama has.

Although Martínez Lázaro believes that these projects are less interesting as a result of the widening of the Canal, he notes that “trade between the Pacific and the Atlantic is getting more and more important due to the 7% annual growth in trade with Asia.” China plays a fundamental role, with its spectacular economic development and its insatiable appetite for energy. Panama could also take advantage of that by providing passage for oil tankers, thus avoiding other alternatives for supply routes. “China is very interested in Venezuelan oil, and there was even a time when it was interested in financing the construction of an oil pipeline that would go into the Pacific through Colombia. But ultimately, it was not possible because of its poor relations with those countries,” adds Martínez Lázaro.

A Country Tied to a Canal

In 1889, Philippe-Jean Bunau-Varilla, an engineer, took control of the canal project, which was launched nine years before specialists at Compagnie Universelle du Canal Interoceanique de Panama approached the U.S. government in search of financing. The company wound up buying all the rights of construction and development on November 18, 1903, after getting guarantees concerning the independence of the Isthmus.

The U.S. administration of the Canal lasted for 74 years, until President Jimmy Carter and his Panamanian counterpart Omar Torrijos signed the Torrijos-Carter Treaty, which gave Panama all power over the Canal starting from December 31, 1999. One piece of information, offered by the Canal Authority, highlights the importance that this change in administration has had for Panama: During the 85 years of U.S. presence, the Panamanian government only received US$1.915 billion from the Canal, which was practically the same amount it collected during the first six years the Canal was controlled by the PCA.

As Vásquez de Ávila notes, “The Canal has played an important role in the development of the country. Today, after the transfer of the Canal to Panama, it contributes important sums of money to all national development projects. Under the administration of President Torrijos, the government set a fixed amount of millions of balboas that must be used for the development of communities, and for projects that are created by those communities. In addition, the widening of the Canal will enable important boats to cross, which would not have been able to do so before. This will lead to an increase in traffic and to greater revenues for the country. As a political concept, I believe that the administration of the Canal has been exemplary; it is something fundamental for us because the transparency of the Canal is recognized not only by Panamanians but also worldwide. People recognize that Panama has demonstrated its capacity to administer and to exceed the expectations about the Canal that existed when it was under the control of the United States.”

The PCA now estimates that over the 11 first years of the widened Canal, it will raise some US$30.588 billion. This figure is six times greater than the US$5.2 billion that the Panamanian government has designated to pay for the entire expansion project, which includes a provision of US$785 million for possible mistakes and delays. In addition, so that the population does not feel any resentment about the project, the business model designed by the authorities involves financing the project with the activity of the Canal, by increasing the tariffs that users will pay for using the infrastructure.

Economic Impact

Marco Fernández, a Panamanian who is a visiting professor of economics at Incae, puts all of this investment in context. “When you analyze how big this project is, you wonder: What is its real size in relation to the Panamanian economy? The answer is that over the next seven years, it is going to represent about 35% of all public investments, so it is a manageable project. It is like adding one-third more to a good year of public investments.” In exchange, this project will enable the country’s GDP to grow by 1.3% a year. And, most important, it will attract foreign investment and industrial development focused around the maritime sectors. “The benefits of the Canal don’t come so much from what the infrastructure represents per se, but by its collateral businesses…. In fact, many foreign investments are already coming as a result of the positive perceptions that companies around the world have about this project. All of the activity that is complementary to the Canal will have a truly big impact, and it will be begin to be felt within seven years,” adds Fernández.

The international contest held by Panamanian authorities to award the construction of a third series of locks is the most important part of this project, awakening interest among the big construction and infrastructure companies around the world. Ultimately, only three consortia were invited to present a definitive offer: one was Spanish; another was led by Bechtel from the U.S.; and a third group was Spanish and Italian. The last of the three, called United by the Canal, was the winner. Managed by Span’s Sacyr, in alliance with Italy’s Impregilo, Holland’s Jan de Nul and Panama’s Constructora Urbana, it earned the highest technical rating, while also making the most economical offer, with a budget of US$3.118 billion. That was US$280 million less than the initial budget laid out by the PCA.

The transparency of this entire project has its roots in the referendum called by president Martin Torrijos in October 2006, five months after the project was officially launched, following 120 studies made over the five previous years. The project was backed by 78% of those Panamanians who voted, although abstention was the dominant trend, since barely 42% of the population went to the polls. After announcing the expansion, and setting a completion goal of 2014 — the Centennial year for the Canal — the government kicked off the international competition. The tender offers were carefully watched over by the Bank of Panama in order to guarantee that there would be no leaks. “This has really been a very transparent process, in which the leadership of Spanish infrastructure companies has once again been made clear; they played a role in two of the three [final bids] in the competition, walking off with a victory in one of them,” notes Martínez Lázaro.

Beyond the international showcase that this process has created for the country, the Canal project will bring significant economic benefit. During the construction period alone, forecasts call for the creation of 40,000 jobs, of which 7,000 will be directly related to the construction work, according to the PCA. By the time the third series of locks is operational, the number of jobs that will go hand in hand with the project will vary between 150,000 and 250,000. “The economic impact of the widening of the Canal will benefit not only Panama, but also all of Latin America, because it will attract industry and will feed commercial activity in the region,” notes Fernández.

The thorniest aspect of this project has been its potential environmental impact. This is a stumbling block that has been addressed by numerous studies that have wound up endorsing its viability. As Vásquez de Ávila notes, “Every project of this sort is going to create an environmental impact because when you build a third set of locks, you are going to change what they call the ‘natural scenery.’ This change in the natural landscape will mean that much of the land will be flooded, with a resulting environmental impact. But the fundamental thing is that this impact, according to all reports made by Panamanians and foreigners, is minimal in comparison with the great benefits that the Canal can bring.”