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Financing of the Panama Canal

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First Attempt by the French

With trade being the most important industry in the world at the time, it is no surprise that many countries explored the possibility of bridging the gap between the two oceans. During the start of the eighteenth century reaching the west coast of the US from Europe took a long time, as one needed to sail all the way around South America. Due to growing global trade around the world it was decided that a canal needed to be built. The ambitious project would be taken on by the French. After finishing the Suez Canal in 1869, the French thought that a canal connecting the Atlantic to the Pacific could be achieved without much difficulty. Teams of engineers surveyed multiple possible locations, including Mexico and Nicaragua, but ultimately it was decided that building would commence at Panama. The task was given to Ferdinand de Lesseps, who was head of the project at Suez. In 1876 an international company called “La Société internationale du Canal interocéanique” was created to construct the canal across Panama. One might think that such a large task should be taken on by a national government and not a private company, but due to the political climate at the time this was not possible. The US had a very clear policy opposing European colonialism in the Americas and attempt for the government to take on the project would have been seen as imperialist.

During the time Panama was not an independent country, but a province of Colombia. A delegation was sent to Columbia to acquire the rights to build a canal across the Isthmus. In 1878 the Wyse concession was signed giving the company an exclusive right, good for ninety-nine years, to build a canal across panama. “Colombia in turn was to get 5 percent of the gross revenue from the canal for twenty-five years, 6 percent for the next twenty-five years, 7 percent for the next twenty-five years, and 8 percent for the final years of the concession. The minimum payment, however, was never to be less than $250,000, which was the same as Colombia’s share in the earnings of the Panama Railroad”. (McCullough, 1977)

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The project was the largest financed at the time. This large stock issue could not be taken on alone, so a group of various commercial and investment banks was organized. Initial capital was set at 300,000,000 francs ($60,000,000), with shares offered at 500 francs each. For the average person this was not very attainable as that amount had been about a year’s wages. This however did not dissuade the people and the stock issue was an outstanding success. Sale of stock began in December of 1880. Within a couple of days, a total of 100,000 people subscribed to twice the number of shares available, this was in part due to interest of average people. “As de Lesseps had forecast, it was the small investor who made the sale such a runaway success. Some eighty thousand people had bought one to five shares each. Only fourteen people owned a thousand shares or more. And about sixteen thousand of the shareholders were women.” (McCullough, 1977). This was due to a couple of reasons. For one, the company offered investors tempting terms – only 25% due now, and the other amount to be paid off in the following six years. People were also influenced by the success at Suez, whose stock on the Bourse had increased by four times and was paying a seventeen percent dividend. The stock issue was not cheap. Commission by banks on stock sale was 4% per share. Including lobbying, promotion and organizational expenses, the issue of stock and starting the company cost around 32 million francs.

After the start the of construction a change of plans was made which required the Panama Railroad to be used. The stock of the railroad company was one of the highest on the New York stock exchange, so acquisition was going to be expensive. After long negotiations, in June of 1881 an agreement was reached. The railroad was bought for over 100 million francs, around three times above par value of the company. This was also a third of the whole budget, so it was clear that more money was needed to finish the project. Ferdinand de Lesseps sked to borrow three hundred million francs more to build the canal and the stockholders approved. The first bond issue was fully bought.

A few years after construction began, problems of building the canal became apparent. Engineers that surveyed the land underestimated the damage that the tropical climate could do. Completed work would be wiped out in a matter of weeks by heavy rainfall and mudslides. Then there was the issue of disease. Malaria and yellow fewer were common across the region. Coupled with unfriendly climate and dangerous working conditions, the death toll was at two hundred per day. The company could not keep up with rising costs of personal as more and more people were needed. At its peak around forty thousand workers were employed making $1 per day. News of this started spreading to France and the stock price of the company started to fall. At this point the government had to step in. Their permission was needed to acquire more financing. With the authorization of government officials multiple bond issues were made to keep the company afloat even though it was clear that the project had been a failure. Last ditch efforts were being made but in the end it all collapsed. In December of 1888, a vote was held, and the company was shut down. The government stepped in and appointed a liquidator. In 1892, a scandal broke out, implicating hundreds of public officials and company workers who gave and took bribes – 23 million francs worth.

The French effort at Panama had been were costly and not only in a financial sense. During the nine years that building commenced around 22,000 people died. The failure to build a canal was a big blow to France and its people. The total undertaking cost around 1.8 billion francs and resulted in lost savings for over 800,000 people. It also hampered the sense of pride that the people had in the country and political scandals gave rise to antisemitic movements across the country. By 1889 all activity at Panama had ended.

Takeover by the Americans

The failed French attempt did not decrease the demand for a connection between the two oceans. The United States believed that a canal across Central America was important to the interests of the country, both economic and military. Even prior to the first attempt at building the canal, American engineers had explored other possible locations, but due to some work already been completed Panama was chosen.

After the failed attempt by the French the company was reorganized into “Compagnie Nouvelle du Canal de Panama”. It had no intentions of finishing the canal, but rather sent workers to do upkeep on the existing infrastructure in anticipation of an acquisition by the Americans. In January of 1902 congress signed the Spooner act which gave permission to acquire the Panama Canal company. $40 million was paid by the US for useful excavation, surveying, maps and the Panama Railroad. The task of transferring the funds was given to J.P. Morgan. Congress gave the go ahead to build provided that permission from Colombia was obtained.

One of the points of the rights that the old company had with regards to building the canal in Panama, was that they could not be sold to a foreign government. The US needed to sign a new treaty obtaining permission. Colombia was very reluctant to cooperation and while certain concessions were signed, they failed to get passed the Colombian senate. Roosevelt knew that a connection between the oceans needed to be built as quickly as possible, so he devised another plan. He hinted that if Panama were to declare independence, the United States would recognize them as a sovereign nation. Following that, in 1903 Panama seceded from Colombia without much struggle to become an independent nation. The favor was returned by the Panamanians in 1904 by granting rights to the canal zone. In return, the US would pay the newly independent country a lump sum of $10 million and an annual fee of $250,000.

Building commenced in 1904. The Americans experienced the same problems as the French had a few decades prior. Malaria and Yellow fewer were rampant, the machinery acquired was in need of repair and malaria and yellow fewer were still rampant in the area. However, the Americans fared better in dealing with these problems. Since the previous attempt, significant medical improvements had been made, resulting in a much lower amount of deaths. They also had a lot more experienced personnel who were able to develop effective working methods. This, along with stricter government oversight, meant that things were running as expected.

The work was completed, and the canal was opened in august of 1914. The cost had been huge. The dollar cost since 1904 stood at $352 million, including the purchase of the old canal company and the indemnity to Panama. This had been the largest construction project in the world to date, not only in monetary terms, but also in human lives. If we add the two attempts together the figure comes out to around $639 million. This show us that, at least in the past, projects commanded by the government can be efficient and cost effective. The project cost came in at $23 million under budget and six months ahead of schedule. Such a huge undertaking was done without the help of bribes, kickbacks or any other many forms of corruption. The American effort was a clean project.

The excitement surrounding the opening of the canal was hampered by the start of WW1. Up until 1918 only four to five ships a day passed, however things improved after the war. The canal was running in full speed by 1924, with 5,000 ships passing every day, and by 1939 –7,000 per day, surpassing the Suez Canal. Due to growing demand nighttime service was implemented in 1966. By the 1970s traffic was at 15,000 ships a day, collecting around $100 million in tolls each year. Prices were set by the US government at amounts to cover expenses, which was enough until 1973 when the canal experienced its first loss. In response, toll fees were raised by 20%. The building of the canal proved to be a very important component in expanding global trade during the 20th century. It was not met without scrutiny though. During the 1970s. protest in Panama occurred requiring the overturn of the canal from the US government to Panama. A new treaty was signed and in December 31, 1999 the handover to the Panamanian government was made.

Competition

The opening of the Panama Canal was one of the greatest engineering miracles of the time. The small nation reshaped much of the worlds shipping routes and gave way to unprecedented growth in maritime trade. At its inception it had a monopoly over western maritime trade, as no clear alternatives were available, but things have changed since then. A big effect has been the development of new nations as manufacturers of the world, specifically China. The country’s main trading partner is the United States, which results in the China to East coast trading route being the busiest one in the world. It might seem surprising but going through the Panama Canal is not the only way to conduct this trading route.

The first competitor is the railroad. As the trade volume between China and the US has increased, alternatives shipping routes have been explored. In order to reach the east coast of the US, a cargo ship has to sail around 21,000 km, and the journey takes about four weeks. The ship has to go through the canal, which means there are limitations to how much cargo it can bring, and toll fees also have to be paid. An alternative to sail to the west coast and then transport the cargo using trains, which are faster and more cost efficient. This route is faster by a week. Although most of the time slightly more expensive, most companies deem the expense to be worthy. The second alternative is the Suez Canal. It might seem strange that a canal on the other side of the world can pose a threat. Even thought it might not seem like it on a map but sailing from China through Europe,and not the Pacific, is not actually that different, only a few days longer. Both canals always compete by changing their fee structure but most of the time it comes out cheaper to sail through Suez.

In recent years a new alternative shipping route has popped up that definitely was not anticipated at the start of the XX c. – the Northwest passage. Located in northern Canada, the shipping route became viable in 2014 due to rising temperatures and melting ice caps in the artic circle. The journey time between east Canada and China was decrease by two weeks. The ship was able to save thousands in fuel costs and take on more cargo. While the route is still in limited use, if rising temperatures continue, this could surpass Panama as the main point for ships to reach the Pacific Ocean.

The Panama Canal in the future could potentially face a threat much closer to home and not just on the China – US route. As mentioned before alternatives to Panama were explored in the XIX c. and those ambitions are pretty much alive today. In 2013 the government of Nicaragua granted a concession to a Honk Kong based company to build a canal across the country. The project has not gained much traction and thing are still moving slowly, but we could see a new canal through Central America being built in the future.

The Panama Canal is the lifeline of the country. At its current state it brings in around $2.5 billion a year in revenue and provides approximately nine thousand jobs to the local economy. It is imperative that the canal stay competitive which is why it has made improvements even since the early days of its inception, in order to stay competitive and try to keep up with the growing demands of the global economy.

Expansion

Since the opening it was known that just building the canal would not be enough. During its lifetime adjustments and improvements needed to be made in order to accommodate the change and growth of global maritime trade and to stay above its competitors.

The first major instance of improvements came in 1935 with the construction of the Madden dam and power project. Its purpose was it enlargen the water reservoir and increase power production in order to keep up with the canals growing use. From 1957 to 1971 the water pathway on the south side of the country was widened by 70& in order to accommodate larger ships. At the time the Canal zone belonged to the United States, so all expansions were financed by the US taxpayer.

The first expansion by the Panama Canal Authority (APC) came in 1991. The project was meant to again widen the southern water pathway by another 50%. The project was completed in ten years and cost the company $219 million, which it financed with its own money. An additional $84 million was spent on locks, hydraulics, tracking systems and other improvements, bringing the total to just over $300 million. This was the biggest expansion to date and allowed the two-way passage of Panamax ships – the largest allowed through the canal as well as reducing total travel time. Despite this, the canal still had its limitations with regards to size and weight and was not doing enough to take business from its competitors.

After much deliberation about what could be done a new plan was put in place. In 2006 the Panamanian government backed the biggest improvement to date – a $5.2 billion expansion plan. This was not achieved without any backlash. Certain local economists predicted that the expansion would not pay for itself, even without counting the environmental damage that could occur. Nevertheless, it was approved, and work began in 2007.

It was calculated that external financing would be needed to complete the project. The ACP estimated that it needed $2.3 billion in order to finance some of the construction and make up for lost revenue during the peak of construction. In December of 2008, in the middle of the financial crisis, a deal was reached among a number of banks for the required amount. “The agreement covers the following amounts: European Investment Bank (EIB) $500 million Japan Bank for International Cooperation (JBIC) $800 million Inter-American Development Bank (IDB) $400 million International Financial Corporation (IFC) $300 million Andean Development Corporation (CAF) $300 million Total: $2.30 billion” (CAF, 2008). The structure and terms of the loan were considered favorable to the canal authority – a 20-year term with a 10-year grace period. All of the banks financed on the same terms and the ACP was given an A1 investment grade rating by Moody’s.

The purpose of the expansion was to increase the capacity of size, weight and capacity that the canal could handle. It allowed passage of a new type of larger ships called “neo-Panamax”. Ships could also carry almost three times as more cargo. Although the canal still cannot accommodate every ship, the majority of the global fleet can pass through. It is projected that peak traffic will be reached by 2025. Revenues for that year are projected to be approximately $6 billion a year.

The canal is already defying sceptic opinions. Since its opening yearly revenues have gone up by 25% in just 2 years. It has resulting in economic benefits for the neighboring countries as well, with a lot of consumer products seeing a decrease in price. The increase in size has also affected seaports all along the east coast of North America. In cities like New Jersey, Baltimore, Miami ports have started expansion projects to accommodate the increase in traffic. This spending stimulates the local economy and creates more jobs.

Conclusion

Since the inception of international trade, people have been looking at a way to quickly and conveniently cross from the Atlantic to the Pacific Ocean. Only in the end of the XIX c. the project of basically diving the Americas into two parts came to fruition. After a failed attempt by the French the Americans took over. It was in their best interest to build a canal in order to exert global influence and the canal is one of the reasons why the country is the world’s superpower. The massive undertaking was not just of high financial cost, but also human life. By implementing changes and improvements the canal is able to keep up with the growing demand in global trade and many are sure that it will do so in the future. While alternatives are being explored and may be viable in the future, for now the Panama Canal remains the worlds shortcut.

References

  • https://www.britannica.com/topic/Panama-Canal/Capital-improvements
  • https://www.caf.com/en/currently/news/2008/12/panama-canal-authority-signs-loan-agreement-with-international-banks-to-finance-canal-expansion/

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