(English) How Much is the Canal Worth?

by Eduardo Morgan Jr.

August 2006

The report covering the performance of the 2005 Fiduciary Development Fund was published recently.  The Fund reported that it had earned $1,151,408.92 from fixed-termed deposits on its capital, that is approximately 3.1669 percent, well above the approximately 1.421 percent of the previous year, to which the earnings from investments on securities must be added.  The Fund’s capital is managed separately from the other government assets and  the owners are,  of course, the people of Panama. 

 As I read the report, it brought to mind another asset, also separated from the other Government assets by constitutional mandate, the Panama Canal.  I asked myself then:  How much is the Canal worth?  Not being an economist or financier I avoided the “short circuits” (as Omar Torrijos used to call them) of the very diverse and complex formulae used to valuate enterprises.  I selected the simple way of determining the value of the Canal by showing the amount of money we would have to deposit in a leading bank to obtain the yields that the Canal produces for us.

It is calculated that in 2007 the Canal will contribute nearly $600 million to the Nation.  We can, therefore, say that to obtain this yield we should have deposits (calculated at 4%) of $15 billion.  This figure could be considered as the present value of the Canal.

How about the value of the Canal once the third set of locks is operating?  According to the Expansion Document, by 2017 the Canal will contribute $2 billion to the Treasury so its value would then be $50 billion.  But this is not the final value of our Canal.  It has been calculated that by 2025, when the expanded Canal is operating at full capacity, its direct contributions to the country will be $4.2 billion.  Therefore, its value will be about $105 billion.

It does not take a financial genius or a university degree to realize that the proposal made by the ACP is the best business proposition ever made to the Panamanian people:  Invest $5.2 billion to increase the value of the Canal to $50 billion, WITHOUT HAVING TO CONTRIBUTE ONE CENT OF THIS 5.2 BILLION, AND WITHOUT ANY REDUCTION IN THE DIVIDENDS THAT THE CANAL GIVES US. This is another way of stating that the Canal is self-financing – an expression that for some has resulted in much confusion perhaps because of its simplicity.  Of course, the expansion of the Canal will require external financing, but this financing will not require financial contributions from its stockholders –the Panamanian people– or the Government (its representative), nor the creation of new taxes to repay it.

Panama’s wealth is in  its geographical location and in  its people.  The Canal, The Free Zone and its Ports, among others, are examples of how we have taken advantage of this location.  But this infrastructure, that we can call “hardware”, is of no use if we don’t have the “software”, in other words, the Panamanians who make it all work.  Our ports are not only the most important in Latin America but are also among the most efficient in the world.  Long before the ports and the Canal, the Colon Free Zone was globally recognized for its importance to commerce in this hemisphere.  Of greater impact has been our successful administration of the Canal.  From being operated by the world’s leading country, it reverted to Panamanian management and, despite many pessimistic predictions, we surpassed all standards of the U.S. administration.  For this performance, Panama also receives worldwide praise and recognition. Thanks to Alberto Alemán Zubieta and the thousands of Panamanians who, with their intelligence and efforts operate the Canal, in all that pertains to the Canal, Panama is already well into the first world.

The Canal Expansion Proposal  is worth reading.  The ACP has demonstrated great responsibility to justify to their clients and shareholders (the Panamanian people), the need and advantage of a third set of locks.  It is relevant to note that the users of the Canal not only have not objected the project but have applauded it.  This proposal answers beforehand all of the questions and criticism that some of our fellow citizens have made about the project, such as the following:

A)     That the expansion is not urgent and the proposal should be analyzed more thoroughly to detect any problems.

The expansion has been under study for more than 60 years.  This was initiated – for military reasons – in 1939 and accelerated following the Torrijos-Carter treaties.  It is also important to mention the studies of the Panama-U.S.-Japan Tripartite Commission of the 1980s.  The studies demonstrate, without any doubt, that the Canal is reaching its capacity. We should not run the risk of doing what happened with the cleanup of the Bay of Panama, which began to be studied more than 50 years ago and countless studies after studies.  The Canal cannot wait since we run the risk of losing clients that could look for other routes.  The Panama Canal is vital to world commerce and that importance implies an enormous responsibility for our nation.

B)     That the Canal’s benefits do not reach the people of Panama s that the Government must be required to establish separate trust accounts for health, education, rural development and the like, or reach other consensus under a new National Development Plan.

As I see it, this allegation is very significant because those who make it, perhaps without meaning to, emphasize the reasons for poverty in Panama; the unequal distribution of resources, poor health and educational services, insufficient attention to the rural sectors, all those things that keep us in the Third World and prevent the country from becoming the richest nation in the Americas.  Despite our valuable geographic position and the great capacity of Panamanians to exploit it, we are a nation with hungry, barefoot children.   This shows the contrast between a First World Panama Canal Authority and our Public Administration still mired in the Third World.  The critics are telling us that our Governments is incapable of properly utilizing the benefits of Canal income as it has been incapable of adequately using its other income, such as taxes and duties.  Nevertheless, what they propose, the creation of a parallel agency to manage Canal income, is not the answer, as that would mean yet another bureaucracy parallel to existing ones.

We proved able to come into agreement to turn the Canal into a first-world enterprise.  We have seen that the contrast between the Panama Canal Authority and  our state bureaucracy is pathetic:  good management against squandering; transparency and honesty against corruption; dignity, assurance and professionalism of the Panama Canal employees against shame, uncertainty and the inefficiency of the public employee.

The most valuable result that should arise as a result of the discussions of the Panama Canal Expansion Proposal would be a convergence of all sectors of Panama’s society and economy, together with the Government, to apply the model that the Canal administration represents, to the administration of the public sector. In this manner Panama could very rapidly achieve the First World status, as a prosperous country, with a fairer distribution of its wealth. If we succeeded with the Canal, we can succeed with the rest of the Public Administration.  It can be done, Mr. President.  Please lead us on the path to that New Nation.  

Dr. Eduardo Morgan Jr. is Senior Partner at Morgan & Morgan, Attorneys at Law in Panama and former Ambassador to the U.S.