US embassy cable - 04PANAMA632

UNCLAS SECTION 01 OF 03 PANAMA 000632 
 
SIPDIS 
 
 
SENSITIVE 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, PGOV, PM, ECONOMIC AFFAIRS 
SUBJECT: STATUS OF FORMER USG PROPERTIES IN THE PANAMA 
CANAL ZONE--A MIXED RECORD OF SUCCESS 
 
 
SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY 
 
 
1.  (SBU) Summary: Panama,s Interoceanic Region Authority 
(ARI) is responsible for converting former USG property in 
the Panama Canal area to private and commercial use.  It has 
had a number of significant successes, and current and future 
investment in these "reverted" areas could total $2.5 
billion.  Even so, ARI is plagued by slow bureaucracy, 
accusations of corruption, and ham-handedness in planning, 
which have caused numerous investor disputes and complaints, 
while significant portions of the lands remain undeveloped. 
Despite its problems, ARI has certainly had a positive effect 
on Panama,s economy, but much remains to be done in the 
remaining two years of its mandate.  End Summmary. 
 
 
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A Huge Development Goal: Former USG Facilities and Lands 
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2.  (SBU) Charged with marketing former U.S. military bases 
in the former Canal Zone that reverted to the GoP under the 
terms of the 1977 Carter-Torrijos treaty and negotiating 
deals to convert them to productive civilian use, ARI manages 
59,300 hectares of land (1 hectare equals 2.47 acres).  Some 
46,000ha are zoned and set aside for environmental protection 
and forestry projects.  Of the remaining 13,300ha, 4,500ha 
are in housing developments and 8,800ha are commercially 
developable.  ARI also controls 13,573 former USG structures, 
including 8,584 houses and 1082 commercially developable 
buildings, plus 3,907 "other" units such as storage tanks. 
There has been no clear methodology to calculate the total 
value of the structures, and overestimation of their 
functional value and investor interest led some experts to 
conclude in 1999 that the reverted areas' buildings were 
worth an improbable $30 billion, though now the GoP uses a 
more modest $5 billion figure, not accounting for 
depreciation. 
 
 
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ARI Has Made Significant Advances Converting the Property 
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3.  (SBU) As of May 2003, private enterprise has invested or 
signed contracts to invest approximately $1.5 billion in the 
reverted areas, with a projected additional $1 billion more 
through 2006.  The maritime industry leads the pack with $771 
million in current investment, followed by infrastructure 
projects at $164 million and tourism at $130 million. 
Businesses in the reverted areas employ 52,000 workers--a 
three-fold increase since the USG relinquished control of the 
Canal, according to ARI.  In the maritime sector 
particularly, the new investment has had a significant 
impact.  Container ports such as Manzaniilo International 
Terminal (MIT- owned by Stevedoring Services of America) and 
Evergreen on the Atlantic side, and Panama Ports on the 
Pacific have all averaged more than $200 million in 
investment with plans for more.  Whereas in 1994 ports in 
Panama moved 400,000 containers, capacity in 2003 was 2.8 
million, and capacity may reach 4 million containers by 2006. 
 Investment in cruise ship ports on the Atlantic and Pacific 
entrances totals $100 million. In the 2002-2003 season, a 
total of 145 cruise ships made port calls with 160,000 
passengers visiting Panama. 
 
 
4.  (SBU) The City of Knowledge, based at the former Ft. 
Clayton, is a business and technology incubator.  Currently 
some 40 companies focused on research, telecommunications, 
software development have set up shop there.  In addition, 
Canada,s McGill University grad school labs, UNICEF and UNDP 
regional headquarters, and the Smithsonian Tropical Research 
Institute have offices there.  Companies on-site receive 
sizeable tax breaks, duty free import of goods, and exemption 
from income tax. 
 
 
5.  (SBU) Fort Amador at the Pacific entrance of the Canal is 
ARI's most visible and clearly successful project.  It has 
seen $140 million in investment so far, and the useable 
terrain is 90% occupied.  In addition to the cruise ship 
port, the development includes four hotels, two marinas, 
multiple restaurants and shops plus a biodiversity museum 
partnered with the Smithsonian.  A convention center that 
anchors the development was the site of the Miss Universe 
pageant this past May.  But success doesn,t stop there- the 
former Albrook air base is now Panama City's domestic airport 
as well as the home to a multi-million dollar  international 
bus terminal.  A new $100 million shopping mall is about to 
open as well.  Other facilities throughout the reverted areas 
include the ecotourism-based Gamboa Rainforest Resort, and 
the five-star Melia Panama Canal Hotel on the site of the 
former School of the Americas. 
 
 
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Unfortunately the Success Belies Serious Investment Problems 
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6.  (SBU) Numbers work both ways, however.  Almost all of 
ARI,s success stories date from before the formal turnover 
in 1999 or immediately after.  A key indicator of ARI,s 
slowing success is its net revenue contribution to the GoP-- 
income from concession fees and property sales minus 
operating costs and investments--which has totaled a paltry 
$100 million from July 2000 to July 2003.  Further, there 
were 323 property transfers for a total of $40 million in 
2000, but in the period January-July 2003, ARI approved only 
48 property transfers worth a total of $3 million--a mere 
fraction of the 2000 figure.  By one estimate, 70% of the 
former USG housing lies vacant in a country where 41% of the 
population lives in poverty and in substandard housing 
conditions. 
 
 
7.  (SBU) Investors are generally critical of ARI,s 
performance, complaining of bureaucratic delays and failure 
to follow through on investor interest.  And though no 
smoking gun has ever been discovered, there are persistent 
charges that ARI officials are corrupt, requiring kickback 
"fees" on concessions that are approved.  Symbolic of these 
difficulties, the Embassy currently monitors six separate 
U.S. investor disputes that involve ARI.  For example, 
MIT--touted by ARI as a major success--has been trying to 
expand its operations by purchasing land adjacent to its 
current concession, but ARI has consistently overpriced the 
value of the property than its commercial value and has 
forced MIT to shelve the project.  Florida State University, 
resident in Panama for over 40 years, has unsuccessfully 
sought to purchase its leased property from ARI.  Again, 
reneging on a previous agreement with FSU, ARI revalued and 
overpriced the concession.  As a result, FSU is seriously 
considering leaving Panama. 
 
 
8.  (SBU) In another project called the Bridge of the 
Americas Cultural Center, ARI delayed granting the concession 
to a U.S. investor for over two years, and even then in a 
much-reduced form, while prime areas of the original project 
were awarded to a relative of the current Colon Free Zone 
manager.  ARI officials granted a marina concession at Ft. 
Amador that trespasses on a Ministry of Economy and Finance 
license that could potentially cause serious damage to Global 
Crossing,s intercontinental fiber-optic cable and hinder 
telephone and internet connection between North and South 
America.  Anecdotally, Econoffs have heard of individual 
homebuyers who have paid over half the value of the house 
they purchased and after several years of delays still do not 
have a title.  The concerns are not isolated to foreign 
investors--ARI has asked the GoP,s National Maritime Service 
(SMN) to move from its current site at the former 
Caribbean-side Ft. Sherman which ARI controls and views as a 
potentially lucrative tourism development.  While 
negotiations are ongoing and the future SMN base will most 
likely be of similar size and utility, initially many worried 
that ARI was foregoing the importance of Canal security for 
economic expediency. 
 
 
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Expectations/Pressures Result in "Grand Scheme" Thinking 
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9.  (SBU) Early successes have unfortunately led to 
unrealistic expectations about what ARI can accomplish and 
exacerbated pressure on ARI to produce visible results 
leading up to the 2004 Presidential elections.  As a result, 
ARI has made a number of inconsistent decisions and resource 
allocations that appear more questionable than those made a 
few years ago.  Indeed, ARI appears to favor a series of 
"grand scheme" projects, while small projects are being 
rebuffed and hence no investment momentum is being created. 
As an example, ARI has taken an "all or nothing" approach to 
develop the former Howard Air Base for $400 million. 
 
 
10.  (SBU) Tenders for Howard as one giant development have 
closed without bidders, and several other concepts for use 
have been stillborn.  Only in March of this year did ARI 
succeed in attracting a Dell Computer Call Center to Howard 
as the anchor of a proposed multimodal-shipping hub.  A GoP 
proposal on September 5 to the Legislative Assembly to turn 
to turn Howard into an Economic Development Zone has 
generated howls of protest from the Colon Free Zone about an 
unbalanced legal framework.  Worsening the situation, ARI has 
approved construction of several high-rise buildings near 
Howard that could obstruct the landing approach to the 
airstrip on the former base, which could inhibit that aspect 
of development altogether. 
 
 
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COMMENT: Troubled victories, confused priorities, unclear 
future 
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11.  (SBU) Clearly, the reverted areas have been an economic 
boon to Panama, and there is significant potential to develop 
the remaining areas that haven,t been auctioned.  In ARI,s 
defense, no government agency could have been completely 
prepared for the massive tidal wave of property and 
infrastructure transferred just before the December 1999 
handover.  Further, some projects are very tough to 
adjudicate quickly, often needing to pass muster by multiple 
GoP agencies--valuations approved by the Comptroller, 
environmental impact statements by the Environmental 
Authority, port improvements by the Maritime Authority, etc. 
Even so, investor disgruntlement and accusations of 
corruption are tough to ignore.  Current investors complain 
of serious problems and potential investors find their ideas 
ignored while ARI pursues grandiose development plans.  It is 
important to remember that the revertes areas include 
significant capital investments by the USG--investments that 
were handed to the GoP for free, and that any conversion to 
private hands is pure profit for ARI. 
 
 
12.  (SBU) Perhaps most importantly, ARI,s mandate ends on 
December 31, 2005.  With substantial land and infrastructure 
yet to be transferred to private hands, ARI would have much 
to accomplish in such a short period of time--a goal that it 
is unlikely to achieve.  However, Panama,s Legislative 
Assembly has made no move to extend the mandate, and ARI,s 
future is unclear. 
WATT