Tuesday,24 October, 2017
Current issue | Issue 1299, (9 - 15 June 2016)
Tuesday,24 October, 2017
Issue 1299, (9 - 15 June 2016)

Ahram Weekly

The Panama connection

Ambassador of Panama to Egypt Tomas Guardia talks to Niveen Wahish about the upcoming inauguration of the new Panama Canal and the leaked Panama Papers

Economy
Economy
Al-Ahram Weekly

Panama made the international news headlines recently when it was associated with the publication of the so-called “Panama Papers”, leaked documents from Panamanian law firm Mossack Fonseca revealing hundreds of offshore companies owned by high-profile individuals across the world.

This month the country will make the headlines again when on 26 June it inaugurates the expansion of the Panama Canal. The expansion, which started in 2007, aims to double the canal’s current capacity at a cost of some $5.25 billion. The expansion includes the creation of a third lane that will accommodate larger vessels of up to 14,000 twenty-foot equivalent units (TEU), a measure of carrying capacity, up from the existing capacity of 5,000 TEU.

The expansion also involves the widening and deepening of existing channels and raising the maximum operating water level of the Gatun Lake. Ships using the Panama Canal go through three locks from the Pacific to the Atlantic Oceans and vice versa that lift them up to Gatun Lake and then lower them through three more locks back down to sea level.

The locks are needed because the Caribbean is eight inches lower than the Pacific and the different tides between the two Oceans must also be accounted for. The isthmus at Panama is also 26 metres above sea level.

In an interview with Panamanian Ambassador to Egypt Tomas Guardia this week, Al-Ahram Weekly found out more about the Panama Canal expansion and what the country is doing to deal with the aftermath of the leaked Panama Papers.

What does the expansion of the Panama Canal mean for Panama?
Before embarking on the expansion studies were carried out on the capacity of the current canal and the trends of cargo worldwide. These studies showed that the canal would be reaching its maximum capacity soon, something that was forecast a couple of years ago. The idea of expanding the canal was to keep up with the demand for the transit of vessels so that it maintained its competitiveness vis-à-vis any other commercial route between places of production and places of consumption. Now the canal will be able to accommodate larger ships carrying more cargo. And that translates into more revenues for Panama.

The expansion will also help tap new markets. For example, there is new production of liquefied natural gas (LNG) in New Mexico in the southern part of the US and there is increased demand for this kind of energy in Asia. Right now, very large gas carriers cannot go through the canal, but they will be able to be accommodated by the new expanded canal. Maritime transportation has also been changing. There are fewer individual transits, yet there is increased tonnage, and this is what the new canal will be able to accommodate. However, there are still the very large container vessels of up to 18,000 TEUs, which will not be able to transit the new canal.

We cannot say that we will automatically have increased revenues from the expanded canal, though there are projections that have to be adapted to the current realities. But in the long term there will be an important increase in revenues, and those revenues will make a direct contribution to our national development and to the whole economic development of the country.

How was the expansion of the Canal financed?
The canal expansion was estimated to cost $5.25 billion. Around $2.3 of that was financed through external financing in the form of loans, mostly from multilateral institutions and some bilateral financing. The rest is self-financed by savings from the canal, and part of these savings was made by a hike in tolls. Since the canal expansion project began the tolls have been steadily increasing. It was a means of increasing revenues without increasing debt.

Are there plans for a new expansion?
A fourth set of locks is a possibility, since there are bigger ships being built that will not be able to pass through the expanded canal. However, many considerations need to be taken into account, like the real need to increase capacity depending on global trade, the size of the ships, and the impact that they could have on the environment. In the end, any expansion will have to go to the Panama National Assembly and to a national referendum for approval, as was done in 2006 when there was a referendum on the current project.

Which routes normally go through the Panama Canal?
The main routes of the Panama Canal are to East Asia, and specifically Northeast Asia, including Japan, China, and South Korea, from the East Coast of the US. China and the US are the biggest users of the canal. About 70 per cent of cargo that goes through the canal either has its origin or its destination in the US. The second biggest route in aggregate terms would be to the South American Pacific countries like Chile, Ecuador and Peru, mainly going to the East Coast of the US or Europe.

These routes are very different from the main routes of the Suez Canal, so the Suez and the Panama Canals are not in direct competition. There is a small area of competition in the routes from Southeast Asia to the East Coast of the US. Some liner services that used to go through the Panama Canal are now going through the Suez Canal because the new Panama Canal has been overdue for quite a while. Some of these liners might now come back. But the Canals are complementary, and there is a spirit of cooperation between them.

What was your impression when you heard of the New Suez Canal?
Coming from a country with a canal and having worked in favour of the expansion, I can understand that canals have to be competitive. They have to be efficient in transit time, in the tolls they are charging, and in making the passage of vessels safer. The New Suez Canal aims at making the transit of vessels more efficient and safer with the addition of the parallel channel and by deepening and widening the existing ones. We welcome that, and we were very much impressed that it was carried out in one year instead of three.

The inauguration of the expansion of the Panama Canal has been overdue for almost two years. Why?
It is hard to compare the Suez Canal to the Panama Canal because the Suez Canal is a sea-level canal. It does not have any locks, and it is less complicated. The Panama Canal needs a complex set of locks, and the terrain is difficult with tropical rainforest surrounding it because the canal goes through the continental divide from North America. There were also many unknowns in expanding the canal, such as labour issues as well as an issue with the composition of the concrete mixture to ensure that it would last.

What is being done to attract more traffic to the Panama Canal?
It is very much self-attracting. The reservation system for the canal has been opened already for the new locks, and we have over one hundred ships that have reserved already. The reservation system is a sort of express lane in which you can reserve for a specific date and time slot instead of queuing for a turn. Even on the day of transit there are some slots that are auctioned to the highest bidder. The main users are the established routes that have specific ports of calls. They have to comply with a schedule, so they cannot simply wait their turn.

Furthermore, the business of the canal is not just seeing ships go by, as the Panamanian minister of maritime affairs recently said at a conference in Egypt. The business of the canal and its potential is about developing the area around it. Just as Egypt is doing in Suez at the moment, the canal is part of the logistics services platform that the country is offering.

That is where the value added is and the real potential for economic growth. Panama has been sharing its experience with Egypt in this regard, and in the coming months we will hopefully be seeing further cooperation in this area. This is an area that Panama has been developing since the turnover of the administration of the canal from US administration to Panamanian administration in 1999. We have been investing in and developing our logistics platform – the services around the Panama Canal that take the potential of our geographical location into account and the fact that the canal serves 144 maritime routes around the world.

We have been developing the sea port system of Panama and increasing its capacity. In the 1990s, we only had two ports, one on the Pacific and one on the Atlantic. In the 1990s, the movement of container cargo through Panamanian ports was also only around 180,000 TEUs. In 2015, we closed the year with over six million TEUs and five ports. Over 70 per cent of the ships that go through the canal go to Panamanian ports for trans-shipment, loading and offloading cargo. Cargo coming from Asia is offloaded in Panama and redistributed onto smaller vessels to Central America, the Caribbean and the northern part of South America. It is easier and cheaper to do it that way. There is also the consolidation of cargo from different countries to be exported to other destinations.

Our economy has always been based on services, and we have very limited industry. What Panama has been working on is to go from a trans-shipment model to value-added processes, and this can mean anything from repacking and labelling to more sophisticated things.

How did Panama deal with the Panama Papers, the 11.5 million leaked documents from Panamanian law firm Mossack Fonseca?
Since 2009, Panama has been taking steps to strengthen its financial services platform through more stringent laws and regulations for opening bank accounts, more accountability by law firms, and tackling money laundering from illicit activities directly, such as from the narcotics trade and the financing of terrorism. We recently passed new legislation on these issues.

In the wake of the leaked publications our position is that we have already been taking steps for a long time, but we are willing to look further into the matter and take further steps if needed. We have accepted the standards proposed by the Organisation for Economic Co-operation and Development (OECD), or the Common Standards of Reporting, but in a bilateral way. We believe that not all jurisdictions have done this. Panama is not the only jurisdiction that allows for the establishment of offshore companies.

Are you investigating the matter further now?
The public prosecutor has started an investigation into this specific law firm. The law firm itself feels they it has been the victim because confidential information from its clients has been leaked. After the release of the papers, we established an international committee of experts on these issues to tell us if we needed to make any legal modifications. There is a will to cooperate, and we are disposed to give any information within our reach through the correct channels.

How is this line of business beneficial to Panama if it does not tax companies that set up offshore in the country?
We have a territorial system which applies to natural persons and legal persons. If revenue is generated outside Panama, it will not be taxed. The benefit for Panama is that there are fees associated with this. For example, lawyers charge a fee, and the public registry charges a fee for incorporating companies. The law firm rents office space, employs staff, and pays social security and salaries and taxes in Panama.

We offer special incentives to multinationals to operate their regional headquarters from Panama. We have about 150 companies that have moved to Panama to open regional operations. One of these incentives is paying lower taxes, but once they move to Panama they will hire a Panamanian workforce that will be living and consuming in Panama. So it generates other types of development, even if the companies do not pay taxes.

So tax incentives are a good thing?
It is normal practice around the world and is why duty-free zones and special economic zones are created. Taxes per se are not the only way of generating revenues.

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