PANAMA CANAL AUTHORITY ADVISORY BOARD

On Monday, December 13, 1999, at 12:30 p.m. the Advisory Board of the Panama Canal Authority (ACP) held its first meeting in the Panama Canal Commission’s Board Room, Administration Building, Balboa Heights, Republic of Panama.  Numerous members of the PCA’s Board were present for the meeting.  The Advisory Board members who were present, sat at the table opposite the Honorable Ricardo Martinelli, Chairman of the Panama Canal Authority Board and Minister for Canal Affairs and the Honorable Alberto Alemán Zubieta, Administrator of the Panama Canal.  Members included:

His Excellency, Mr. William O’Neil, Secretary-General, International Maritime Organization

Mr. Gerhard Kurz, Chairman, Mobil Shipping and Transportation

Mr. Michael Barnes, Chairman of the U.S.-Panama Business Council

Mr. Philip A. Embiricos, Director of Embiricos Shipbrokers Ltd.

Mr. Joe Reeder, former Chairman, Panama Canal Commission Board of Directors

The Honorable Martinelli opened the meeting stating that the Advisory Board is a “Partner for life”.  By working together with the Canal Authority, the waterway will function efficiently as it has for 85 years.  The Board was then formally confirmed and Mr. Philip Embiricos moved to appoint Mr. William O’Neil, of the International Maritime Organization, as the first Chairman.  The other Advisory Board members voted in support of appointing Mr. O’Neil.  The Honorable Martinelli later said that the Advisory Board is the first line of defense for Panama.  He informed the Board that he personally knows Canal Administrator Alemán, and they are former classmates from school.  The Honorable Martinelli pointed out that 10 heads think better than one and that Panama’s perspective is very localized and the Boards perspective is more global.

Canal Administrator, the Honorable Alemán, stated that Panama’s Organic Law, the Amendment to the Constitution and the establishment of the Advisory Board, stress the seriousness of Panama’s intentions to operate, maintain and modernize the Canal to serve world trade.  He noted that although the members of the Board of Directors of the Canal Authority must be Panamanian, there is no restriction regarding the nationality of Advisory Board members.  The Honorable Alemán added that it is important for Panama to send the right message that it is serious and it recognizes the importance of the Canal.   He also referred to the Advisory Board’s bylaws.  He said that although Article III specifies that the members will serve for a 2-year period, their terms could be extended.  Furthermore, although the Board must meet once a year it can do so more frequently if the need arises or the Board determines that it must meet with greater frequency.   He highlighted the fact that the headquarters are here in Panama, adding that there are provisions in the bylaws in Article VI that allow for the flow of information.  He said that the Canal would have a special web page on the Internet exclusively for the Board, with capability for e-mail and exchange of e-mails within the Board.  The Organic Law, Canal regulations and other pertinent documents will be provided to the Board.  The Honorable Alemán said that the Canal will be tested in many areas and that the Advisory Board will provide valuable advice and support. 

His Excellency Mr. William O’Neil accepted the appointment as Chairman of the Advisory Board, noting that his 32 years of experience with the Canals of Canada, including 10 years as President and CEO of the St. Lawrence Seaway, combined with his experience in the maritime industry and the IMO, would serve him well in advising the Canal Authority Board.  He recognized that the role of the Advisory Board is to provide guidance to the Canal Authority Board.  Mr. O’Neil expressed the need to maintain a smooth flow of information in both directions and to always recognize the needs of the shipping community.   He mentioned the importance of maintaining and improving the Canal and getting the message out to the international shipping organizations as well as those who have interests in shipping.   Mr. O’Neil said that the shipping world wants stability on the political side, tolls that are designed to make a reasonable profit as long as the focus on profit does not supersede the efficient operation of the Canal and the interest of its users.  The immediate concern is that the structures will all work well and the Canal personnel can cope with any situation that arises so there is no gap in the process.   He said that training is most important particularly for those involved in the day-to-day operation of the locks, vessel traffic control, pilotage, locomotives, etc.  He felt confident that the implementation will be smooth because Canal personnel know their business.  On the issue of Y2K he said that people can manage parts of the issue, but that there are others that may be unknown and would be a problem.  He felt that the operators and users had done their part to internally address the Y2K issue but they must depend on others outside their realm of authority.  He said that it is important to keep records of all meetings and to distribute those to all Board members and the Canal Administration.  The Advisory Board would like to feel free to bring matters to the attention of the Canal Authority Board and Canal management.

Mr. Gerhard Kurz said that he feels very confident that there is a very competent group of people running the Canal, perhaps the finest he’s seen in his career.  He stated that the world will be surprised in a few years at how well the Canal runs, and how unfair it was for anyone to think that the Canal would not be properly managed.  He said he felt very positive about the transition and transfer of the Canal.

Mr. Barnes expressed a strong desire to help and he said that the business community will lend its full support to the successful operation of the Canal.    His law practice is very involved in the cruise and tourism sector and they are very much looking forward to the development of tourism infrastructure in Panama.

Mr. Embiricos stated that he is married to a Panamanian so he has an added interest in the success of the Canal.  He noted that the Advisory Board is the antenna for the Canal and the Panama Canal Authority Board.  He emphasized that it is important for the Board to be in tune with what is going on, like the pilot issue, therefore, the Canal must keep the Advisory Board informed of important issues of that nature.  The Canal must maintain good coordination with the flag administration.  He said the Advisory Board wants maximum success for the Canal and he takes great interest in the current and planned expansion of the Canal.  He pointed out that he has witnessed the transition and it has been completed.  Mr. Embiricos recommended that the tenure of the Advisory Board’s Chairman be changed from one to two years.  The Board agreed with his recommendation and The Honorable Alemán and the Honorable Martinelli said they would make that change.

Mr. Reeder mentioned that he has served as past Chairman of the Panama Canal Commission’s Board of Directors.  He said that he echoes the statements made by the other Advisory Board members.  Mr. Reeder stated that he hoped the world will be bored, because that reaction will demonstrate that the transition was very smooth and there is nothing of significance to report because the Canal will continue running very well.   He made special mention that the U.S. has a two-party system and Panama has several parties; nevertheless, Panama came to a consensus on establishing the Advisory Board.  Panama’s openness demonstrates that it wants input to help run the Canal.  He felt that Panama will run the Canal better than the United States.   Mr. Reeder noted the U.S. has been fair and efficient but it did not run the Canal as a business.  Panama will be business and customer oriented in its management and operation of the Canal. 

There was a subsequent discussion about the venue for the next meeting.  Mr. Embiricos said that the next meeting could be held in London or in conjunction with the Posidonia conference in Piraeus, Greece. Mr. O’Neil responded that the venue could be discussed at a later time but felt that London would perhaps be the preferred location.

The meeting was concluded.  Photographs were taken of the members prior to a working luncheon in the Board Room.  Following the luncheon, Captain Orlando Allard provided the Advisory Board with a demonstration of the Ship Handling Simulator at the Canal’s marine and pilot training facilities in Balboa.  The Board later visited the Canal Capacity Office for a briefing on studies of the expanded Canal watershed and future projects that are under consideration to increase Canal capacity over the long-term including hydroelectric and potable water projects.

REPORT OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD TO THE BOARD OF DIRECTORS

 June 20, 2000

London, United Kingdom

First of all, we welcome the opportunity to meet with the Board of Directors again. After we have reviewed the presentations which were made to us yesterday, I must say we, the members of the Advisory Board commented on how important it was that we should receive information in this fashion so that you clearly outline the issues and we could discuss during the time available, the presentations and some other issues.

We took the position that was outlined when the Advisory Board was set up, that we are asked to advise the Board of Directors on matters that would concern to the Board and also to have a free discussion on anything related to the operations of the Canal. I don’t think that this expanded our mandate too far, because we felt that whatever information and knowledge that the members of the Advisory Board could individually and collectively provide to you, both the Board of Directors and the Administration, would perhaps be helpful.

First of all, we felt that the review of the first 150 days to use this sort of catch phrase, the operation of the Canal under Panamanian administration had a seamless transfer from the previous arrangement. So that everyone said that there really was no difference in the way that the things were run and they felt that any concerns that may have been in people’s minds before were not in any way necessary and that it was really a non-event and that it just happened and that everything just kept on as it had previously.

We also noted that the Administration - and I use the term broadly for the Board of Directors and the Authority - are concentrating on and focusing on the future and the possible requirements for the future and how to deal with them. There was some discussion about other operational issues. One was the matter of pilots, and some concern about some actions that have been taken by the pilots which some people felt that were not necessarily in the best interests of presenting an outside picture to people as to what was taking place at the Canal. It was certainly recognized, and I don’t want to get into very great depth on the pilot situation, but it was certainly recognized that the pilots are very important, play a very important role in the safe movement of ships through the Canal and that it would be very important to make sure that labor relations issues don’t get mixed up too much with the matter of presenting the Canal as a secure operating unit. At the same time, I said, keep in mind the importance of pilotage to the safety of the operation of the Canal.

We talked about the security issues, and would like to be kept updated on a regular basis on what is taking place with regard to security. There was some concern on the vulnerability of the Canal. The issues came down to a few points. One is the vulnerability of the Canal to some form of terrorist activity. The possibility of this is not only related to the Canal; has an application in the ports and other maritime installations as well. We are trying to make sure that the risk is understood and whatever measures are taken to deal with that are in place. Then drug issue again, the matter of drugs being available from ship to shore  or from shore to ship and the concern about the transport of drugs by vessels, and the impact that this can have on the general crime scene, this whole matter of drugs can have an impact on the whole operation. There was a special concern I think expressed that now that cruise ships are becoming more involved in the Canal, both moving through the Canal and stopping at the Canal facilities. That presents a special security focus for both the passengers, their safety, their movements ashore,  and back onto the ship and again some drug related issues with regard to the cruise ship activity.

If I could then move on to the traffic forecast. We felt that it was important that we should understand clearly the basis for the forecast, how the forecast was developed, because the Advisory Board felt that any of the ideas related to future expansion or even shorter term operational requirements were related to the traffic forecast and the potential traffic that would be using the system. So that it was felt that a lot hinged on the accuracy of the forecast and how they were modeled and how they were handled so that we were pleased to hear that arrangements are underway to have a second forecast by some independent body that you are negotiating with. So we all felt that, let’s say some comfort in the fact that that would be done because the members recognize that while you are working within a band of forecasts, saying a minimum and a maximum and perhaps an average or a most likely figure, that these are all subject to a great deal of variation depending on what factors are used and how it is all put together and so on. I think that the forecasting is one of the most difficult problems to be able to feel really comfortable that you have got figures that you know are really going to be responsible figures, neither too high or too low. If the decisions are going to be based on the trends for the future then its extremely important that this should be done with all of the information available and some of the Board members felt that they could perhaps have some input into this in the course of time and would be quite prepared to assist in what you might feel appropriate on an individual basis or collectively.

There was quite a bit of discussion about the need for expansion, how it could be explained as being a requirement, whether it was to Panama’s advantage to look at expanding the Canal, what would happen if no expansion took place, what would be the reaction of the ship owners, the shipping industry and how would they feel if under certain different possibilities, certain different scenarios as to what might happen. There was discussion about size of ships and what would happen with ship size in the future. We talked about what would determine the size of ships in the years ahead. I think there was a statement that ten to fifteen years ahead, the ships will be larger. The optimum size is very difficult to, at this stage, to put positive figures on but they would be guided by the Suez as one of the points where there are limitations that would have to be, that the ships would have to be designed around. Also would ships be staying in the Atlantic or the Pacific basins, would they tend to stay in those areas? Mr. Thomsen offered to have an additional closer look at this and to provide additional information to the Administration because it does have a great bearing on what has to be done or what might or could be done at the Canal as to whether or not ships are going to work within a more limited, or let’s say confined area.

We had some discussion on fast ships and what impact they might have because they would be able to make faster movements through the Canal and perhaps be fewer of them, or they might change the mix and so on but it was felt that the fast ships at the end of the day would fill a niche  market and would not become the norm for the whole of the fleet of the shipping world. There was a great deal of discussion on what would be really the trigger point to determine the need for expansion and the size, if that need should be determined. It was generally agreed that the container ship activity and movement of containers would be a determining factor. And discussion took place as to the size of container ships, and how large would they be likely to get to; whether would they be eight, ten, or fifteen thousand TEU ships. The discussion  was a lengthy discussion and we are very  fortunate to have representatives of the major containership operators of the world. So we benefited from their advice and their views. I think at the end of the day the feeling was that about eight thousand TEU’s would be the size that you would be dealing with for the immediate future. And that the dimensions could be, and these are please very broad sizes but they are for consideration only, we talked about an eight thousand TEU ship. They are considering a beam of fifty meters and a length of three hundred and sixty meters. Of course larger vessels would require tremendous infrastructure modifications in other places than the Canal; the ports, the railways, all of the land side facilities including the railroads would have an impact on them. But it was still noted that shipping has had a habit of expanding, and  expanding, and expanding, and sort of every direction and what we thought were sort of the limits a few  years ago have not been fixed, they have been changed. Also, in the tanker industry we have had the situation where one million ton tankers were considered, five hundred thousand ton tankers were built and they  were proven not to be the most cost effective ships to operate and the industry settled down now unto a boat,  three hundred thousand tons as the norm. So these are things that have taken place in the tanker industry and the shipping industry itself.

In the consideration of the expansion, it isn’t just one single thing that we have to look at. It is necessary to examine the whole economics of the activity; keeping in mind that this is all about moving a pound of product from one place to another place as cheaply and effectively and efficiently as possible. And as long as the transportation system and each of its components meets its obligations and is efficient then that is the route, or the way the goods are going to be moved. And if anyone starts to become noncompetitive, then the chance of it being dropped out of the chain is very high.

The discussion about what happens if nothing is done about the Canal either in its current operation or to expand it without going to the major construction works, and in the major construction works, focusing mostly on the major expansion requirements. What would happen if nothing is done? The shipping industry has a history of adapting to conditions that they are presented with, but I think that the message is that the Canal has a place in international shipping and a role to play and is of some benefit to Panama (economically) but it is necessary to do additional work to justify the six billion odd requirement for the major expansion project and to make sure that the economics of the transportation system are properly put together so that it remains competitive. And also to take into account the side benefits which would occur to Panama.

I think that the very fact of the income that is generated through the Canal operation would be important to Panama itself. The point of some of the social activities or social issues that would have to be addressed; only Panama can do that. Those are Panamanian issues. But there was a feeling that this should be looked at as a business proposition. And if it can generate a return on investment of something like ten or fifteen percent for the length of the duration of the life of the Canal, then it would be a good proposition. If it has turned out that in the economic analysis that there would be a negative return then of course the words were, “Just forget it!” So I think that is something that would be important to keep in mind. It is complex, and the Advisory Board does not need to try tell this Board that. The matter of water supply, the matter of power generation, the infrastructure that is being built in the Panama area now which relies on the Canal, the ships coming to Panama to go through the Canal or to set up Panama as a maritime center are all  part of the equation and all would have to be taken into account. Generally, the ship owners and the commodity, I think, the shippers would say that the justification for the Canal being built in the first place is still there.

Some things have changed,  maybe a lot of things have changed, the ships have changed and so on but fundamentally the Canal is satisfying an international commercial need and as long as the United States remains the center of trade in the world, the Canal has a direct linkage with that and the movements of products from say Asia to the United States or vice versa, is extremely important to the future of the Canal. As well as the north-south movements that can be generated, that have been and could be perhaps expanded and it was felt that there should be some examination made of perhaps other traffic which could be enticed to utilize the Canal, and what would be the determining factors related to this. Generally speaking, it is cost, the cost of the movement is and the increase in size of course of ships gives better economies of scale normally. So these are all elements that come into the decision making process.

We had some discussion about the marginal cost of the bigger Canal. What determines whether you should build on an expansion program at one size as against another size. If someone made a wrong guess on say container ships and eight thousand TEU ships was not the norm, they became fifteen thousand, what difference does that meet in the expansions of the Canal. And it was I think felt that the real problem would be related to draft and the cost of a deeper channel from end to end rather than just the bigger locks, say themselves. So that however changes in the range of eight to ten thousand TEU ships wouldn’t make that much difference but a doubling of size would. While at this stage there is no real feeling that that is going to happen, because as I said before because of the entire infrastructure problems it was felt that that should be kept in mind. And also the question about how far in the future are you building for? That is a very important point. I mean the Canal has lasted for all these years because people were foresighted and did things that were way beyond the needs of the day, and certainly beyond the capacity of the ship building industry of the day. So that would the future. Any future expansion would be done with the same foresight or not. I think these are things that would have to be considered. I think that we, well we didn’t come to any strong conclusions. We had some general positions, which I have tried to outline.

There would be, I think, concern if the capacity was capped at two hundred million tons. In fact, with the water utilization  that would  go up, if nothing is done, that two hundred million would be reduced because the water  would not be available for the Canal operation itself and it was felt that this would not be a really a desirable position.

Well, Mr. Minister I have tried to follow as best I could, the discussion, which took place this morning. We did feel that we need more time to address all of the issues the way we perhaps would have liked to. We would think that his should be kept in mind when we have the next meeting of the Advisory Board.  Maybe getting through this agenda we had this time was not possible but we did touch on the important points and realized that a full day of discussions by the Board would perhaps be more useful.

Another point that I have just been reminded on, with regard to the expansion program, is that if nothing is done, if we don’t do anything at all, then the Canal would lose business because people would, with the increase of the size of ships that are coming about, would find some other way of moving and that in the end it would be a matter of the Canal stagnating and business would find some other way around the situation. So, it really is a matter of either looking at the expansion in a serious vein, selecting the best or what could be considered the best or optimum way of doing that and we did not get into any details on the one lock, two lock system or the technical issues.

Those are matters that can be dealt with either later or separately. We were trying to get at some of the justification for doing or not doing something rather than the details on the individual components. But if nothing is done, then it would be a stagnation situation and it would be leading to a reduction in business. I got the words “Expand or die,” so I don’t know if that reflects what was said or not. But I think that it does put it in a pretty sharp focus. These were basically the comments of the Advisory Board.

REPORT OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD TO THE BOARD OF DIRECTORS

 February 15, 2001

Panama City, Panama

The Advisory Board had some discussions about the presentations made yesterday. With regards to the achievements that are included in the document that Alberto Alemán prepared, we felt that the transfer had been repeating what has been said before, done in such a way that it was really from the users point of view, there’s no noticeable change in the way the Canal has functioned and operated since the return to Panama. So that we just like to reinforce that the performance has been one which the representative industry feel is more than satisfactory, rated on a scale of 1 to 10, which we ask the board members to consider, will be rated between 8 and 9, something in that range, so that there’re no complains of any significance that anyone has to raise.

There were some considerations of the public relations.  It was felt that this is a very important item, and one which was mentioned last year. We recognize that there is the Newsletter that it is distributed which I can’t put my hand on now, but it’s one that comes out every three months and goes to your users. We felt this should get wider distribution, particularly to the Advisory Board members.  We feel that that could be perhaps, expanded on and distributed more widely, because we find it useful and there were only a couple of us that have received it before.  These points that we are making are not meant to be criticism. It’s meant to be helpful and to try to, perhaps, direct things in a slightly different way or put emphasis on certain points that we might feel are significant and important; that might just sort slip pass as far as your concern, some of them we know very well that you are completely involved in.  But it was felt it would be important to look at supplementing what you’re doing now with some public relations or equivalent organizations that would have world wide connection that could reach into all places where you want to deliver your message. It was felt that it would be sort of appropriate to interview 4 or 5 well-known firms that have a good reputation in this field, then to select one of them that will be your choice. I said before and I repeat it, we don’t feel that it is appropriate nor do we intend to become involved in micromanaging what you are doing. We do not believe that that is our function, but rather it is to provide you with whatever guidance and advice we can bring, from the shipping community around the world. 

Another point that we touched down was the matter of accidents and accident statistics.  We would like to see a broader display of the accident record and, perhaps, using that as a basis for the administration to establish some safety goals with respect to navigation that you could then use as target.  In the presentation there were references to accidents with ships of 100,000 tons and over, and we feel that (information) should be collected in such a way that it could be used as in connection to a PR program, to show the fact that the Canal is a safe operation. I’ve said at our meeting and I repeat it, that I am very familiar with the Saint Lawrence Seaway, and I know that your record is far better that theirs.  They do not have the advantage of locomotives, which is a big help.  They do have problems that you don’t have and their record is worst than yours. So I think probably it is safe to say that the only other Canal that might be better is the Suez, but they do not have any locks, so they don’t have the problems that you have and that others have, so all and all, the records seems to be extremely good, but we would like to see a presentation that will clearly indicate that, and as I said, establish some goals that you’ll then be able to point to and then say “well, we are doing at this level, but we see that we can improve” and that is something that you can publicize and build on. This has a linkage with the advantages to the ship owners with respect to their insurers, particularly the P&I Clubs when they talk about whole insurance and they do look at the casualty records.  So it will be important to present it in such a way that be useful to them and in conjunction, you may like to invite some of the most prominent members of the P&I Clubs to see the Canal and to experience what your arrangements are now, particularly with the new locomotives and the improvements that you’re making to clearly demonstrate that you have safety as a high priority item and make this well known to them.

On the issue of the market studies and the market analysis that we were presented with, I think that  we can only reinforce the statement which was made before and that is that in moving this along, it is necessary that you should conclude the studies on the various commodities and the point to point movements of the different products that are carried by sea. There should be some target dates established, as for the conclusion of some of these items.  We understand that some of these are already in hand, perhaps, they should be given a big, wider distribution so that the targets will be clear and we will understand what are you aiming to do, and in what time frames and then how successful you were in achieving those, keeping in mind that we feel that it’s important that there should be an optimistic forecast, there should be a pessimistic forecast and then there hopefully should be one which will be your best guess. Then it will be up to people who are looking at whatever proposals you’d make, to select which one they feel will be the appropriate one to use to making assessments. How secure you were in your thinking and how well you have done your preparatory work to make whatever decisions are made in the course of time.

With regard to the functioning of this Board, we feel that we need to make adjustments in the way we establish the agenda for our meetings.  We feel that it is important that you should advise us of any particular questions that you may have, that you would like us to respond to. We feel that we have access to sources that could be beneficial and while we can generate this within the Advisory Board, we think it is quite important when you have specific issues that you feel might need an outside look and the examination that we could either do ourselves or ask others to help us with.  We know what these are specifically and you could bring it to our attention. We will intend to have our agenda firmed up, at least a month before we meet, we are still thinking that meeting about every 6 months will be useful; we’ve also agreed that we will communicate ourselves at a teleconference about halfway trough whatever period it is, so that we can just review what have you responded to and how you have responded to us. We feel that it will be important that the Administrator should be in on that teleconference so he knows what we are talking about. So this would be an innovation that was recommended by the Advisory Board and one which we intend to implement.

With regard to the expansion program, we noted what I would refer to as an interim report which we have; we understand that there are a number of alternatives and issues which have to be examined in further detail and again, we feel that this will be best advanced if some time frames - specific time frames - could be put on them, recognizing that at some point in time you will have to come with some conclusions and studies do take a certain amount of time, because of the areas that they cover, the engineering aspect, the sociological aspect, the environmental aspect, the financial aspect, either all specific but interrelated matters and some of them will be leading into areas of advanced technology and others will be just because of their sensitivity, even with regard to people or political sensitivities, which we’re all aware of, which would require that you be quite transparent in how you present this information so that the alternatives will be indicated as having been addressed. We don’t think it’s appropriate that as we go along that you just put the conclusions down at the final thing in the hole of the recitations and analysis that you make; and in the analysis you should indicate clearly that you have examined this particular point, or that particular point, and you have to dispel them for whatever reasons. We know that in the engineering side you may be moved into areas that are quite advanced, beyond the state of the art today, and caution that these should be very thoroughly investigated before you seize upon one of them as the course that you feel is the one you wish to follow.

With regard to the composition of the Advisory Board, we have some members that have never participated in the deliberations.  We think that it is very important that the Board should be active.  We understand that from time to time people find that some thing has crop up that doesn’t permit them to attend or to participate to one of the meetings, we understand that.  But there are three members in particular that have never attended any of the meetings and we will suggest that they should be advised that we appreciate their interest and so on, but that they are not going to be considered as members any longer.  They are Mr. Barnes, Mr. Schmidheiny and Mr. Somavia.   However, we also feel that the Board will function better if it encompasses at the meetings about 10 to 12 people, so we would suggest that you should look at increasing the number to 15 so that we could muster say 10 to 12 people at each session. We feel uncomfortable or naked at only 5 of us looking at all these subjects and we feel that having additional membership from certain sectors of the industry will be helpful.   We will be quite prepared to suggest some names to you in the course of time.

As the Canal, goes on with the operations, and focusing on the expansion program, the broader expertise of the Advisory Board would be beneficial. We should be able to reach the elements of the shipping world and get feedback from them and to that end I’ve been asked to speak to the International Chamber of Shipping in London, to see whether or not they still have a Canal Committee, which they had at one time; in any case, we can make contact with the International Chamber of Shipping and find the status of that.  In addition, it was suggested that we might be able to consult with BIMCO, Intertanko, and Intercargo, the commodity organizations that are in existence, and get the benefit of their information, because we feel that this is important to you and it will be very helpful.

Mr. Chairman, I think that that just about covers the issues. We intend to have a Press Conference later after this meeting sometime this afternoon. Our view at that conference will be, basically with the information which have been presented to us that it will be irresponsible not to go ahead with plans to expand the Canal. We know that whatever is done must be justified as to cost, will the traffic bear what the proposals are and how this will be handled. There are lots of issues that are not yet clear. The engineering and sociological and environmental issues and so on, all has its own plusses and its own minuses; it has its own problems, and perhaps its own benefits. It is very important that all be assembled and then decisions can be made that are based on the best data, the best information, the best brains that you can get with respect of all the various carriers and then you have to put the judgment decisions in place, the political issues will have to come together and we feel that by taking an approach such as that and not allowing this to be driven by emotional or other factors will be the way to take this ahead where you can be made accountable for every decision and every step that you take in this whole process. 

We think that the accountability is extremely important, so it will not be proper for any of us who are invited to give you guidance not to point out different factors and facets of this that we consider extremely important and that will make the transparency of the whole issue, readily available to anyone who whishes to challenge, to comment or to assist in the final decisions which will be made.

In concluding Mr. Chairman, in line with your desire to have meetings every 6 months and to have it in different locations where you can be closer to some of your costumers, that it will be appropriate to look to the far East, perhaps Hong Kong, in the early part of August, so we leave that with you, Mr. Chairman (Martinelli) and others that may have to make the arrangements. Thank you very much.

REPORT OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD TO THE BOARD OF DIRECTORS

 September, 2001

Hong Kong

It is a pleasure for the Advisory Board to have the opportunity to get together with you this afternoon to review the items that we have on our agenda.  First of all, I would like to welcome Mr. Salvador Jurado for joining the Board and for taking an active part in the discussions this morning.  I think that, as we said before, the expansion of the Board is extremely important to give us a broad coverage of people who have an interest in the activities of the Canal as possible.  I would also like to thank the members of the Board for having a lively discussion on.

I would like to thank, as I said, the members of the Advisory Board for taking a very active part in the discussions this morning and for the great interest that they showed in the activities of the Canal and the issues that you have presented to us.  In a way of a few general comments, if I could, before we get into some of the specifics; we first of all, the Advisory Board found the presentations extremely well prepared and well presented.  We are very pleased with the quality of the papers and the quality of the presentations.  They have been very helpful to us.  We would, perhaps, request that in the future, if possible, you might get them to us, in our hands, in advance of the meetings, so that we could absorb the great deal of information that they contain.  We found that they were very complete, but there were matters, which required some digestion, so that we could have a complete understanding of the points that you were making.  So, we just ask that you might, in the future, try to get them to us so that we could benefit from that, and perhaps contribute a little more thoroughly. 

We decided that, it would be helpful if at the next meeting, when we meet for the first time, we should review the results of this meeting, and that it would be helpful if you were to give us an update on the points that have been raised and could explain to us the actions that have been taken on the issues that had been identified from the meeting. 

We ask that we should revise the agenda in the future; to do that as the first item because we think that would set the stage for the meeting a little bit better.  We found that in going through the items that there were some that had been addressed and I would now touch on them. 

There was suggested that you should meet with the P & I Club, and we were pleased to see that the Administrator had done that and also intending to meet with the P & I Club in the near future.  There was an issue with respect to teleconferencing, and we know that, thank you for the table that you supplied showing the alternatives and costs related to them, we concluded that certainly for this present time that telephone conferencing would be the preferred method.  It is the cheapest and we think that probably the most effective way for this Advisory Board to work.  And we would intend to have a telephone conference between the two sessions of these meetings and on a routine basis.  If there were some special issues that came up, we could arrange that separately.  We feel that there is a dialogue now between the members of your Board and your management and the Minister with anyone of us that is handled on a direct basis, and we feel that should continue and that it is a very good arrangement that prevails.  It is helpful to us and we think that any value we have to add to what you are doing can be assisted in the way that it has been, and just we wish to continue that but, in addition, we would intend to introduce the teleconferencing process. 

The one issue that we would like to stress is the matter of policy, the Maritime Policy.  We have discussed this before.  We feel that it is extremely important that at the highest level in government, and as you know we are very straight forward in this Advisory Board, we think that from the presidential level there should be an enunciation of the policy, which would reflect not the Canal alone, but also the Panama Maritime Authority.  And we mentioned this previously but we would like to highlight it, and stress that it is extremely important that that should be attended to as soon as possible.  We did have some comments with regard to some recent events that have taken place with respect to the Maritime Authority, which I would like to bring to your attention.  But I would like to stress that we are not the Advisory Board for the Maritime Authority.  We make these comments in the interest of trying to stress the need for perhaps some changes, but a policy which would reflect properly the fact that outsiders look at what takes place in Panama.  They don’t distinguish between the Panama Canal, the Registry of Shipping, or the Maritime Authority.  It is Panama itself that is put under the microscope if something goes wrong.  That is why we are stressing the overall policy, and when an issue comes up with respect to bogus certificates or fake certificates, the difficulties are not only with respect to Panama, but an IMO concern worldwide and also with respect to the certificates of the ships:  ISM code, the SOLAS certificates and so on.  We are merely identifying this as a subject that should be attended to in this overall matter of policy and strategy.  But I would only stress again, that it is not our business to get into the Maritime Authority; but the members felt that it was important that we should draw this to your attention again. 

The matter of public relations, this one we went into some length at the last meeting, and it was included in the report.  By the way, I do not have a written report.  I am using the best of my ability with what I sketched during the course of our meeting this morning.  The PR issue was one that we felt should be pursue by the Canal; and that it was extremely important that the good things that you are doing should be highlighted and there are many of them.  So we suggest that you might wish to consider, first of all, looking into the employment of some international quality-level PR organization.  We won’t go through that again because we did it previously.  We just ask that you reflect the comments of our last meeting.  But we did feel that it would be helpful if some factors could be identified as sort of measuring sticks as to gains, which could take advantage of the excellent work that has been done to get some good public relations out of it.  And we were thinking, particularly, about things such as the acceleration of the work and reduction in costs in the Gaillard Cut.  The track replacement program, which is coming under budget, the Canal waters time reduction, the improvement in service; those are just examples.  Reduction in accidents and the fact that the quality of service improved.  And the efforts that you are making inspecting vessels to assure that they are meeting the standards of the Canal, particularly, that this can be fed into the port state controlled system.  We recognize that the Canal is not engaged in ports-state controlled inspection activities, but some of the information is extremely important to be fed through either the Maritime Authority into the ports-state controlled mechanism or to some way by some vehicle, make its way into that system because it is extremely helpful and you are viewing it and you should get the credit for doing it.  So we stress that if you can identify additional factors which would be useful in trying to make the point that the seamless transition has taken place, and that it has been sustained, and that you are taking care of other issues in the operation and maintenance sectors and planning for the future, which are beneficial to you and to the international shipping community.  We could then go on with some of the information with regard to the presentations that were made. 

On the matter of the Canal Traffic Update, that is, both a combination of the existing situation and maybe some are linked to the projections for the future.  We were quite pleased to see that certain factors had been dealt with.  We looked and appreciated what you said about the reservation system.  While we are not approving or otherwise, we felt that your decision to add the 7-days slot in the reservation system was extremely wise and that the reservation system seems to be working.  The function will assist the Canal in its operation as well as serving the needs of the shipping industry.  So it appears to us that the decision to proceed with that, which was a little bit not accepted quite readily at the start, but that now is an integral part of your operating mechanism and it is helpful; it is a positive step forward to gain.  We also note that the change that you are making with respect to how you are handling the Reservation System with respect to customers, the vessel booking, and the transiting vessels; the three items that you have identified which have changed from previous tie-breaking rules.  So we feel that those are modifications to the system, which are quite appropriate and should be helpful to the industry.  We also note that you have gone to the Bridge Simulator and that this will be a great improvement in training not only your pilots and your own people, it will be helpful to others and it will be useful to as you go into the examination of the various people of the expanded Canal.  This is a system, which has proven its worth in other places, and I am sure that you will be able to use as laboratory tool, if that is the right way; an engineering assist for the future development of any proposals that are made for the expansion of the Canal.  

The Canal expansion plans: we noted the developments that have taken place regarding your scheduling.  That you now have quite a clear plan for the future with some timeframes as to when certain activities will be concluded and when certain decisions will have to be made.  We feel that on the engineering side, the concept of matrix arrangement whereby you can look at, you will develop with certain widths, depths, lengths criteria and they can be examined with all of the variables of the locks taken into account.  By having a matrix, it will be quite easier to look at what changes in any of these factors, the basic factors, will mean with respect to ship dimensions, ease of navigation, and the financial connection between the two.  So that when an evaluation is being made, it will be easier to come to a conclusion as to what the appropriate arrangement would be.  We fully well recognize that some of these can be done on a technical basis, analysis of ship designs, ship construction, projections of future ship sizes, and so on will all being done and help.  At the end of the day, it is going to be a judgment factor that is going to have to come into it and there is where your Board is going to make those, perhaps, difficult decisions.  But the way you are going about assembling the information, provides the background and the supporting analyses that will help you at the end of the day. 

There is one area with respect to this that was some concern expressed on, and that was the costing and financing.  There was concern in this light that if the cost comes to a certain level and the analysis of the toll capability of satisfying that financial requirement is not met.  In other words, if the traffic doesn’t provide the sufficient funds to meet what would be the potential obligation, then, what would happen?  What would be the next step?  If it does meet that, and all of the indications are that there is no problem there, then what we think needs to be done is that this should be clearly outlined and the same sort of a thorough presentation made on that financial aspect as has been done with the expansion engineering, technical side.  Because if it is determined that the resources could not be supplied within the existing method of operating the Canal, that is through the tolls and any ancillary money that you may take in, then something else would have to be done, and that should be identified early on and people shouldn’t, in any way, be deluded into thinking that there is going to be no problem in that area.  That is all the Board is stressing.  That this should be presented in such a way that the hazards or concerns can be set aside.  We also, in connection with that, got a little bit into the financial.  We had a discussion about being careful that we did not try to start to micromanage anything.  We don’t want to do that; but sometimes it is a little difficult not to start to do the i’s and cross the t’s.  But we are very conscious that this is not our role, and we try to steer clear of that.  But we did feel we should ask you to pursue the idea of the business plan.  We felt that from our discussion yesterday that there were still some gray area as to whether the Canal is a straight forward business function or a utility function and the accounting treatment that it is given should be clearly understood as to which direction you are taking. 

We understand from our discussion yesterday that you will follow the governmental bureaucratic system of presenting your financial statements.  We do think that it would be better if it was done in a more business-oriented fashion, and you indicated that you had information along that line.  We think it would be important that you should clarify this in your minds the way you are going and that your financial accounting treatment should be the more business-oriented balance sheet and profit and loss statement accounting system.  And those factors could be brought in, which would be helpful in clear understanding of what is really costing.  Some questions were raised as to whether there is a profit or there isn’t a profit and that, in large measure depends, on the accounting treatment that you have given.  What profit is supposed to be; and whether you would go into a system where you have depreciation arrangement and you do advertise the assets over a certain period of time.  We recognize it in a system such as this.  The advertisement period of different elements will be different.  A lock’s wall may be advertised over, or the lock’s structure, the concrete structure, may be advertised over 100 years and a miter gate over 50 years, and some system, the locomotive system over 20 or 25 years.  These are all factors that should be properly taken into account, so that the system or the accounting and financial arrangements would be closer to a straight forward business activity. 

However, we did have some concern in some of the presentations and maybe I am stepping over the tolls area a little bit here and there may be a great desire to run it as a straight forward business activity. You should not lose sight of the fact that the Canal is also a service organization; and that has to be given some priority in stressing what your activities are.  In the toll presentation, there was a description of the Main Drivers for Change.  Now, I am not saying that what I am talking about here should be included right there, but it should be given a higher visibility the fact that it is a service organization.  The fact that there is an expansion program that is not just a matter of business.  This is extremely important to Panama from the point of view of job creation during the construction phase, and assuring such things as water supply, which you explained to us very clearly, and the ongoing income that is generated for the country through the successful continued operation of the Canal.  That these are points that are not identified here, and we think that while it may not be easy to put a financial value, a dollar or a monetary value against them, that they are items which would be of great assistance in trying to sell a project and to demonstrate the value of the Canal to the country beyond the straight sort of profit bottom line that is attractive in itself, and there is nothing wrong with it at all.  But we are looking for ways that value added could be expressed in what you are going to vote right now. 

In the financial and expansion and the work you are doing in the Gatun Lake and the tolls, they seem to get a little bit homogenized when we start to look at them.  We felt that it would be important that any of the activities that you have in hand now:  the billion-dollar project that you had commenced and it is still under way, that it should be clear that the components, and even in the future activities, the components which are related to maintaining the quality service that you provide now by assuring water levels and assuring draft by the dredging programs, or whatever other activities you may have; that this should not be looked as part of the expansion program, but be looked at as part of providing of service to the level that you have been and assuring that service.  Maybe you already do this.  We may be ignorant as to exactly how you are addressing these.  But we just wanted to draw them to your attention that we think that the operation and maintenance factors are one component.  The additional work you are doing, which is related to maintaining the quality service, as I said, is another, and anything related to the expansion is something else.  We just felt that it would be wise to make sure that these are clear in everyone’s minds as to which category these items would be reflected under and would be considered under. 

The tolls themselves, we did have some basic questions and we took into account the comments that we received this morning from Flemming Jacobs and Tommy Thomsen, who as ship owners, we are not very much in favor of any toll increase, but no ship owner is going to admit to be in favor of a toll increase regardless of how much you are going to improve the quality of service, I can assure that from other experiences.  But they did reflect some important points, as did the other members of the Board that we think that it is important you should clearly identify why the Canal needs the increase.  Because while it is all right to say you need it because you need more money, that isn’t a telling argument to the people who are going to have to pay.  It needs to go beyond that, and we felt that there were ways of going about this that could be more productive or more persuasive on the part of the presentation.  That maybe the presentation, as much as anything else and what the tolls are perceived to be doing.  And I think we felt that you had to look at the system that has been in place for sometime, almost since the beginning and address the changes that are proposed in the certain individual components that you were proposing and the overall picture of how this might be accepted or not accepted by the outside people, who are going to have to pay, which is not always the ship owner, sometimes it is the cargo that pays, sometimes it is the ship owner that pays, and there is always a debate when a toll increase comes into place as to where the burden is going to be.  We did not get into that, but we recognized that it is an issue as far as the people who are involved in that commercial side of the business are concerned.  We felt that it was not perhaps the best time to clear up the anomalies that are in the system.  We recognize what the approach is, and we were trying to match the Canal’s position and desires to do certain things with the economic situation that we face at the present time, and this uncertainty as to whether we are in a recession or we are not and which parts of the world are affected; and what would be the impact, either actual impact or perceived impact, of what the Canal might do at this time, especially when this is the first toll adjustment that has been made since the Canal came into your hands.  That is going to be even more important that it should be done in a way that when challenged, because it is going to be challenged, you can stand up to that challenge, and that you won’t find that people are saying well we went for so many years without any toll increase and now after four or five years of new ownership, there is a toll increase of X percent coming into play.  We are concerned about that. 

We felt that it is quite logical to build a case on certain factors that no one can dispute the inflation and cost of living increases.  That is a factor that the operational and maintenance increases that come about through that line.  The major works that you are undertaking to maintain or to improve the quality of service and the security of the system and, particularly, with respect to the widening projects and the water level issues that an element with respect to studies or the activities you are taking with respect to the future development, can be without support.  The matter of reserves for future expansion is one that becomes a little more difficult, but we are not saying that there is anything wrong with any of these things.  It is just a matter, as I said before, of presentation that might be done a little bit differently.  And that if the reserves are going to be satisfied for future expansion, then it should be indicated clearly that those reserves will be protected and will not be in any way diverted to other activities or to anything else but the reserves for the future expansion.  That was sort of the general approach that might be taken. 

We feel that the toll increase of 7½ percent  should be reconsidered, in the climate of today it would be very difficult to support and gain the acceptance on the broad front of the industry.  But we say that in the absence of knowing what the value of the four items that I just listed would be.  So that we are in a bit of a vacuum in trying to see what might be more appropriate toll structure, except there was a general gut feeling that 7½ percent was high in the light of say settlements in the labor market today and other things that are happening around the world; that we can only leave that with you and say that our feeling was along those lines.  And we think that it would be appropriate to have another look at these factors and see where you think you are going with them, and how you could address the opposition, which is bound to be there.  I am not saying that everyone is going to be opposed, but the general tone I think would be prove it and to demonstrate clearly to us that that is the way to go. 

Another item was the matter of security and that, of course, came up as a result of this tragedy in New York this week.  And, again, we don’t know what the state of the security is at the Canal; but we just indicate that there was an expression of concern that it should be, perhaps, reviewed again in the light of the different world circumstances.  We felt that this matter of coming back now, I guess, financing a bit, that there should be a follow up on a formal basis with the U.S. Navy with regard to financial participation in any expansion program, which might take place.  We felt that there should be a formal follow up with the U.S. Navy. It should be formalized the discussions which have taken place should be put on a formal basis with regard to the financial participation in any expansion program, which has been suggested as a possible way of financing, say, the top layer, anything which might be used to utilize the Canal for the movement of ships of a certain sizes. 

There was one point that I didn’t cover with regard to the accounting treatment in the presentation of the balance sheet. We felt that the accounting treatment and the reinstatement of the financial fixture and the method of reporting if you agree with what we are picturing, we are wondering how quickly that could be implemented?  Well, I do not have anything else to add except for the date of the next meeting, which is one of the items that we have in our agenda.  We felt that it would be very appropriate to have the meeting in Panama, which would means that this group would meet on February 28 and March the 1^st 2002. 

REPORT OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD TO THE BOARD OF DIRECTORS

 February, 2002

Panama City, Panama

The first substantial item that we had to deal with was the review and discussion of the topics, which were presented by the Canal Authority.  I would like to say right off that we were impressed by the professionalism and the quality of the presentations that were made.  We felt that they were very clear.  They outlined the situation as it is.  And you gave us in most cases all of the information necessary for us to comment and make recommendations to you. 

We welcomed the information, which was given with regard to the Canal traffic and modernization program. We feel that with regard to the modernization program the traffic analysis was extremely important.  Because it is important for all of us to understand what has taken place over the past few years, and to look at this in the light of what may be the view as to the future.  Certainly the traffic component is vital to the analysis as to whether or not, and when any additional expansion should be undertaken. 

We are very pleased to note again that the Gaillard Cut project is essentially being completed one year in advance, at a cost substantially lower than that of which was originally estimated.  Our view was that the benefits of that widening should be achieved from an operational point of view as soon as possible.  We recognized that this requires some consultations with the pilots and review by your operating people.  Perhaps, revision of some of the regulations that have been in place for some time but would now be overtaken by the fact that traffic movement can take place in a different way and benefits can be achieved and improvements to capacity as a result of the introduction of various operational and navigational advances that have taken place.  Certainly, the explanation on the various safety requirements introduced, such as the range lights and positioning systems and so on, that are now available, we feel would be of great advantage in the operation of the Canal.  I would just underline the point that as soon as these can be made effective and the Canal can benefit from them the better of it would be.  We also understand the negotiations, which will be required with the pilots on various items.  And we would encourage you to conclude those as soon as possible. 

We did talk about the problem of container ships and compliance with the Canal rules vis-à-vis the IMO rules.  And again would recommend that the sooner it is possible to implement or comply with the IMO rules the better it would be, recognizing the differences that there are in the requirements in the Canal and in the locking operation that exist. 

The Canal expansion plans occupied quite a bit of our time.  We did wonder about when the capacity of the existing Canal would in fact be reached and we therefore asked the Administrator to join us and to provide information which would establish a critical point beyond which the Canal would be in some difficulty should it continue operating as present.  We know that the modernization program, the various features that have been introduced would have some beneficial impact on extending the life of the current Canal, although that might be difficult to quantify.  There will also be benefits from deepening the Gatun Lake.  Keeping those improvements in mind, and that they were fairly costly, we wonder when the capacity would be reached. Keeping in mind the uncertainties that are involved with the mix of ships, the introduction of more Panamax vessels impact the operation of the system. It was generally accepted that 2010 would be the critical year. So with that in mind the question then, of course, is more related to what do you do?  What happens then?  We did look at the fact that the so-called third lock system was sort of dominating the considerations.  We know that this is taking a great deal of the time and energy of management to make the proper analysis that is going to be necessary to go on to the next stage.  We had previously suggested both at the meeting a year ago and the press release that was issued at that time, and again after the Hong Kong meeting, that there were certain studies that needed to be completed. We encouraged that these studies should proceed and we reinforced that statement.  The information that will be gleaned from those studies is of vital importance in the decision-making process. 

With regard to the operation of the present Canal in parallel with a single lock enlarged system,  it appears to us that there would be a requirement to essentially continue two operational paths at the same time with the cost associated with them.  Let alone the capital, which will be invested in the new locks system in the new channels, connected with that.  And we think that it is important that particular aspect should be examined in more detail so that it would be clearly understood that it would be cost involved in the parallel type of operation.  We did also reflect on the point which was raised, mentioned yesterday, that the post-Panamax ships would use the new system but there also would be in a gravitational to the new locks because the increased draft which would be available.  And this would impact, perhaps, on the traffic patterns and, perhaps, on the financial arrangements as well.  Because these are all features, which are going, to have come out of the more information be made available from the studies which are underway and we just highlighted those, as points, which we felt were important.  We also recognized that there is a very clear political element in the decision-making process that will have to be addressed at an appropriate time.  But we considered that it was the responsibility or duty of this Board to… while recognizing that, to make sure that we kept the technical, financial and the other elements clearly in front of us as we go ahead.  Because it’s not be sway solely by political expediency but we fully well understand that it can be there and can in some instances or could in some instances be the driving feature which would dictate what you might end up doing.  But we merely wanted to stress that it would be in our eyes most important that the aspects related to the financing and the technical side should be displayed so there could be no question that they have been analyzed as carefully, and the environmental issues, and sociological ones as well.  I am not cutting those out.  I am just sort of putting them all into the same basket.  But it is important that they should stand on their own and then political judgment could be applied in whatever way that it is appropriate.  We know that at the end of the day there is a lot of judgment that is going to have to be put on the decision and in the decision-making process.  It isn’t going to be, we don’t believe, just a hard and fast statement of A plus B equals C.  It isn’t going to come out just that way.  Its going to have to… the decision-making process will have to take into account all of the sound information which can be put together.  But at the end of the day it will depend on a judgment decision which will bring into play all of these other features.  I don’t think there are any particular points on the expansion program that we would like to talk about.

We had a lighting discussion about the proposal, which has been made to revise the basis for the toll structure.  And we appreciate very much the work and effort that has gone into trying to put into place a system which it’s different from that which has been in existence for some 87 years.  We felt that there is nothing wrong with that.  It is quite in order to look at whatever proposal would be made with regard to modifying the system to take into account the features as they are before you today.  The objective of having flexibility and perhaps incentive for the encouragement of new traffic, we support.  We felt that the direction it has been taking is appropriate.  We felt that we were lacking some information on the impact of the revised system, what the impact would be on individual ships and individual ship owners.  That it would be necessary to make further analysis, which we understand are in hand, but not available to us today.  And we would felt more comfortable if we had that information, because we felt we were lacking something that you are going to be press on as you put this forward.  In our view is no doubt that the first thing a ship owner will do is look at his fleet and his use of the Canal and determine how this is going to impact on his operation.  Therefore, we look forward to seeing the results of your examinations of these particular points.  We felt that there is no good time to put a toll increase in place.  Therefore, the introduction of a new system and accompanying a toll increase would require preparatory work on the public relations front, which would define what your intention is, in sufficient time that people could understand it clearly.  And this public relations exercise would have to be conducted by professionals who could give you guidance as to the best way to put your point across and to deliver the message of precisely what you intend to do.  I think it was felt that while the arrangement that you’re proposing would in general be not challenged too much, the process that you go through -hearings and allowing the public to participate in what your proposals are should include the shipping industry and other countries who would perhaps have an interest in this, to make their case should start as soon as you consider its convenient.  It would be wise to start at sooner rather than later and that you should consider a phasing in process to put the toll increase that you feel is necessary. 

There was a great concern about the current situation in the shipping industry where it’s suffering somewhat because the recession worldwide and because of the downturn in international movement of goods since September the 11^th.  Therefore, it would be important that you should have this feedback and perhaps look at phasing in the toll increase.  If you had an increase of whatever it should be in a percentage figure that you might consider phasing that; having that agreed to, having that go through the process with hearings and so on.  But then you might phase it in such a way to lessen the impact on the industry.  But that could be phased in, in such a way that it would show that the Canal is recognizing the condition of the shipping industry today and have the world recognize that you are not unaware of their problems.  That might be a benefit in putting any toll increase in place.  We would encourage the administration to continue its evaluation of this situation.  And I think we are talking about additional information being available in a short period of time in a couple of months.  That would then we all would feel a bit, I think, more satisfied that we had got behind the phase of what we see right now.

We were quite pleased to hear that you had instituted a Canal security program and that the safety record has improved in the operating of the Canal.  We commend you for that.  We felt that the transfer of information from the Canal to the Maritime Authority on the quality of certain ships is an improvement and we note that the Canal Waters Time has come down and at the same time the safety record has improved.  So I think those are good measures of the improvements, which have, been brought about in the last couple of years.  With regard to the security, maritime security and counter terrorism. 

The Board was very pleased to hear that the Administrator had made all the contacts that we learned of with the security forces within Panama and that you had a formalized structure for dealing with these matters here.  But in addition to that that you had extended your reach to, I guess, particularly to the Coast Guard in the United States, and other security organizations in the U.S.; so that you can benefit from this great deal of effort that is going on with respect to maritime security around the world.  And it was suggested that you should maintain your surveillance of the, of what is going on in IMO where there has been some work done on a couple of weeks ago with the one-week long meeting to deal with the subject and that is going to come back again in IMO in May at the maritime safety committee meeting and again in, probably in December where a diplomatic conference will be held to deal with certain changes in the regulatory regime that IMO is responsible for.  And the point here is that we would encourage the Canal to participate in all of the deliberations in that regard.  Because I think is important that what we do should be done on an; what you do should be done on an international basis and that could best be done through IMO.  At the same time, it was in commending the Administrator for taking the action that has been taken, it was suggested that it would be helpful if contact could be maintained with the Commandant of the U.S. Coast Guard who are taking the lead in this matter both internationally and nationally in the U.S.  They were the sponsors of the IMO meeting a couple of weeks ago.  And it is on the basis of their proposals that we set off with a road map of what we are going to introduce.  We are concerned that the Canal is to some degree at risk.  We heard that before.  We feel that you can benefit by making sure that the intelligence systems that you have are kept up to speed.  We should not drop the interest in any way.  As we sort of move farther away from September the 11^th, and there is a tendency for that to happen in the maritime world.  If there is a casualty of some sort, the farther you get away from the actual incident, there is a waning of interest and we encourage you not to allow that to happen with regard to this matter of terrorism and maritime security.  Those are the observations we made with respect to those particular items on the agenda.

Our view is that the names of those who cannot attend the meetings should be dropped as members of the Board; and that they should be replaced by others who would be more active.  We also felt that there should be a representative on the Advisory Board from Japan.  We did not come forward with any particular name, but we would suggest you might look at that and decide who you think would be appropriate.  We did, however, feel that it would be helpful if COSCO of China, Mainland China could be represented.  The name of Captain Wei Jiafu, the chairman of COSCO, was suggested.  We had no other recommendations with respect to the board membership.

The date and place of the next meeting, it was suggested that this should be in Fort Lauderdale or Miami.  We are suggesting Fort Lauderdale, the dates we put forward at this time for your consideration would be September the 19^th and 20^th, that fits in with some meetings that people have in the United States prior to that.  It is up to you to look at this more closely and see whether that fits in with your plans and your views.

I was told as unanimously selected to those present to continue the chairmanship of the Advisory Board. I said that, yes, I would be quite pleased and happy to do that.  So if this Board approves of that then we will continue of that arrangement for a short period. Minister, I think that concludes our report.

VI Advisory Board Meeting

Report of the Advisory Board

Miami, September 20, 2002

Canal Operations Update:

The Advisory Board expressed its views that the overall operation of the Canal after the transfer continued to be of the highest quality and that the administration of the Panama Canal Authority should be commended on the professional and dedicated approach they are taking to their responsibilities.

In particular, they noted the reduction in Canal waters time and the lower accident rate, which are of substantial benefit to the shipping industry.

It was also recognized that the arrangement to pre booking of transits has continued to be successful and has resulted in shorter transit times for those vessels taking advantage of it.

The Advisory Board appreciated the fact that the bridge simulator was now fully integrated and would provide additional complement to the safe movement of ships in the canal.

The advances in implementing the AIS system were also considered to be a significant step in enhancing safety.

Considerable discussion took place regarding the improvements in capacity anticipated through the widening of the channel in the Gaillard Cut.  It was recognized that the navigational aids necessary to take full advantage of this project would be installed in December of this year and that until then the full utilization of the channel improvements could not be achieved.  The Panama Canal Authority Advisory Board was informed that this was in accordance with the original plan.

The issue of pilotage and the sensitiveness of the negotiations to bring about the required degree of safety and the economic benefits of the capital investment in the project were considered at length.  It is stressed that the anticipated improvements and the high expenditure involved should not be jeopardized by personnel issues which should be settled in advance of the technical improvements being in place.

It was also recognized that considerable attention by the authority had been paid to instituting measures for cost reductions but that these should be reinforced.  It was felt that a formal program enunciating a cost reduction policy would be beneficial.

Expansion Program:

The update on the status of the studies related to the expansion in capacity of the canal was welcomed.  The fact that various factors were being examined such as lock configuration, water supply and utilization, as well as financial considerations are not available at the present time left some uncertainty as to how the Advisory Board could provide any considered advice at this time in addition to the previous comments it had made.

The Advisory Board looked forward to receiving the results of the various studies presently in hand, prior to its next meeting so that the various facets involved could be brought together and a more comprehensive understanding of the issues and recommendations concerning them could be made.

Some concern was expressed that a general scoping of the expansion project was not readily available and it is requested that this should be done.  The basic point being made is that order of magnitude estimates utilizing all known information should be assessed to determine the approximate cost per vessel transit to the shipowner, which could be anticipated at the end of the project and also at any intermediate stage when incremental improvements would be introduced.

Tolls Process:

The Advisory Board expressed its disappointment that the consultation process with the Panama Canal Authority was not pursued to the end before decisions were made as to the nature and level of the tolls were announced by the Panama Canal Authority.  Concern was expressed that substantial changes had been made since the last Panama Canal Authority Advisory Board meeting and that the toll increase was much higher than had been anticipated and against the advice of several Advisory Board members.  Strong feelings were expressed particularly by the industry members of the Advisory Board that the process should be formally structured to assure full participation by the Advisory Board and that if its advice should not be accepted by the Panama Canal Authority, the reasons for this should be explained.

The Advisory Board recognized the legitimate right of Panama to get some return on its investment, but also remarked that better understanding of this objective and transparency is essential.  It was stressed that the process should be clearly understood and if found to be unacceptable to the Panama Canal Authority, the Advisory Board should opt out of the tolls review deliberations.

To assure clarity and transparency, the following should be included in the tolls analysis:

• Criteria in the toll level and composition
• Elements included in the costing should be clear
• Changes should be easily measurable
• The impact on industry should be assessed
• The Advisory Board should be kept appraised of the Panama Canal Authority intentions throughout the process
• No public statement should be made until the Advisory Board members were provided with the position being adopted by the Panama Canal Authority

This list should be expanded by the Panama Canal Authority as required to assure that there would be no last-minute surprises.

It was also noted that sufficient lead time should be provided when introducing increases to allow the industry to adopt to the new circumstances.

Financial Outlook:

The Panama Canal Authority has stated that the financial basis on which the Canal is operated is intended to be “market-driven” and that a business approach would be taken; However, it does function in part as a utility and therefore would be considered as a hybrid of business and utility.  It is recognized that other pressures may hinder developing cost efficiencies, which a normal business does not have to comply with, i.e. political and social obligations.  Nevertheless, the Advisory Board believes that as a principle cost increases should be covered by efficiency gains and the Panama Canal Authority should therefore be encourage to take every effort to expand the efficiency program it has already undertaken.

Advantage should be taken of the impact of the reduction in Canal waters time and improved accident records as contributing to cost savings for shippers.  A calculation should be made translating these improvements into monetary values which can then be publicized.

Insurance:

The current situation regarding property and liability insurance cover for the Canal was reviewed in the light of decisions taken by the insurance providers since September 2001.

In short,

• Insurance is unobtainable to cover property and liability claims due to terrorist activities
• Shipowners no longer have P&I coverage for terrorist related incidents
• The Panama Canal Authority would not have access to P&I insurance for ship generated catastrophes and would be required to take action directly against the shipowners.  The government of Panama should be made aware of this situation
• The Panama Canal Authority will attempt to obtain cover of $250 million for property damages and this is all the insurance industry might provide
• The government of Panama should be made aware of the fact that the Panama Canal Authority does not have insurance coverage against terrorist attacks

The Advisory Board could not recommend alternate means of obtaining the cover lost as a result of the P&I Clubs decision to withdraw.

Agenda for the next sessions

Canal operations update

Canal expansion update

Insurance

Tolls process

Maritime Security and terrorism

Financial outlook

Strategy and policy for the future

Public relations update

Other Issues:

Members of the Advisory Board

• Japanese representative – good idea - Mikio Sasaki
• COSCO representative - Captain Wei Jiafu
• Commodity – Cargill
• Ecuador – Ms. Ivonne Baki
• Shipping car carrier – Wallenius

Next meetings (TENTATIVE)

• 13 and 14 of February, 2003 in Panama
• 11 and 12 of September, 2003 suggested in Copenhagen

Report of the VII Meeting of the Panama Canal Advisory Board

Panama 13-14 February 2003

Mr. Chairman, members of the Panama Canal Authority

It is a pleasure for me to present this report on the deliberations of the VII Meeting of the Panama Canal Authority Advisory Board.

At the outset, the Board appreciates the professionalism and high-level of the quality of the presentations and responses which were made. They have clearly outlined the issues and their current status and thereby have made it possible for the Board to deal with the issues addressed to it.

I would like to thank the Advisory Board members for the substantial contributions they have made to the somewhat difficult and delicate issues before us.

Financial Outlook and Insurance

PCAB appreciates the clarity of the financial statements and commends the Administration for the cost savings, which have been effected, despite the impact of the terrorist activities in 2001, and world economic conditions.

The policy of financing capital projects utilizing current funds available was strongly supported and, if possible, it should be expanded.  Some concern was expressed at the change whereby the finances of the Canal were for the first time included in the financial statements of the country.   This concern is primarily because of the impact this may have on the future capability of the Canal to take advantage of the best possible credit rating when negotiating for external funding for the Canal expansion project. There was considerable discussion about the distribution of unappropriated retained earnings. It was also suggested that the Canal reserves should be increased so as to provide a sound basis for future negotiations with financial institutions.

It was felt that the transfer payments beyond those required by law should be made with long-run implications been fully appreciated.  

It was recognized that the insurance market has become extremely difficult and the extent to which the administration was able to obtain reasonable premiums was appreciated. With respect to the movement of nuclear INF cargo, keeping in mind that the Canal has an obligation to provide service, it was felt that this should continue. However, all cost associated with such transits should be fully recovered.  This would include direct expenses, such as additional security, tugs, and also any loss of income, which may result from the rescheduling of other commercial transits. A new tariff category should be introduced for this purpose.

The IAEA-TRANSAS study should provide a clear understanding as to what type and degree of risk is associated with the transit of INF cargo.   The anticipated positive results of the study should be used in negotiations with insurers regarding the premiums for the coverage provided to the Canal.

Canal Enhancement

The Board appreciates the progress made on the various studies related to the expansion plans and considered it extremely important that the draft Master Plan be available on 20 May 2003 as proposed. It is expected that this plan will be a compendium of the interrelated studies and will provide a comprehensive analysis of all aspects of the proposed enhancement program.

The Board would appreciate an Executive Summary containing information on:

1.    Lock and channel dimensions

2.    Water management

3.    When capacity of present facilities will be reached

4.    Environmental considerations

5.    Cost estimates covering enhancement alternatives

6.     Financing options

7.    Continuity of operation of present facilities

8.    Impact of potential external technological developments i.e. engineered, agriculture, trans European railroad, etc.

9.    Income and debt servicing forecasts

To provide constructive comments on the draft master plan, consideration should be given to convening a special meeting of the Advisory Board prior to the scheduled September joint meeting with the Board of Directors.  It is also advisable to have a matrix with the possible options as to the size of the locks, ship dimensions, cost of each alternative, as well as the revenue effect of each option, as previously requested at the meeting in Hong Kong.

The Board supports the effort being made to extend “daylight hour operations.” Consideration should also be given to the possibility of offering financial incentives to ships, to encourage off-peak transits.  It also supports exploring marketing measures, which take into account customer needs, but cautioned that this should not lead to undue discrimination.

Operations Update

The board noted with satisfaction the performance of the Canal operations over the first quarter, and specifically in the increase in PCUMS of 3.9 millions, the increase in the number of Panamax ships and the decrease in Canal water time of approximately two hours for the 3,932 transits involved. This reflects a high level of performance.

Maritime Security

The board commends the Administration for the initiative it has taken to improve security and in particular the provision of the Incident Management Center. It also notes, that the steps are being taken to comply with the amended SOLAS Convention and the International Ship and Port Facilities Security Code which will become mandatory on the 1^st of July, 2004.

Public Relations

The board is pleased to note that substantial improvement has been made in the public relations area. It encourages a continuation of the program to educate the school children of Panama on the importance of the Canal as an asset of the country and to the world’s economy.  Further public relations work lauding the merits of the international aspects of the Canal should be stressed.  This would in fact be an essential step in the selling of the enhancement program.

Other Issues

Next meetings

·        11 and 12 September 2003 - Copenhagen

·        19 and 20 February 2004 - Panama

VIII ADVISORY BOARD MEETING

REPORT OF THE ADVISORY BOARD

September 11-12, 2003, Copenhagen, Denmark

The chairman welcomed the new members to the Advisory Board and noted that their broad areas of expertise would contribute substantially to the Advisory Board’s ability to provide advice and guidance to the Panama Canal Board of Directors.

The Board commended Mr. Alemán and the Panama Canal officials for the excellent presentations they made and their verbal responses regarding the master plan and the various studies.

The Board noted that certain improvement items have been concluded and complimented the Administrator on accelerating the work to complete the Gaillard Cut widening ahead of schedule and the locomotive and tow track replacement programme.  It also noted that the items, such as changes to the gate operating machinery which added one foot more draft, and adding to the tonnage capacity of the Canal were extremely important.

The Board noted that capacity and capability issues were estimated to become critical in 2010 and therefore encouraged the administration to continue to identify and implement projects, which would minimize the problem during the intervening years.

With respect to the six commodity studies, it was agreed that they were generally acceptable and noted that:

• Dry bulk cargoes  -  were a significant contributor to canal business
• Grain -  would increase on the Brazil to China and Japan trades more so than indicated
• LNG -  should be given higher importance and consideration
• Liquid bulk -  is not going to drive the expansion program
• Liner study forecast -  agreed that the trade could be slightly higher than the 36 million TEUs forecasted as a moderate scenario

It was unanimously agreed that container traffic is the main driver for expansion.

In recognizing the contents of the six studies, the Board noted that each one could not be taken in isolation and that their interrelated conclusions should be compiled into a single report. The interaction among the different commodities could then be properly examined in order to present a clearer picture of the overall capacity of the system.  In addition, it is noted that the projections would be influenced by the cost of transit and that the forecast should be modified accordingly.

Size of Ships

It was agreed that in the next five-year period there will be an increase in the number of 8,200 TEU ships and that they would be considered as the “workhorse” of the industry.

Beyond that – say 10 years – the possibility of larger sips in the round of 10,000 to 13,000 TEUs could not be excluded, the main limiting factor being propulsion systems.  Development programs are underway to this constraint.  While technology was not available at present to move to even larger ships, it was not inconceivable that this might change in the future.

It was considered that with larger ships being inevitable a closer examination of in-lock vessel handling and positioning systems were needed.  The traditional locomotives or tugs assisted methods were considered to be in need of serious study to seek a replacement method utilizing the availability of current technology.  Alternative methods for handling of water within the locks system should be examined in other industries for comparison purposes.

The relationships between US East Coast port expansion and the canal being the choke point for the utilization of larger container ships was discussed.  It was agreed that some US East Coast ports would be reconfigured to take larger ships and that this development along with the availability of transshipment ports in the Caribbean would eliminate most impediments to the introduction of bigger vessels.  This would leave the canal as potentially the critical bottleneck.

On the basis of the information provided, the Board concluded that China would take appropriate steps to create or modify its port facilities to handle a larger size of ships.

The following are the responses to the specific questions listed:

1. How will the shipbuilding industry be impacted if the Canal is expanded?

There will be no adverse impact on this industry, which would continue to be market driven.

2. If the Canal is expanded, how will the carriers modify their service patterns to call on East Coast ports?  How long will this change take?

Already answered on other issues discussed previously in this report.

3. Are the different scenarios and traffic projections of containers through the Canal reasonable?

The traffic projections and scenarios are reasonable (see notes referencing specific commodities)

4. Which would be the ports that will become the new load centers in the East Coast of the U.S., in the Gulf of Mexico, and in the Caribbean?

On the East Coast it will most likely be New York - Norfolk - Savannah

There will be none in the Gulf of Mexico

No new load centers for large ships are expected in the Caribbean, as Freeport is already in operation

5. Which is the container vessel size to become the “workhorse” in the liner industry?

·        Already answered – 8,200 TEUs in the larger vessel category

6. What is the operational cost difference between the Panamax and Post-Panamax vessels?

Sufficient information is not available at this time for the Board to provide a suitable response to this question.

7. Is the existing trend in new buildings of Post-Panamax container vessels going to continue?

New post Panamax buildings will continue.

8.     Will Asian ports (mainly China’s) be able to receive dry bulk vessels carrying grain, fully laden to a maximum draft of 45’?

Yes.

The Board discussed at length the need to develop a sound argument supported by factual information on the benefits to Panama as well as to the global maritime industry.  At the national level, this would include amongst other matters a boost to the Panamanian economy during the construction phase, such as increased services and employment, as well as substantial benefits from the transshipment operations, and an assurance of continued income from the canal, which would retain its central position as a transport artery. 

The Board also requested that a scenario be developed detailing what would happen if no expansion takes place.

The Board stressed that a model should be created outlining the method of operating the existing and proposed facilities as a single cohesive unit. Capacity and capability implications should be included and a projection made as to when further lock capacity might be required.

As the plans and studies underlying the expansion program mature and results are being considered, cost and revenue levels and structure will emerge.  The Board would like to review the assumptions associated with these results, particularly those considered appropriate to populate a financial model based upon generally accepted accounting principles (GAAP) which can be understood in the financial community.

As to the size and dimensions of the third set of locks, we have taken note of the presentations, we agree that dimensions should be driven predominantly by the expected development in future container vessel design.  The present dimensions will be able to accommodate existing post Panamax designs of around 8,000 TEUs capacity and probably up to 12 to 13,000 TEUs. This may be sufficient, but the Board points out that any possible set of locks should be built with a long-term prospective and should be able to accommodate potential future designs 20 to 40 years from now.  Dependent on the incremental extra cost, the canal is advised to build to larger rather than smaller dimensions.

The Board would appreciate the identification of major milestones and decision points for the expansion project.  Future briefing sessions may start with a review of this milestone plan.

IX Meeting of the Advisory Board

Advisory Board Report to the Board of Directors

Panama City, June 29 – 30, 2004

The Advisory Board appreciates the serious efforts undertaken regarding the preparation of the Master Plan, which encompasses over 140 studies, and represents an investment of millions of dollars. Significant progress was reported in undertaking and integrating the studies.  The Board is particularly encouraged by the fact that many studies specifically address some of its previous comments and views. Overall, these efforts have been of great benefit in bringing this project to a point where, informed decisions can be made.

The Board, in particular, commends the presentations delivered by the Canal Administrator and Deputy Administrator, both for their details and their insight.

The studies and briefings confirmed that the expansion of the Canal is required in order to meet the market demand. The unanimous sense of this Advisory Board is that it should be undertaken as a matter of urgency. 

The industry and other customers are anxiously awaiting a definitive position, because it impacts on vessel size determination, future traffic flows, and port development.  The Board feels that if the Canal does not expand, it will suffer several negative consequences, including reduced traffic and general national economic loss.

The Panama Canal is currently operating at near capacity and continues to provide sound financial results.  The cash flow generated has been sufficient to finance the ongoing necessary initiatives undertaken to improve the capacity and to provide efficient services to its users.  Continuing these efforts in the Canal operations is critical, as time and financial resources allow.  It was noted that over 180 million dollars have been designated to cover the continuing cost of these improvements in 2004. In particular, all efforts focus on improving safety, operational efficiency and security measures are greatly appreciated.

As to locks dimensions, the Board supports the ACP proposal, as presented, however it should be noted that further attention must be given to the method of vessel positioning in the locks chambers. 

The Advisory Board is very pleased to note that important environmental concerns have been addressed by a design of the new locks allowing recycling of fresh water. The expanded Canal will present challenging operational conditions and therefore recommends that model testing for the entire system be undertaken, not just the locks. 

The Board does not have sufficient information to provide definitive advice as to the impact on transhipment and requests the Administration to further study this issue.

The Advisory Board understands that the project must proceed without direct financial support of the Central Government of the Republic of Panama.  But believes, however, that the project is financially viable, provided certain conditions are met. 

While it is recognized that the goal of the Canal is to finance the project out of revenues over time, it is foreseen that it will require a financial plan, which will accommodate users concerns and will also assure timely project completion.  This will require investigating several alternative financial structures, the objective of which is to arrive at a plan that will not discourage traffic.

With regard to Canal revenue generation, pricing strategies remain an open question; no consensus was reached.  We recommend that users and trade industry associations be consulted, so that additional views can be obtained.

Finally, work that remains regarding Canal expansion includes developing an employment plan, which would be part of an Economic Impact Study.  The results would then serve as basis for informing all interested constituencies.

REPORT OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD TO THE BOARD OF DIRECTORS

 October 15, 2004

Santiago, Chile

OPERATIONS UPDATE

Reservation system

The reservation system is a significant management tool for the efficient scheduling of the mix of vessels transiting the Canal as well as for scheduling periods of maintenance and repairs.  We commend the ACP for its implementation and its resolve to target an increase from 21 to 29 average daily bookings.  It is noted that a website explaining the details of the system has been created and made available to all users and we welcome this, because it is our view that the ACP should be doing everything possible to educate all Panama Canal customers as to the implications of the reservation system.

Canal capacity

The Canal currently appears to be operating at near capacity; however, the container trade is growing at a pace that will outstrip the Canal ’s ability to accommodate it. 

Many improvements have been made and we applaud the continued effort.  But the real issue here is that it is critically important, as we have emphasized in prior meetings, to accelerate the modernization /expansion at the Canal. The Board highlights that Pedro Miguel is the choke point for Canal operations and applauds ACP for its actions to optimize all possible efficiencies at this set of locks.

Security

Internal security is an important issue and the Board would like an ACP status report at each meeting to touch upon the security measures taken to protect the Canal. 

FINANCIAL UPDATE

The Board commended the ACP management for the financial results obtained in the latest financial year, particularly the continued low operating cost.  Two other measures of importance are safety and Canal Waters Time and we very much appreciate updates and the hard work and success they represent.

GENERAL

The Board is encouraged by the continued development of technology applications that streamline Canal operations. As the Canal expansion is undertaken.  ACP is encouraged to look at emerging technologies that will further enhance safety and reduce Canal Waters Time.

CANAL EXPANSION

The schedule for Canal expansion is not in harmony with the pace of containership industry growth and traffic demand; therefore, the Board would appreciate, at the next meeting, a “critical path” discussion based upon a detailed milestone plan about acceleration of the Canal expansion timetable with shortest and expected time schedule and resulting cost estimates. It is also noted that further delay in the decision to commence the expansion will exacerbate the situation.  Alternative transportation options or modalities inevitably will be adopted if, and to the extent, the Canal cannot accommodate demand.

With the rapid expansion of the post-Panamax fleet, there is a serious danger that the Panamax container traffic through the Panama Canal would decrease in the long run if the expansion of the Panama Canal is delayed or not implemented.

Regarding the expansion, it is important to know how it is going to be financed and that customers need to be informed. It will be extremely helpful for the ACP to present the business case with its associated financing options to the Advisory Board at its next meeting.

ON-DECK PER TEU CHARGE

The Board has noted the proposed on-deck container charge as explained by the Canal administration.  The Board finds it to be too substantial and it is not considered reasonable to charge users on a capacity which cannot be used.  The Board wishes to highlight the following:

·        Agrees to the principle of charging on-deck containerized cargo.

·        Agrees that the charges should be applied to full or empty containers.

·        A usable capacity should be used.  It is recommended to use IMO sight line to determine the usable capacity. The Board encourages the Canal to develop the final standards in consultation with the World Shipping Council.

·        May 1^st, 2005 commencement

·        Phase in 40 percent – 20 percent – 20 percent – 20 percent.

The principle of on-deck cargo charge on other than cellular container vessels should also be applied and it is recommended that the Canal liaise with the International Chamber of Shipping.

OUTSTANDING ITEMS

Transshipment.  The Board does not have sufficient information to provide definitive advice as to the impact on transshipment and request the administration to further study this issue and, if appropriate, to present this information to the Board at some time in the future.

Employment plan.  Work that remains regarding Canal expansion includes developing an employment plan, which would be part of an economic impact study.  The results would then serve as the basis for informing all interested constituencies. 

ADMINISTRATIVE ISSUES

Next meeting in Panama.  The Board proposes Thursday, February 24 and Friday, February 25, 2005.

REPORT OF XI MEETING OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD AND THE BOARD OF DIRECTORS

 June 28 and 29, 2005

Panama City, Panama

Background

Dredging

The Advisory Board received the briefings form the Panama Canal Authority.  These included a description of the Canal expansion and its design features, including lock dimensions, lake depths, and environmental remediation efforts.

A discussion of significant interest is the depth of Gatun Lake.  It is the Advisory Board’s sense that the controlling depth of the Canal should be 46 feet and the dredging of the lake to 46 feet should be undertaken, as traffic and circumstances demand over time.  Taking into account ships depth characteristics as they enter the market place.

Lock configuration

Other issues with which the Advisory Board agrees are the concept developed for lock configuration, which includes maximizing the reuse of water employed in lock operations.  The Board is particularly pleased with this practical approach and encourages its further development. 

Recent governmental actions with regards to restructuring taxes and social security resulted in significant social unrest in Panama. At best, there seems to be consensus that the timing of a referendum should be consistent with the time it requires to explain to the people of Panama the enormous advantage of the expansion.  This will require that social, political, and economic consensus be reached.  Accordingly, a strategy outlining the message must be developed now to convey the advantages of Canal expansion and the disadvantages of not expanding the Canal.

In the intervening period, the Board recommends that full consultation should ensure with all sectors and components of the civil population.  What has emerged and what appears particularly critical is to introduce transparency to all interested constituencies, both in Panama and among all market participants.

A major concern has surfaced among all, repeat all, Advisory Board members. The concern is that after repeated suggestions and recommendations, the Canal expansion message to all concerned effort is lagging the problem.  It is important for the Panama Canal Authority to take the initiative and develop ”the message” and devise a strategy along with a plan of action and milestone to accomplish Canal expansion as soon as possible, but not later than 2007.

The Advisory Board applauds and endorses the approach taken to explain the financing of the expansion: the application of retaining earnings, tolls surcharges and commercial financing. This approach is sensitive to the needs for the Canal expansion to be self financed by the ACP.  The bottom line is that “the users of the Canal will fund the Canal expansion”… no direct financial burden will be placed on the people of Panama. 

The Advisory Board strongly recommends the creation of a Canal expansion action plan.  There are several themes, which must be adopted to ensure the message is effective.  First, the practice of transparency must be observed.  It is critical, particularly as it addresses the citizens of Panama, the grass root supporters of the expansion.  Second, is the shipping industry, which must fully support the expansion program.  Third, the declaration by the nations that use the Canal on the conduct of their respective economies and finally, the world-wide environmental constituencies who will have confidence that the Canal expansion will be in the hands of responsible and concerned stewards.

It is also strongly recommended, that consulting resources be employed as soon as possible these resources must possess regional experiences and have demonstrated record of success. 

Benefits

For Panama

• Beyond what expansion will do for the individual citizen, there are benefits in the expansion, which will be realized by the nation.  Increasing volumes from taxes from an expanded economy is just the most direct benefit.  The increase in the skill level of the population gives promise of panama becoming more capable of producing export products and services.  Again, because of the requirement of the expanded Canal to support increased world trade, panama’s relation with other nations will become closer and more harmonious.
• For the individual citizen, expansion of the Canal will provide job opportunities across a broad range of skills.  Such jobs will pay well and many will pave the way for even better jobs for each citizen in future. The Canal expansion and following increased operations will both boost the Panamanian economy and generate additional personal and national income. The former will significantly raise the citizen’s standard of living and the later will make available recourses, which can be used for social programs.

For ship operators

• The operators of ships depend upon the dimension and capability of the Canal to determine the design of ships. This is especially the case of containerships, which represent the most rapidly growing segment for the foreseeable period.  An early decision to expand the Canal will enable these firms to acquire ships, which can be accommodated by the Canal.  This also serves the interest of the Canal, since it will assure containership transit, which may be reduced, as ships are delivered which cannot fit in the locks.  It should be recognized that the economies of scale reflected in the larger ships will not be denied and that without an expanded Canal, the carriers will route their ships over other routes.

REPORT OF XII MEETING OF THE PANAMA CANAL AUTHORITY ADVISORY BOARD AND THE BOARD OF DIRECTORS

 May 18 and 19, 2006

Panama City, Panama

A.   CANAL EXPANSION

The Advisory Board was briefed by the Panama Canal Authority (ACP) on the Proposal for the Expansion of the Panama Canal Third Set of Locks Project which was handed by the Board of Directors of the ACP to the President of the Republic of Panama on April 24, 2006.

The Advisory Board today issued a press release expressing unanimous support of the proposed expansion.

CAPACITY

Perhaps the most critical matter for consideration by the Advisory Board is that of the capacity of the Canal system.  The Advisory Board applauds the ACP for the measures taken to enhance the present capacity. It also notes that further initiatives are in place to further improve capacity.  Nonetheless, maximum utilization of capacity is expected to be reached by 2009.  Evidenced by the number of ships awaiting transit today, the ACP should consider this situation as an early warning sign that in time, users will seek alternative transportation options. This would represent a significant business loss with its associated revenues. This also highlights the need to commence the expansion project as soon as possible.

FINANCIAL ASPECTS

The Advisory Board believes that the details of the financing option provided in the report would benefit from an independent professional opinion.  It therefore recommends that the Canal should proceed to award a contract for financial advice from an organization experienced in these matters, but not a supplier of funds, so that an independent view of the model presented may be obtained.

With respect to the repayment program from tolls, whilst always remaining competitive, the expansion will be paid over time by users consistent with current principles. The Advisory Board encourages the Canal administration to continue a close dialogue with relevant industry parties on this important matter.  Any tolls adjustment must be transparent, gradual, and long-term in nature.

REFERENDUM

COMMUNICATIONS

The Advisory Board has on many previous occasions emphasized the importance of an effective communications and public relations plan.  Although the industry and the business community have been skillfully informed regarding the benefits of the expansion, an effective communication plan is now needed to inform the Panamanian constituencies of the benefits of the expansion.  Recent polls indicate this is essential. Given the legislative process, it is clear that there is little time to effectively convey the message.  The success of the referendum in large measure depends on the effectiveness and transparency of the communication efforts. The urgency of action on this matter cannot be overstressed.

The Advisory Board recognizes the importance of providing Panamanians with an opportunity to participate in all aspects of the expansion project; it also recognizes that training will be required to provide them the requisite skills to gain employment and share in the potential financial rewards that will be available. The training effort should commence as soon as the planning process will allow. The Advisory Board sees this as a critical element to communicate to the people of Panama that their involvement not only is encouraged, but welcomed. 

Given the magnitude of this project, and capitalizing on other large infrastructure projects, the Advisory Board recommends that managing execution of the expansion requires a sound, dedicated management structure. The precise nature of this management structure should also be developed with some urgency.

AUCTION SYSTEM

The Advisory Board has noted the recent introduction of the auction system on a 60-day trial basis for one daily transit slot.  Although, in principle, all booking slots should be allocated according to the general booking system rules, the Advisory Board recognizes that the situation may warrant application of an auction system to handle special cases.  However, this should be restricted to one slot only regardless of the total number of reservation slots that may become available.