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Panama risk: Infrastructure risk
(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentB36B37Infrastructure riskC41C41Note: E=most risky; 100=most risky.SUMMARY
Infrastructure has improved since the 1990s. Telecommunications and power were both privatised in the late 1990s and have benefited from large injections of private capital. The number of fixed telephone lines has risen rapidly although penetration rates remain low by international standards. Mobile phone penetration is high by regional standards, and rising. Internet cafes are proliferating. Power supplies are reliable but expensive. Heavy investment in Panama's international transportation services has created some of the most modern and efficient port facilities in the world. Road services around the capital and the city of Colon have been improved. The trans-isthmian railway has been restored to service, offering both freight and passenger services. While infrastructure for the services sector has improved, infrastructure in the rural hinterland is poor. There are plans to modernise Panama's main airport and enhance civil aviation regulation.
SCENARIOS
The inadequate national road network hampers efficient transport (Moderate Risk)
Internal transport relies almost entirely on the road network. Between major cities, where the bulk of business operations take place, and especially in and around Panama City and Colon, the road network is generally good, the result of considerable investment. This allows for the relatively efficient movement of goods and people in these areas. The road network in the rest of country is inadequate. Businesses should, whenever possible, locate facilities in the built-up growth areas, or else be prepared for considerable transport delays.
Canal development is held up by political interference (Low Risk)
Since the handover of the Canal by the US to Panama in December 1999, the Autoridad del Canal de Panama (ACP, Panama Canal Authority) has been running the waterway successfully and without political interference. Both the US government and major shipping companies have praised the professional management of the Canal by the ACP and voiced support of the proposed expansion of the waterway. Political meddling would add to delays already arising as a result of financial constraints and would seriously damage the ACPs reputation for financial and administrative autonomy. However, the risk that the Torrijos government would seek to meddle in Canal affairs for political advantage is low in view of the ACPs expansion plan for the Canal and the need for a substantial portion of the investment necessary to be financed by tapping the international capital markets. The need to attract international investors and the ACP's desire to attract an investment grade rating to keep financing cost down, will both militate against government interference in the running of the Canal.
BACKGROUND
(Updated: July 2nd, 2007)
Natural Resources and the Environment
Panama lies on the narrowest stretch of the isthmus connecting North and South America, between Costa Rica in the west and Colombia in the east. The Panama Canal stretches roughly across the middle of the country, providing passage between the Caribbean Sea to the north and the Pacific Ocean to the south. A mountain chain runs eastwards along Panama's spine, reaching its highest point at the Baru volcano (3,475 metres) in the province of Chiriqui. Most agricultural development is concentrated on a plain located on the southern Pacific side of this chain. East of the Panama Canal, the Darien region is covered by tropical forest. On the coasts, the average temperature is 29C, with average humidity of 90%. The average temperature drops to 18C in the highlands. The rainy season lasts from May to December. The average rainfall per year is 1,500 mm along the Pacific coast and 2,500 mm on the Caribbean coast. Arable land makes up around 20% of Panama's total land area and 44% of the country is forested.
Panama has an extremely rich biodiversity, among which are 900 species of bird and 10,000 species of plant, including 1,200 species of orchid. However, it has suffered heavy deforestation, which, together with various forms of pollution, has led to severe environmental degradation. In an effort to halt this process, an extensive system of protected national parks, forests and game reserves covering 1.9m hectares (25% of Panama's national territory) has been developed. Under the latest programme, the five-year Programa Nacional de Administracion de Tierras (Pronat, National Land Administration Programme), which began in January 2002, five new protected areas have been created and indigenous territories, such as that of the Ngwobe-Bugle territory in the province of Chiriqui, are being formally demarcated.
The Canal watershed, which includes large tracts of land covered with dense forest, comprises the artificial Alajuela (formerly called Madden) and Gatun lakes. As well as providing the water needed to operate the three sets of locks along the Canal, it provides more than 95% of the drinking water for Panama City, Colon and Arraijan. Managing water resources is at the centre of Canal operations; over 1.8bn gallons of water a day are used in ship transits. During times of drought, draft and cargo restrictions have been enforced, most recently as a result of the El Nino global weather phenomenon in 1998. In March 2002 the Autoridad del Canal de Panama (ACP, the Panama Canal Authority) began the seven-year, US$190m deepening of the Panama Canal navigation channel in Gatun Lake and Gaillard Cut. When completed, Gatun Lake's active water storage capacity will have been increased by 45% and its operating depth will increase by 1 metre. This will augment the Canal's watershed output by 330m-360m gallons of water a day, a necessary component for the construction of a third set of locks (see Transport, communications and the Internet). Deepening the channel will benefit Canal customers by enabling more efficient draft administration and reducing the impact of water shortages on shipping. It will also allow the transit of larger vessels with a deeper draft when a new set of locks is constructed.
In the run-up to the ACP's announcement of its plans for expanding the Canal, objection to any project involving flooding land and the displacement of farmers formed a focus for those opposed to the expansion. The ACP's answer to these concerns has been to opt for a design for a new set of locks incorporating water-saving basins, which will enable recycling of 60% of the water used in each transit, eliminating the need for any significant increase in the existing reservoirs serving the Canal. The decision enabled Mr Torrijos to give firm assurances to the thousands of small farmers along the Canal's western watershed that they would not be relocated.
Transport, Communications and the Internet
Lower import tariffs and cheap consumer credit have led to a sharp rise in car ownership since the late 1990s. This, together with a deficient urban public transport system and a poorly designed and managed road network, have created high levels of congestion in Panama City, despite the opening in 1999-2000 of two toll roads that skirt the capital. A unitary transport authority was created in 2001 but did little to improve transport policy. The Torrijos government has responded to the transport problem in the city by deciding on a system of articulated buses to relieve congestion, for which it is preparing an international tender. The Pan-American Highway from Costa Rica to the Darien jungle has been repaired, as has the Transisthmian Highway between Panama City and Colon. A long-awaited toll road between Panama City and Colon remains at the planning stage, with estimates suggesting that the combined cost of construction and indemnities to owners along the planned route could be in excess of US$100m. However, with construction of a "mega-port" planned on the Pacific coast, the government has announced that construction of a Panama City-Colon highway will include the awarding of a concession to operate a toll road.
The Panamanian ports system has improved markedly since privatisation in the mid-1990s, and Panama has become one of the most important bases in the region for container transshipment, handling 2.8m 20-foot equivalent units (TEUs) in 2005, a 14.8% increase year on year. The private sector accounts for 98% of all container movement. At the end of 2004 the Panama Ports Company (PPC), a subsidiary of Hong Kong-based Hutchinson Ports Holdings, completed a US$200m expansion of its Balboa container port, doubling its capacity to 900,000 TEUs. PPC's upgrade of its Balboa port included the installation of three post-Panamax cranes. PPC is already planning an additional investment totalling nearly US$1bn in the ports of Cristobal and Balboa to increase capacity in both locations. On the Atlantic coast, the long-awaited expansion plans, at a total cost of US$500m, of Evergreen's Colon Container Terminal and Manzanillo International Terminal have received government approval. Evergreen will invest US$200m in doubling its Colon Container Terminal capacity to 900,000 TEUs, and Manzanillo International Terminal will increase its installed capacity to 3m TEUs over the next three years as a result of a US$300m investment.
In May 2006 the Panamanian authorities' launched a bidding process for the concession to build and operate a mega-port on the west side of the Pacific entrance to the Panama Canal, close to the Howard special economic area. The port will be designed to allow the operation of up to 18 post-Panamax cranes, the simultaneous docking of two post-Panamax vessels, and the capacity to handle 2.4m TEUs per year. The cost of the project is estimated at between US$600m and US$1bn. The build-operate-transfer (BOT) concession will run for a renewable period of 25 years. The new port is scheduled to come into operation in 2009 and is part of the government's plan to increase the port system's handling capacity to 6m TEUs.
Tocumen international airport is a regional hub serving 16 airlines. A private concession for its management should have been awarded in 1999, but the government at the time delayed privatisation and eventually cancelled it in August 2002. Instead, the airport was made a state enterprise, although its management board enjoys autonomy in day-to-day decision-making. In July 2004 Tocumen airport received a US$70m loan to upgrade its facilities.
A former US air strip at the Albrook base near Panama City has been converted into the Marcos Gelabert airport and has become a hub for many domestic flights. Government plans to use the airport site to build government offices, which would have meant the airport being relocated, met with strong opposition from airline companies, and from commuters, and were abandoned.
The Panama Canal is the country's greatest economic asset. A study on the impact of the Panama Canal on the country's economy, commissioned by the ACP from the Intracorp consultancy, the Universidad de Panama's Instituto del Canal and the Contraloria General de la Republica (the comptroller-general's office), concluded that in 2005 the Panama Canal (including the multiplying effect of its operations) accounted for 18.6% of the country's GDP and 41.2% of its exports, and generated 28% of fiscal revenue.
From its completion in 1914 until 1979 the Panama Canal was operated by the US under the auspices of the Panama Canal Company, and thereafter by the Panama Canal Commission (PCC). This arrangement ended on December 31st 1999 when the US handed over the Canal to Panama in compliance with the 1977 treaties between the two nations. Since the handover, an independent government body, the ACP, has been headed by a Panamanian administrator and supervised by an 11-member board of directors, the president of which also has the position of minister of Canal affairs without portfolio. The ACP board of directors has an advisory committee made up of 12 members from the international shipping and business communities. Since 2000 the ACP has been run as a profit-makingcorporation.
Most of the income from the Canal comes from transit tolls, which increased by 22% to a new all-time high of US$1bn in the ACP's fiscal year 2005/06 (the Canal accounts operate on the basis of a fiscal year running from October to September). Toll revenue accounts for around 70% of total Canal income, with the remainder of the Canal's income derived mainly from other transit-related services such as line-handling and tugboat fees, and sales of surplus water and hydro-generated electricity. The 20% rise in toll revenue in 2005/06 was a direct result of the new pricing mechanism. The number of ocean-going vessel transits in 2004/05 grew by less than 1%. Since 2002-03, when tolls were increased by around 12.5%, tolls have risen sharply alongside the introduction of a price differentiation policy to capture changes in the relative importance of the cargo type of vessels using the Canal. Since 2002 containerised shipments have been the Canal's largest single cargo segment and revenue earner. From mid-2005 tolls for container vessels have been charged per TEU, replacing the Panama Canal Universal Measurement system (PC/UMS) previously used, whereby tolls were based on the estimated volumetric carrying capacity of vessels. The introduction of the revised pricing structure for container ships and vessels with on-deck container-carrying capacity between mid-2005 and mid-2007 resulted in a 54% increase in the price chargeable per TEU over the period.
Panama Canal results(a)2003/042004/052005/06Toll revenue (US$ m)756.2846.31,025.0Total number of transits14,03514,01114,194Ocean-going commercial traffic12,51812,64712,772Cargo (m long tons)193.9197.4216.5PC/UMS(b) (net tonnage)266.7278.8296.0(a) Fiscal years running from October to September. (b) Panama Canal Universal Measurement system. Source: Autoridad del Canal de Panama.Changes to the ACP's toll pricing mechanism and its longer-term modernisation programme have been driven by changes in the composition of Canal users. The Canal has seen an increasing trend towards larger, so-called Panamax container shipsthe largest ships currently able to navigate the Canal owing to size restrictions imposed by the locks. The majority of Canal traffic is between East Asia and the eastern coast of the US. In terms of cargo transported, the US is by far the most important user of the Canal. However, changing patterns in world trade have seen China, which in 2000/01 did not rank among the top ten users, emerge as the second-largest user of the Canal, with both Chinese demand for commodities from the Americas and Western appetite for Chinese manufactured goods driving the trend.
Top five users of the Canal, 2005/06(a)(m long tonnes)OriginDestinationTotalUS(b)75.174.7149.8China28.516.545.0Japan7.825.633.4
Chile12.95.918.8South Korea10.28.118.3(a) Fiscal years running from October to September. (b) Includes inter-coastal cargo transport.Source: Autoridad del Canal de Panama.The ACP has an ongoing programme of investment aimed at maintaining the efficiency of the Canal, including the widening and deepening of parts of the Canal to improve navigability for some of the largest vessels. According to the ACP, the Canal operated at 93% of its capacity in 2003/04 and will reach full capacity by 2010. This, together with the increasing use in merchant shipping of post-Panamax ships that are unable to pass through the Canal owing to their size, has led the Canal authorities to conclude that expanding the capacity of the Canal is a necessity in order to maintain its position as a major transit route. With world trade growth forecast to remain strong, the fear is that failure to increase the capacity of the Canal will result in the Canal's losing an increasing share of its custom to alternative routes. To address this, the ACP, which has spent several years formulating a proposal for expanding the Canal to meet the needs of the modern merchant fleet, released details of its Canal expansion proposal on April 24th 2006.
There are five Spanish-language newspapersLa Prensa, ElPanama America, La Estrella de Panama, El Siglo and Criticain addition to two tabloids, Mi Diario and Dia a Dia. There are five television channels and over 100 radio stations. A bilingual (English-Spanish) weekly maritime magazine is also published. The five most important local newspapers have their own websites.
There are around 80 private Internet service providers (ISPs) and around 200,000 Internet subscribers. The total number of users is estimated at three per subscription, nearly 500,000 in total. Asymmetric digital subscriber line (ADSL) technology was introduced by Cable & Wireless (UK) in 2003. Internet access, hosting and first-tier Internet provider services represented a market worth around US$27m in 2003, according to the privately owned Telecom Newsletter. Around 30 banks offer clients Internet access to their accounts. Coffee growers use the Internet for marketing and online auctions. However, only around 40 companies have websites, and domestic online sales remain low because of limited availability of goods online. Companies use their websites more to advertise their products than to sell them. Companies in the Zona Libre de Colon (ZLC, the Colon Free Zone) are rapidly developing the use of the Internet for taking orders. The Internet is also widely used in the maritime sector and by law firms.
Most government entities are online, and the government has implementedthrough the Ministry of Economy and Financean integrated system of financial administration (SIAFPA, Sistema Integrado de Administracion Financiera de Panama) to promote the modernisation of the administration and to comply with the Letter of Intent signed in 2000 with the IMF. The system allows each government entity to publish its accounts online, including debt stock, revenue, budget and financing, in order to provide increased transparency. The system includes the ministries, the judicial police, the electoral tribunal, the Legislative Assembly, the judiciary system, the social investment fund and the office of the attorney-general.
Telecoms
Telecommunications have expanded rapidly since 1996, when BellSouth International (US) introduced A-band cellular phones. All provinces now have cellular coverage provided by both BellSouth and Cable & Wireless (C&W) Movil of the UK, which have operated B-band services since 1998. In 2005 Spanish-based Telefonica began to operate as Movistar after buying the concession and installations of BellSouth at end-2004. The two companies have over 1m customers, according to the Ente Regulador de los Servicios Publicos (ERSP, the public services regulatory body). In May 1997 a 49% share in the Instituto Nacional de Telecomunicaciones (Intel), the state telecoms company, was sold for US$652m to C&W. By September 1998 C&W had increased the number of fixed lines from 330,000 to 400,000. The company's monopoly on fixed telephony services came to an end in January 2003, when the sector was fully liberalised. Mobile density is around 27 per 100 inhabitants and fixed-line density is 118 per 1,000people.
Energy
Panama's main energy sources are petroleum-based fuels, all of which are imported, and hydroelectricity, which supplies around 64% of the country's electricity generation. Wood, charcoal and bagasse make a smaller contribution. Several geothermal fields have potential, but extensive exploration for oil and gas has failed to locate any commercially exploitable fields. Venezuela and Ecuador supply almost all of Panama's crude oil imports.
Electricity Sector
In 1998 the government privatised the Instituto de Recursos Hidraulicos y Electrificacion (IRHE), the state electricity utility. Foreign investors now operate and own stakes in four generating companies and three regional distribution companies. The state retains control over power transmission. Independent generators sell smaller quantities of electricity to the national system and directly to larger private customers. The ACP also sells surplus electricity to the system from its 175 mw of generating capacity. The Panamanian electricity grid is interconnected with that of its Central American neighbours, to which Panama is a small net exporter of electricity.
Strong economic growth in 2004-06, with annual real GDP growth averaging 7.5%, has resulted in a rapid increase in demand for electricity. However, the country's nominal generation capacity has been falling since 2003, reducing Panama's energy security, as a result of the decommissioning of old thermoelectric plants and the discouragement of investment in the industry by political intervention in the setting of electricity tariffs. In July 2005 demand for electricity reached 946.3 mw, according to the Comision de Politica Energetica (CPE, the energy policy commission), while the country's installed generation capacity in the grid totalled 1,271 mw, of which 1,105 mw was firm capacity (guaranteed to operate at peak hours 365 days per year). In other words, the electricity generation companies were operating at 85.7% of firm capacity, at a time when there are no significant generation projects due to come on stream before 2008.
Increased costs resulting from high international oil prices led electricity distributors to seek an increase in tariffs of between 7% and 31.5% from the start of 2006 for business and residential clients with a consumption of more than 200kw/month. Despite being given authorisation by the Ente Regulador de los Servicios Publicos (ERSP, the public services regulating board), public protest resulted in the government's suspending application of the increases pending an investigation by a technical commission. The commission recommended a tariff increase of around 15%, followed by monthly tariff adjustments in line with world energy prices. The government, wary of damaging its popularity in the lead-up to the referendum on Canal expansion, authorised a rise of 9.4% on average until the end of 2006irrespective of the trend in fuel costshelped by US$18.7m in government subsidies. A further US$22m in government subsidies ensured that there would be no increase in electricity tariffs for the two-thirds of users who consume up to 200 kw/month.
In response to electricity supply approaching capacity and what it perceives as excessively high tariffs demanded by the existing electricity providers, in March 2006 the government, in a departure from the privatisation policies followed by the two previous administrations, secured congressional approval for the creation of a state-owned power generating company, the Empresa de Generacion Electrica (EGE). The EGE is intended to introduce additional competition into the market, with the aim of driving spot electricity prices downwards. The government also introduced tax incentives for the construction of small electricity generation units of up to 20 mw based on clean renewable energy sources. In the case of plants of up to 10 mw, these include exemption from import tariffs for equipment and spare parts, and corporation tax exemptions for up to one-quarter of the direct cost of the project through deductions of up to 100% of liabilities for up to ten years.
Hydroelectric generation benefits from Panama's abundant and relatively stable rainfall levels. Hydroelectric capacity rose from 700 mw in 2002 to 850 mw in 2003, as a result of the coming on stream in 2003 of the Esti hydroelectric plant. The country's other main hydroelectric stations are La Fortuna (300 mw), Bayano (150 mw) and La Estrella-Los Valles (90 mw). Hydroelectricity accounted for 57.7% of total generation capacity in 2005, and this proportion appears set to rise further given the substantial potential still unexploited and continuing high oil prices. A joint venture formed by Hidro Teribe and AES Panama is completing the engineering studies to build three hydroelectric plants on the Changuinola river that are scheduled to come on stream in 2010 with a total capacity of 420 mw, and there are over a dozen smaller hydroelectric projects with an aggregate projected capacity of 333 mw whose environmental impact studies have long been approved.
Copyright 2007 Economist Intelligence Unit
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