VZCZCXYZ0004
RR RUEHWEB

DE RUEHZP #0047/01 0121801
ZNR UUUUU ZZH
R 121801Z JAN 07
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 9605
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0155
RUEHEG/AMEMBASSY CAIRO 0022
RUEHCP/AMEMBASSY COPENHAGEN 0052
RUEHPE/AMEMBASSY LIMA 0671
RUEHSG/AMEMBASSY SANTIAGO 0214
RUEHQT/AMEMBASSY QUITO 0926
RUEHUL/AMEMBASSY SEOUL 0194
RUEHTV/AMEMBASSY TEL AVIV 0031
RUEHKO/AMEMBASSY TOKYO 0097
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFISS/JOINT STAFF WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEKJCS/SECDEF WASHDC
RUENAAA/SECNAV WASHDC
RUEHGV/USMISSION GENEVA 0279
RHEHAAA/WHITE HOUSE WASHDC

UNCLAS PANAMA 000047 
 
SIPDIS 
 
SIPDIS 
 
FOR WHA/CEN TELLO 
 
E.O. 12958: N/A 
TAGS: ECON EFTA ETRD EWWT FCSC PM
SUBJECT: PANAMA CANAL AUTHORITY EYES TOLL INCREASES 
 
REF: A. PAMAMA 2374 
     ¶B. PANAMA 2375 
 
¶1. SUMMARY. On December 18, 2006, DCM and EconOff met with 
Panama Canal Authority (ACP) Administrator Alberto Aleman 
Zubieta and ACP Chief of Planning Javier Sabonge to discuss 
the ACP's planned toll increases.  The ACP has not yet 
determined the magnitude of the toll increases.  Aleman 
hinted that the increases could be as high as 8.0% per annum 
over the next five years.  Concerned about potentially 
adverse USG reaction to any toll increases, Aleman sought to 
soften possible opposition by suggesting such increases 
should be of no concern to the USG.  Aleman said the 
Miami-based cruise industry will complain as they did after 
the 2002/2003 toll increases. END SUMMARY. 
 
 
--------------------------------------- 
ACP May Front-Load Canal Toll Increases 
--------------------------------------- 
 
¶2. (SBU) On December 18, 2006, DCM and EconOff met with 
Aleman and Sabonge to discuss the ACP's planned toll 
increases.  Aleman told EmbOffs the ACP has not yet 
determined the magnitude of the toll increases.  Aleman said, 
however, that the increase would be in excess of the 3.5% 
discussed during the runup to the October 2006 referendum on 
the $5.25 billion Panama Canal expansion project (Project). 
He also hinted that the increases could be as high as 8.0% 
per annum over the next five years.  While never committing 
to an actual toll increase figure, the ACP's public discourse 
during the Project debate was that annual toll increases 
would be between 3.5% and 8.0%.  ACP Project Manager Jorge de 
la Guardia separately told EmbOffs that the ACP plans on 
implementing toll increases during the first quarter of 2007. 
 See reftel A. 
 
¶3. (U) Since the start of the Project debate in April 2006, 
the ACP has consistently stated that its goal was to (i) 
raise tolls 100% by 2025 (hence the 3.5% annual toll increase 
figure) and (ii) finance the Project through a combination of 
toll increases and debt.  Aleman said the ACP may raise tolls 
higher than 3.5% in the short run in order to incur less 
indebtedness.  Publicly, the ACP has stated that $2.3 billion 
of the $5.25 billion Project costs would be financed with 
debt.  ACP Chief Financial Officer Jorge Barrios Ng told 
EmbOffs in a December 6 meeting that the ACP might boost the 
Project's debt to $2.5 billion. See reftel B. 
 
------------------------------- 
ACP Girds for Pushback by Users 
------------------------------- 
 
¶4. (SBU) The ACP is concerned about potential adverse USG 
reaction to any toll increases.  The December 18 meeting was 
part of the ACP's efforts to keep Post apprised of the toll 
increases situation in order to avoid, or soften, USG 
opposition.  Aleman said he expects significant protests from 
countries such as Japan, Ecuador, Peru and Chile, as each 
country protested the 2002/2003 toll increases.  In 
preparation for such protests, Aleman is saying the ACP is 
paying for the Project, not the users.  He said the users are 
simply paying for the services rendered by the canal.  Aleman 
argues that the ACP is assuming all risk in the Project since 
the users are under no obligation to use the canal once 
expanded.  To date, the GOP and ACP assuaged public concerns 
over who would pay for the Project by saying it would be 
partially funded by the users through increased tolls. 
 
¶5. (SBU) Aleman said the toll increases should be of no 
concern to the USG.  Aleman added that canal tolls are the 
lowest costs in shipping goods.  Aleman said it costs $600 to 
transport a container across the U.S.  The ACP charges $54 
per container.  Even if the price doubles to $108 overnight, 
Aleman says the incremental cost per item transited is minimal 
 
¶6. (SBU) Aleman said the Miami-based cruise industry will 
complain as they did after the 2002/2003 toll increases. 
Aleman believes the cruise industry will simply pass the 
costs through to the passengers. Aleman said the canal is the 
second most popular cruise destination after Alaska and the 
cruise industry cannot afford to curtail cruises to Panama. 
Aleman said he is willing to work with the cruise industry to 
time the toll increases in such a manner which will 
facilitate the industry passing the costs to the passengers. 
 
--------------------------- 
ACP Toll Pricing Philosophy 
--------------------------- 
 
¶7. (SBU) Aleman said the ACP's pricing philosophy is to 
charge what the canal is worth to each user and to charge 
based on a ship's cargo carrying capacity. Unlike during the 
USG administration where tolls were applied more uniformly, 
the ACP seeks to price each user based on the price 
elasticity of that user. Therefore, the ACP will, for 
example, charge liner services (cruise, container and vehicle 
ships) which operate on tighter schedule more than grain 
ships which have a more flexible timetable.  Aleman said if 
oil prices continue to rise, the canal's value will increases 
and he will be able to raise tolls even further.  However, he 
said he realizes that once he charges "one penny more than 
the value received by its users, they will go elsewhere." 
Aleman also said the ACP will not disclose the uses of any 
toll increases.  He said that the cost to operate and expand 
the canal is no concern of the users.  Under USG 
administration, the toll structure was geared towards 
covering operating costs and capital expenditures, 
accordingly any toll increases were justified to the users by 
disclosing the uses of such toll increases. 
 
--------------------------------------------- ---------- 
Comment: Toll Hikes Driven by Politics, Not Just Market 
--------------------------------------------- ---------- 
 
¶8. (SBU) Aleman and the ACP officials have an encyclopedic 
knowledge of the shipping industry.  They have extensive 
research on the costs of structure of the canal users and 
understand the dynamics of any toll increase.  Aleman also 
knows that with global trading increasing, particularly 
containerized traffic, and with increased fuel costs, the 
canal services are in great demand.  He knows he is in an 
excellent bargaining position.  However, he also understands 
that either changes in the world economy or extraordinary 
events (such as a drought which would limit the number of 
possible transits) could adversely effect the canal's 
financial situation.  Aleman's stated rationale of increasing 
tolls by as much as 8.0% annually in order to lessen the debt 
burden is contrary to matching the duration of the Project or 
the canal's operation with the duration of its long term 
debt.  The ACP's return on assets was 18.8% during 2006.  The 
yield on GoP's most recent long term bond issuance was 
6.729%. From a strictly financial point of view, it would 
make more sense for the ACP to incur more long term debt, not 
less.  The real reason for the hesitancy to incur greater 
debt appears to be political. The ACP needs to assuage the 
public's concerns about increased public debt.  The ACP's 
real reason for higher toll increases appears to be market 
driven.  The ACP knows the canal's services are currently in 
great demand and it therefore has pricing power.  The higher 
toll increases will also limit the increased financial risk 
imposed on the canal by the Project. By increasing tolls 8.0% 
annually beginning in 2007, the ACP would double tolls by 
2015 instead of 2025.  Increasing tolls by 8.0% annually for 
five years and 3.0% thereafter would double tolls by 2020. 
The higher toll increases in the early years would increase 
the present value of the future cash flows which will help in 
lowering the interest expense on any Project debt financing. 
Eaton