Panama Canal expansion project

The Panama Canal Authority predicts that the volume of cargo transiting the canal will grow by an average of 3% per year, doubling the 2005 tonnage by 2025. Allowing larger vessels to transit the canal will move more cargo per transit and volume of water used.

Historically, the dry and liquid bulk segments have generated most of the canal's revenues. Bulk cargo includes dry goods, such as grains (corn, soy, and wheat, among others), minerals, fertilizers, coal, and liquid goods, such as chemical products, propane gas, crude oil, and oil derivatives. Recently, containerized cargo has replaced dry bulk as the canal's main income generator, moving it to second place. Vehicle carriers have become the third-largest income generator, replacing the liquid bulk segment. Shipping industry analyses conducted by the ACP and top industry experts indicate that the canal expansion will be beneficial to both the canal and its users because of the demand that will be served by allowing the transit of more tonnage.[1]

The growth in usage of the Panama Canal over the past few years has been almost entirely driven by increased US imports from China passing through the canal en route to ports on the US East and Gulf coasts. But it is increasingly recognized in both the US and China that this imbalance in trade is unsustainable and will be reduced via some sort of adjustment in the coming years[12] (although such an imbalance need not be made up by physically shipped goods, but could be made by other trade such as intellectual property as China upgrades its intellectual property protection laws). The ACP, however, presumes that trade will continue to grow for a generation as it has for the past several years.

One of the central points made by critics of canal expansion, most prominently former canal administrator Fernando Manfredo, is that it is unrealistic to attempt to predict canal usage trends over a generation, improbable to expect that US imports from China will continue to grow for a generation as they have the past few years, and irresponsible to bet Panama's financial future on such a projection.

Container ship routes to North America from Asian Pacific

The most direct competition to the canal comes from alternative routes that present options for transporting cargo between the same points of origin and destination.

The opening of the Russian Northern Sea Route and the Canadian Northwest Passage to commercial traffic could pose an alternative to the canal in the long term. Warmer waters in the Arctic Ocean could open the passage for an increasing number of months each year, making it more attractive as a major shipping route. However, the passage through the Arctic would require significant investment in escort vessels and staging ports. The Canadian commercial marine transport industry does not anticipate that this route will be a viable alternative to the Panama Canal within the next 10 to 20 years.[13]

The two main current competitors of the Panama Canal are the US intermodal system and the Suez Canal. The main ports and merchandise distribution centers in these routes are investing in capacity, location, and maritime and land infrastructure to serve post-Panamax container ships and their larger cargo volumes. According to the ACP, the growing usage of such ships in transcontinental routes competing with the canal is irreversible. It was estimated that by 2011 approximately 37% of the capacity of the world's container ship fleet would consist of vessels that did not fit through the canal, as it existed prior to 2016, and a great part of this fleet could be used on routes that compete with Panama.[1]

The proposal states that strengthening the canal's competitive position will allow it to accommodate demand and serve its customers. If the canal had the capacity to serve the growing demand, Panama could become the most important connectivity hub on the continent by joining together north–south continental routes and east–west transcontinental routes. Accordingly, the canal will continue to be viable and competitive in all of its routes and segments, and contribute significantly to Panama's development and growth while maintaining its position as a major world trade route.[1]

According to the studies conducted by the ACP in 2005, the canal would reach its maximum sustainable capacity between 2009 and 2012. When it reached this capacity it would not be able to continue to handle growth in demand, resulting in a reduction in the competitiveness of the Panama maritime route.

As approved by the Panamanian people, construction for the expansion project was slated to conclude by April 2016. The ACP said it would use all possible means to stretch capacity until the construction was completed.

The proposed expansion of the canal by the construction of a third set of locks would allow it to capture the entire demand projected through 2025 and beyond. Together, the existing and new locks approximately double the capacity of the canal.[1]

Critics such as former legislator Keith Holder, co-author of the legislation that created the ACP, pointed out that canal usage is seasonal and that even during the few months when it is most crowded, the bottleneck that slows traffic is not the locks but the narrow Culebra Cut, which has a limited capacity for large ships to pass one another.[14]

Although the canal was nearing its maximum capacity, it did not mean that ships were unable to transit it. Rather, the canal's growth capacity stagnated and that it could not capture additional cargo volumes.[1]

The former head of the Panama Canal's dredging division, Thomas Drohan, a critic of the expansion plan, discounted allegations that this is a problem in the short term. He argued that if the supply of any good or service becomes short, businesses can raise their prices; this would apply to Panama Canal tolls as much as it does to petroleum.[15]

The original canal has two lanes, each with its own set of locks. The expansion project added a third lane through the construction of lock complexes at each end of the canal. One lock complex is located on the Pacific side, southwest of the existing Miraflores Locks. The other is located east of the existing Gatun Locks. Each of these new lock complexes have three consecutive chambers designed to move vessels from sea level to the level of Gatun Lake and back down again.[1]

Each chamber has three lateral water-saving basins, for a total of nine basins per lock and 18 basins in total. Just like the original locks, the new locks and their basins will be filled and emptied by gravity, without the use of pumps. The location of the new locks uses a significant portion of the area excavated by the United States in 1939 and suspended in 1942 because of World War II. The new locks are connected to the existing channel system through new navigational channels.[1] The new lock chambers are 427 m (1,400.92 ft) long, 55 m (180.45 ft) wide, and 18.3 m (60.04 ft) deep. They use rolling gates instead of miter gates, which are used by the original locks. Rolling gates are used in almost all existing locks with dimensions similar to the new ones, and are a proven technology. The new locks use tugboats to position the vessels instead of electric locomotives. As with rolling gates, tugs are successfully and widely used for these purposes in locks of similar dimensions.[1]

Diagram of water-saving basins (descending)

Diagram of water-saving basins (ascending)

The new locks have water-saving basins to reduce the volume of water that is needed in lock operation.[16] The operation of both the old and new locks uses gravity and valves. There is no pumping involved.

Operation of the locks, old and new, uses water from Gatun Lake. Even in the original situation with two lock lanes, water supply can be limited at the end of Panama's dry season, when the lake's water level is low. The addition of a third set of locks meant that this water supply issue needed to be addressed.

For the new locks, three basins are associated with each lock chamber.[17] The volume lost per cycle is two-fifths of the "moving water" chamber volume. The other three-fifths is reused. An equal savings of water, based on the same principle, could be reached by adding more lock chambers. Constructing a stair of eight chambers (instead of three) to elevate 85 ft (26 m) would use an 11 ft (3.25 m) water slice per cycle. However, this would require ships to travel through eight locks, making ship handling less efficient.

Water usage is calculated per single lock cycle. It is determined by the water volume in a lock chamber between the levels it handles. Essentially, each cycle uses the volume of water discharged by the lock chamber (its width multiplied by its height and depth). When the locks are in stairs, as in the Panama Canal, only the first (highest) lock chamber matters for this calculation. None of the lower locks use additional water; they have the same volume. Moreover, the ship's underwater volume does not matter, because that volume is present both before and after the change in water level and thus is part of the non-moved volume.

The water used per lock operating cycle is therefore equal to the amount of water that flows into the first (upper) lock chamber when filling it from Gatun Lake. Reducing this volume requires reducing the chamber's width, length, or elevating height. Note that the elevating height has already been reduced by staging the total 85 ft (26 m) elevation change into three locks. Were this change done in a single lock chamber, the water volume lost would be three times as much.

The water-saving basins function as follows: The volume of water moved by the lock chamber (e.g., a height of 30 ft (9 m)) can be divided into five equal horizontal "slices" (here, 1.8 m each).[18] When the canal begins operation, the chamber is filled once from Gatun Lake. Then, when emptying the chamber, the top three slices (1, 2, and 3) are emptied, one by one, into three basins, each at a successively lower elevation. That is, water slice 1 is emptied, using gravity and valves, into a basin that is at the same level as water slice 2. Then water slice 2 is emptied into a basin at the same level as water slice 3, and slice 3 is emptied into a basin at the same level as slice 4. Water slices 4 and 5 are emptied into the next lock chamber and "lost" (as in the original canal locks).

When the lock moves a ship upward, the chamber is closed, and the water from the basin at level 4 is let into the chamber, filling slice 5. Then basin level 3 fills level 4, and basin 2 fills level 3. Next, from levels 2 and 1 are filled from Gatun Lake, "costing" a volume of 12 ft (3.6 m) instead of 30 ft (9 m) over the chamber area (2/5 of the elevation height). The ship is now at the level of Gatun Lake and can cross it.

According to the plan, a 3.2 km (2.0 mi)-long access channel was excavated to connect the new Atlantic locks with the existing sea entrance of the canal. To connect the new Pacific-side locks with the existing channels, two new access channels were built:

• The 6.2 km (3.9 mi) north access channel, which connects the new Pacific-side lock with the Culebra Cut, circumventing Miraflores Lake. This channel runs along the new Borinquen Dam that separates it from Miraflores Lake (which has a water level that is 9 m lower, due to the dislocation of the Pedro Miguel locks).
• The 1.8 km (1.1 mi) south access channel, which connects the new lock with the existing sea entrance on the Pacific Ocean

The new channels on both the Atlantic and the Pacific sides are at least 218 meters (715 feet) wide, permitting Post-Panamax vessels to navigate in a single direction.[1]

Canal elevations are referred to using the Precise Level Datum (PLD), which is close to the mean sea level of the Atlantic and Pacific entrances. The maximum operational level of Gatun Lake was raised by approximately 0.45 meters (1.5 feet) from the previous PLD level of 26.7 meters (88 feet) to a PLD level of 27.1 meters (89 feet). Combined with the widening and deepening of the navigational channels, this has increased Gatun Lake's usable water reserve capacity and allows the canal's water system to supply a daily average of 165,000,000 US gal (625,000 m³; 137,000,000 imp gal) of additional water. This additional water volume is enough to provide an annual average of approximately 1,100 additional lockages without affecting the water supply for human use, which is also provided from Gatun and Alhajuela Lakes.[1]

In 2006, ACP estimated the cost of the third set of locks project at US$5.25 billion.[1] This figure includes design, administration, construction, testing, environmental mitigation, and commissioning costs, as well as contingencies to cover risks and unforeseen events, such as accidents, design changes, price increases, and possible delays. The cost of interest paid on loans during construction is not included. The largest cost is that associated with constructing the two new lock complexes—one each on the Atlantic and Pacific sides—with estimated costs of US$1.11 billion and US$1.03 billion each, plus a US$590 million provision for possible contingencies during their construction.[1]

Opponents contend the project is based on uncertain projections about maritime trade and the world economy. Roberto N. Méndez, an economist at the University of Panama, alleges that the economic and financial projections are based on manipulated data.[44] Independent engineers, most notably Humberto Reynolds[45] and Tomás Drohan Ruiz,[46] the former head of engineering and dredging of the Panama Canal, said that the project would cost much more than budgeted and that it was too risky for Panama. M. A. Bernal, a professor at the University of Panama, argued that confidence in the ACP's budget is undermined because of the involvement of engineering and consultancy firm Parsons Brinckerhoff.

According to the ACP, the third set of locks would be financially profitable, producing a 12 percent internal rate of return. The project's financing is separate from the governmental budget. The state, which has a lower credit rating than the ACP, does not guarantee or endorse any loans borrowed by the ACP for the project. Assuming that tolls increase at an annual average rate of 3.5 percent for 20 years, and according to the traffic demand forecast and construction schedule deemed most likely by the ACP, the external financing required would be temporary and in the order of US$2.3 billion to cover peak construction activities between 2009 and 2011.[1]

The ACP's revenue projections are based on questionable assumptions about increased canal usage and shippers' willingness to pay higher tolls instead of seeking competing routes. In a bid to attract new business as well as keeping the current customers, the ACP is looking to implement financial incentives in their toll programme, including a loyalty scheme, which are expected to combat the problems raised by increased fees.[47] With the cash flow generated by the expanded canal, investment costs are expected to be recovered in less than 10 years, and financing could be repaid in approximately eight.[1]

The $2.3 billion financing package for the canal expansion, signed in December 2008 in the midst of the global financial crisis, includes loans from the following government-owned financial institutions:

• Japan Bank for International Cooperation (JBIC)—US$800 million
• European Investment Bank (EIB)—US$500 million
• Inter-American Development Bank (IDB)—US$400 million
• CAF – Development Bank of Latin America and the Caribbean (CAF)—US$300 million
• International Finance Corporation (IFC)—US$300 million

The financing is not tied; that is, contracts can be awarded to firms from any country. The loans are for 20 years, including a 10-year grace period. Under a common terms agreement, all five financial institutions agreed to provide the same loan conditions to the ACP. Shortly before, credit rating agency Moody's gave the ACP an A1 investment grade rating. Mizuho Corporate Bank and the law firm Shearman & Sterling helped develop the financing package.[48]