US embassy cable - 05PANAMA2004

C O N F I D E N T I A L SECTION 01 OF 02 PANAMA 002004 
 
SIPDIS 
 
DEPT FOR WHA/CEN, EB/TRA/OTP AND EB/TPP 
USTR FOR RVARGO AND AMELITO 
USDOC/MAC FOR GAISFORD 
 
E.O. 12958: DECL: 10/03/2015 
TAGS: EWWT, ETRD, ECON, PREL, PM, CH, ECONOMIC AFFAIRS 
SUBJECT: GOP WINS BIG AGAINST CHINESE-OWNED PANAMA PORTS 
 
Classified By: Classified by Ambassador William A. Eaton for reasons 1. 
4 (b and d) 
 
1. (C) Summary:  The GOP and Panama Ports Company (PPC) 
agreed on September 8 to reverse a highly questioned move by 
the former Moscoso administration in 2002 that freed PPC from 
its contractual obligations to pay $22.2 million annually 
plus a variable annual payment of 10% of its gross annual 
income to the GOP.  Moscoso,s action would have cost Panama 
more than $1.3 billion in lost revenues during the remaining 
45 years of PPC,s concession.  Spearheaded by Minister of 
Trade & Industry Alejandro Ferrer, the GOP overcame PPC,s 
hardball tactics and forced PPC (owned by Hong Kong-based 
Hutchison Port Holdings) to drop $40 million in counter 
claims and to pay $102 million in back rent, avoiding a 
prolonged legal fight.  Whatever the reason for PPC,s 
agreement to settle, the GOP showed its clear readiness to go 
the mat with the world,s leading port operator and a 
powerful Chinese-owned company.  Looking ahead to the GOP,s 
future solicitation on a proposed $300 million &megaport8 
at the Pacific end of the Panama Canal, Ferrer told the 
Ambassador September 19 that &the Chinese already have 
enough ports here.8  End summary. 
 
PPC,s 1997 Deal for Ports at Both Ends of the Panama Canal 
--------------------------------------------- ------- 
 
2. (U) In January 1997, PPC signed a 25-50 year concession to 
develop terminals at the GOP,s previously existing Balboa 
and Cristobal ports at the Pacific and Atlantic ends, 
respectively, of the Canal.  PPC agreed to pay the GOP $22.2 
million annually in fixed rent as well as 10% of gross 
revenues.  Among other financial considerations, PPC also 
agreed to pay the GOP $10 million for all existing equipment 
currently at the port facilities, and give the GOP a 10% 
stake in PPC.  Through this deal, PPC took control of more 
than $700 million worth of docks, land &portico8 cranes, 
equipment, buildings, and other assets. 
 
3.  (SBU) As PPC is a subsidiary of Hong Kong,s Hutchison 
International Port Holdings, its winning bid sparked worries 
over potential Chinese influence in the Canal,s operations. 
Hutchison Port Holdings, itself a wholly-owned subsidiary of 
Hutchison Whampoa, Limited (HWL), is the world,s leading 
port developer and operator, with 236 berths in some 40 ports 
around the world, along with a number of 
transportation-related service companies.  The 1996 bidding 
process was marred by controversy, as one competitor, Cooper 
T. Smith Kawasaki Shipping Partnership, complained that the 
GOP had awarded them a ports privatization contract on two 
occasions, only to take it away each time in favor of other 
competitors, Bechtel and Hutchinson Port Holdings. 
 
4. (U) The GOP sought to resolve the controversy by using 
offers of fixed rent as the determining factor to award the 
concession.  Bechtel dropped out after falling short with an 
offer of $5 million per year.  Kawasaki,s $10 million per 
year bid also fell far short of Hutchison Port Holdings, 
winning $22.2 million offer.  Complaints from Bechtel and 
others about irregularities in the bidding process sparked 
concerns in Washington that increased Chinese influence over 
the Canal could enable China to deny passage to U.S. ships. 
 
5. (SBU) In 1996, many believed that HWL,s primary interest 
in bidding on the Panamanian ports was to establish a Pacific 
Ocean hub for its shipping interests.  Two major sites, 
Balboa and the former U.S. naval base at Rodman, are worthy 
of investment necessary to develop a major port on the 
Pacific side of the Canal.  HWL obtained the rights to Balboa 
on the east bank, and the right of first refusal to the 
Rodman facilities.  At the GOP,s insistence, HWL also agreed 
to develop a port on the Caribbean side at Cristobal to 
obtain the Balboa concession. 
 
Moscoso Let PPC Off Hook for $22 Million in Annual Rent 
--------------------------------------------- ----- 
 
6. (U) Each port concessionaire in Panama has an 
&equiparacion8 (&make whole8) clause in its contract with 
the GOP, ensuring that each is afforded the same benefits 
under Panamanian law, i.e., to maintain a level playing field 
for port operators.  In 2001, PPC sought to modify its 
concession agreement, claiming, inter alia, that it was 
paying more per TEU movement than Manzanillo International 
Terminal (MIT) and the Colon Container Terminal (CCT).  In a 
highly controversial move in 2002, the Moscoso administration 
repealed two clauses in PPC,s port contract, effectively 
freeing PPC from its $22.2 million in annual fixed rent and 
other payments, representing about $1.34 billion over the 
remaining 45 years of the concession. 
 
GOP Reverses Moscoso Action ) PPC Will Pay $102 Million 
------------------------------------------- 
 
7. (U) As part of his 2004 campaign, President Torrijos 
promised to overturn Moscoso,s 2002 deal with PPC. 
Following months of difficult negotiations that began in 
September 2004, the two sides appeared far apart as recently 
as the beginning of September, particularly as PPC pressed 
for some $40 million in claims against the GOP for 
non-performance of certain aspects of the original contract. 
As the GOP,s lead negotiator, Ferrer was unyielding and on 
September 8, the GOP and PPC announced a surprise 
breakthrough.  PPC agreed to pay $102 million in back rent 
and committed to invest some $1 billion in facility upgrades 
at Balboa and Cristobal between 2008 and 2015.  PPC expects 
this will create 5,000 jobs in Cristobal and 7,500 in Balboa, 
and increase annual TEU movements from 1.5 to 4 million. 
 
8. (SBU) Ferrer told the Ambassador on Sept. 19 that he held 
firm because he was &fighting for a just outcome for the 
Panamanian people.8  He said he thwarted PPC,s hardball 
tactics, including blackmail, by telling PPC that &you,ve 
got nothing on me, but you don,t want me to come out with 
what I have on you!8  In the end, Ferrer said, he could not 
have prevailed without President Torrijos, strong backing, 
as the president twice rejected PPC,s telephone calls aimed 
at going over Ferrer,s head during the negotiations.  He 
believed PPC ultimately capitulated because it saw little to 
gain from a protracted legal battle.  Second Vice President & 
Maritime Authority Director Ruben Arosemena told the 
Ambassador on Sept. 15 that he believed PPC settled because 
it was falling behind other MIT and CCT in carrying out their 
projects. 
 
Comment 
------- 
 
9. (C) The GOP,s victory over PPC gave an embattled Torrijos 
Administration a sorely needed win, as it continues to 
struggle with its fiscal and social security reform agendas. 
President Torrijos expressed great pride in the PPC outcome 
during the Ambassador,s September 9 presentation of 
credentials.  Whatever the reason for PPC,s decision, the 
GOP showed its clear readiness to go to the mat ) and 
prevail ) in its battle with a powerful Chinese-owned 
company.  Looking ahead to the GOP,s future solicitation on 
a proposed $300 million &megaport8 at the Pacific end of 
the Panama Canal, Ferrer told the Ambassador that the 
&Chinese already have enough ports here.8 
 
 
EATON