Sunday, August 27, 2006

The true cost of the post-Panamax locks

The true cost of the

post-Panamax locks

by Tomás Drohan Ruiz ---

The post-Panamax project of the Panama Canal Authority (ACP) 2006 is almost identical to the solution (option 5 CAS) of the tripartite commission composed of the United States, Japan and Panama. The truth is that the ACP project is physically more ambitious and a bit more expensive than the CAS 1993 solution for the following reasons:

a) The ACP locks are larger than those of CAS 1993. It is well known that the cost of a set of locks is proportional to the volume of the locks chamber and the ACP Locks occupy 8 percent more volume than those of CAS 1993.

b) The ACP locks have expensive recycling pools and those of CAS 1993 did not have pools or lakes. CAS 1993 underestimated the project cost because it omitted the water augmentation projects.

c) The ACP project raises the level of Gatun Lake to 90 feet and CAS 1993 maintains the level of Gatun Lake at 85 feet. The ACP project will be much more expensive because of the necessity of building a new spillway in Gatun Lake and other measures to protect the existing locks against flooding due to the higher lake level. The ACP forgot to include the cost of the new Gatun Spillway in their project estimate. They also forgot to include the cost of the new tugboat fleet, which will replace the locomotives, the deepening of the canal entrances and the project financing.

d) The ACP and CAS 1993 both use the Atlantic excavations made by the North Americans in1940 in order to build the new Atlantic locks. But the ACP does not utilize the 1940 excavations for the new Pacific locks for one simple reason: those excavations are oriented to use Miraflores Lake. Rather than use Miraflores Lake the ACP has decided to dig a new and expensive excavation to connect the Pacific post-Panamax locks with Gaillard Cut. That will require constructing two enormous rock dams in order to contain the waters of Gatun Lake thereby avoiding a catastrophic flooding of Clayton, Albrook, Balboa and Plaza 5 de mayo. The ACP does not have experience constructing that type of rock dam. The ACP prefers to create the impression that all project components are easy to build because the ACP has built them before. Unfortunately, a set of post-Panamax locks with recycling pools has never been built before.

e) Both proposals contemplate one-way traffic in Culebra Cut for post-Panamax ships and two-way traffic in Gatun Lake where a post-Panamax could meet a Panamax ship. CAS 1993 and ACP 2006 are identical in their strategy for channel width, thus both proposals economize similar amounts of excavation.

f) The ACP proposal is much more costly than option five of CAS 1993 due to the recycling pools and the raising of Gatun Lake to 90 feet. The only item in option five of CAS 1993 which is more expensive than the similar item in the ACP proposal is channel deepening. CAS 1993 requires more dredging due to the design ship draft of 59 feet versus 50 feet for the ACP design ship. But I note with interest that the ACP locks have a depth of 60 feet. The only logical reason to incur in this considerable additional cost would be an ACP intention to deepen the entire canal to 60 feet after the referendum is approved.

g) The ACP recycling pools and the post-Panamax locks they serve occupy similar volumes, therefore the recycling pools will be costly. The cost of the new locks is 60 percent of the cost of the entire project. The recycling pools with all the mitigation measures required to minimize the potential salinization of Gatun Lake could approximate the cost of the new locks thereby doubling the cost of 60 percent of the project. The only item where CAS 1993 is more costly (9 feet of additional deepening) is neutralized by the recycling pools and the raising of Gatun Lake by the ACP. The above preamble is made only to dissipate the notion that the option five of CAS 1993 is a larger project and therefore more costly than the ACP proposal. The truth is that the differences in the two projects are neutralized and the total cost of both are similar in magnitude.

Option five of CAS 1993 cost $5 billion in 1990 dollars without recycling pools, without raising Gatun Lake, and without including contingency cost due to uncertainty. Using US Corps of engineers tables for the construction of locks and navigation channels one notes that a 1990 dollar is worth $1.70 in 2010 dollars. The adjusted CAS 1993 project costs $ 8.5 billion in 2010 dollars without contingency costs, without recycling pools, and without raising the level of Gatun Lake.

Professor Flyvberg in his book (Megaprojects and risks, Cambridge University Press) shows that one should use a contingency factor of 50 percent to attain a 50 percent confidence level AFTER completing the detailed design of the project. Option five of CAS 1993 with a 50 percent contingency factor costs $12 billion in 2010 dollars without including the recycling pools or the raising of Gatun Lake. That 50 percent contingency factor should be higher because the ACP has not completed the detailed design of the post-Panamax locks or their recycling pools. The ACP project will not cost anything near the alleged cost of $5.25 billion. Until the ACP completes the detailed design of the new locks in 2008 one can not know the true cost of the project with any degree of certainty.

In November of 2005 the detail design of the post-Panamax locks and their recycling pools had just started (less than 30 percent completed). The detail design of a system as complicated as the new locks will take at least two or three years to complete. The ACP cannot estimate with any degree of precision its megaproject until after January 2008. It is unfortunate that the Panamanian government is conducting a referendum where the public will have to blindly vote without the benefit of a more precise cost estimate, which will be available in 2008 when the ACP completes the detail design of the new locks. What will happen if after completing the design of the new locks the ACP informs us that the new cost of the project is $10 billion? In recent public forums high ACP officials have stated that the post-Panamax locks is not feasible if it costs more than $6 billion. I imagine that the shipping industry is unwilling to pay the tolls required to amortize a megaproject that costs more than $6 billion. This became abundantly clear when Mr. C.T. Burke associated with K-Line said “shippers are willing to accept a moderate increase in tolls, but are not willing to pay for the total cost of the project.” (La Prensa, 11 June, 2006).

The most fervent apostle of the ACP who wishes to believe in the ACP cost estimate of $5.25 billion (Even though the 28 percent contingency factor used by the ACP appears low because the detail design of the new locks do not yet exist) has to admit the following: there is not much difference between the $5.25 billion ACP cost estimate and the $6 billion which the ACP states would make the project financially unfeasible.

The adjusted cost of CAS 1993 option five is $12.5 billion in 2010 dollars and the ACP cost is $5.25 billion. Because of the enormous difference between these two estimates one needs to look at other sources in order to determine which estimate is more consistent with reality. A US undersecretary of defense, with thousands of engineers at his disposal, has estimated the post-Panamax locks project at a cost ranging between $15 billion and $25 billion. The ACP rejected with displeasure the above Pentagon estimate. Several serious foreign publications have stated that the new locks project in Panama could well cost more than $10 billion. (La Prensa, 11 June 2006). Because Panama’s government is betting the entire country on only one megaproject, I would have to be conservative and favor the $12.5 billion estimate until the ACP finishes the detail design of the new locks in 2008. On the ACP web site there exists a study by US experts where they counsel the ACP that the public should not be given a single number as a true estimate which could cause false expectations… but instead should give a cost range which will become more reliable as the detail design of the new locks progresses towards completion. Until the detail design of the new locks is completed, I believe that range should be not less than $10 billion and not more than $15 billion.

Now that we see that we own a financially unfeasible megaproject we should take the following steps:

a) The Panamanian government should postpone the referendum until 2008 or 2009 when the detail design of the new locks is available along with a more reliable ACP cost estimate.

b) Panama could then use those two or three years to inform the nations using the canal that the post-Panamax locks with enormous risk of a cost over run and uncertain demand cannot be paid for by a small and poor country. Panama is only disposed to make available its natural resources (land and water) and its geographic position to make possible the construction of a post-Panamax locks. The rich countries with maritime economies would have to prove their interest in the new locks by absorbing their entire cost. Those contributions should be made by the major users of the Panama Canal: Korea, Japan, China, the European Union and the United States.

c) Panama, as the sovereign host nation, would operate the new post-Panamax locks. The donor nations would be allowed to provide a rigorous audit of the construction in order to assure that the donated funds are used in the project in a transparent fashion. Panama would negotiate the future tolls to be charged for the next 15 or 20 years with the donor nations. If the canal users are really willing to pay for the new locks with tolls increases in the future, then they should also be willing to pay for the new locks with money up front in exchange for smaller tolls increases in the future.

The unrealistic ACP proposal assumes that shippers are willing to pay whatever toll increase is required to amortize the cost of the new locks. Panama would be running the risk of a large loss on the project if shippers do not use the new locks because they find the toll increases unreasonable. If these negotiations between Panama and the using nations do not conclude with guaranteed profits for Panama greater than those which are possible with the debt-free existing canal, then Panama should not make its geographic position available for the post-Panamax megaproject.

The ACP proposal is not in the best interest of the host country because the entire project risk is placed on Panama’s shoulders. After Panama puts all their money in the new post-Panamax hole, the shippers would have all the advantages to dictate the tolls they are willing to pay because the shippers are free to use other routes since they have no money invested in the new post-Panamax locks. The shippers could use other routes like Suez or California, and Panama could only opt for lesser losses accepting the tolls dictated by the shippers.

If Panama aspires to be a member of the first world rather than be catapulted into the fourth world with a mega project that cannot be amortized because it is generating losses, then Panama must reject the post-Panamax locks if the using nations are unwilling to pay for the entire construction with upfront money. Panama and the ACP should not have to put up any money since they are providing free usage of their land and water.

The author is the retired chief engineer and director of the Department of Engineering, Dredging and Construction of the Panama Canal.


No comments: