The best-laid plans of mice and men, the poet advises, often go awry, leaving nothing but grief and pain and so it is with those who make only plan A.Those who have designed their future schemes on the assumption that a promise will be kept by others against whom, in cases of breach, they have little if any recourse may come to rue such folly.

So any who are betting more than the farm that the Panama Canal will complete its planned expansion by the most recently revised date of December 2015 may now be anxiously following the negotiations between the canal authorities and the European consortium it hired to carry out the work.

Large (and they don’t come much larger) infrastructure projects are, of course, notorious for cost over-runs and delays. These so-called mega (multi-year, multi-billion dollar) projects are subject to a law (possibly Sod’s) that they will be beset by every kind of problem – from the physical to the political– known to man.

Armed with knowledge of previous mega-project mistakes, the customers – usually governments, central or local – now cover themselves with extra clauses covering performance and costs. The contractors, themselves often bitten more than once by customers changing their minds mid-way through a contract, do the same, while armies of lawyers stand by to do profitable battle.

The first attempt to build a canal across the Isthmus of Panama ended in expensive failure in 1889. The French, despite building the Suez Canal, were unable to repeat the success and the first Panama canal enterprise went bankrupt, having lost an estimated USD 287 million, while more than 22,000 are said to have died, many due to malaria in the tropical forests, in the attempt.

The US then stepped in, first controversially supporting the cause of Panamanian independence from Colombia and then building the canal itself in an area that in effect became American territory.

The canal was completed and opened 100 years ago but at a cost to the US of USD 8.6 billion and of several thousand more lives. Further work on the waterway – in particular to enable it to handle the larger warships being built for the US Navy in the 1930s – added several more billion dollars to the cost.

The US eventually agreed to hand control of the canal to Panama in return for guarantees of neutrality, an act that took place on 31 December 1999. Since then, the canal has become a vital part of the Panamanian economy, generating USD 1.8 billion in annual revenues (the equivalent of 7% of the country’s GDP) in 2012.

Constant rises in canal tolls have, however, created friction with canal users. A report by the Japan Maritime Centre (JMC), published in December last year, claimed tolls have risen by 95% since 2005 and as a result, had driven some shipping to alternative routes, mainly the Suez Canal.

The JMC report estimated Japanese shipping accounts for around a fifth of the Panama Canal’s revenues, but added that the Suez route, despite the threat to ships from piracy, has increased its share of traffic on Asia-Europe routes from 15% in 2008 to 35% last year. It estimated a further 10% rise in canal tolls would see an 11% drop in Japanese use of the waterway.

Not only does Panama have to worry about established rivals like the Suez Canal, now dredged deeper to take containerships of 13,000 TEU and bigger, but new threats like rail freight from China to Europe, Arctic routes as ice melts and, much closer to home, a rival trans-isthmian waterway across Nicaragua.

They may take comfort from the sceptics’ view the Nicaraguan canal will never happen, but would be unwise to ignore the possibility. Last month the latter’s government announced construction would begin in December this year, following the granting of exclusive rights to a Hong Kong company believed by many to be acting on behalf of the Chinese government. The company’s chairman and CEO, while strenuously denying the Chinese links, has promised the first ship will be transiting by December 2019.

While the expansion of the Panama Canal will no doubt be completed (Panama insists it has its own plan B), no-one can now be sure when. Forecasts of the effects of an expanded waterway on trade and traffic – from South American dry bulk and oil exports to LNG shipments from the US - have had to contend with a moving target.

The escalating costs will also have to be passed on somehow. The contractors may prove reluctant to absorb them (the dispute between them and the canal authorities seems destined for arbitration) and shipping has already shown its readiness and ability to use another route if the economics are favourable.

Whether the Nicaraguans and their Hong Kong partner can build and operate a canal at least as efficiently as the Panamanians appear to have done since 1999 remains to be seen. The lingering suspicion that China is really behind the Nicaraguan project also introduces a geopolitical aspect. The US may regard it as an unwelcome presence in an area it regards as its sphere of influence, although how it might react to any perceived threat is an imponderable.

The US, of course, takes, as its biggest user, a keen interest in the Panama Canal and not only because of the effect on American seaborne trade. Ports on the US East Coast have been gearing up for the expected arrival of the bigger containerships able to transit the expanded canal.

There is bound to be concern that the billions of dollars invested in dredging deeper channels and in new cargo-handling facilities – often by states or cities still struggling with the impact of the financial crisis – might not see a return either as big or as soon as expected.

Unlike ports, ships can go more or less where the tides of trade and the currents of economics take them. The man in the Panama palindrome may have had a plan, but ships sail by their own voyage plans.
Source: BIMCO