Panama Investor Blog

Low bid, low ball? Financial strength of canal bid winner in question

A La Prensa article headlines the potential profit the winning bid can make on the canal expansion project to be between 10-12% profit or about $300 million. While another article by stock analyst, S. McCoy, on a Spanish website that monitors stock values raised questions about the financial stability and bid price motivation of one of the companies in the consortium that won the bid for the expansion of the canal.

A brief mention of this concern was made in La Prensa today, but was treated as not a problem by the ACP, who said they have safeguards in place should the company not deliver.  The Spanish article  also brings up the question of the big differences in the winning bid and the two others which was significant and characterized it as "recklessly low". According to the analyst, he believes Sacyr Vallehermoso low balled it in order to bring their share price up in the wake of losses in the real estate market to which they have been exposed. The stock price rose significantly after the winner was announced. He also said there is "widespread skepticism that they can accomplish the impossible". You can read the story in Spanish here at Cotizallia.

Excerpt from La Presna:

But another consideration was the financial position of each company involved in the three consortium's. The financial position of one company in particular, Spanish firm Sacyr Vallehermoso, which was the lead of the winning consortium, has raised concerns because of its exposure in the Spanish real estate market.

Jorge Quijano, director of the Canal expansion project, said that the commission eventually decided that the overall financial strength of the consortium outweighed any potential problems with an individual company. He added that appropriate safeguards will be put in place to protect the project in case a company is unable to do the work.

Bid for lock construction comes within expectations

The bids for the major portion of the canal expansion project have come in and apparently one of them is under the threshold established by the ACP. Many have been skeptical, myself included, on whether the bids could come in at an appropriate amount because of the increases in material costs and the many unknowns of a project of this scale. I posted an article last year where the ACP was expecting the price to come in at around $2.7 billion. The winning bid actually came in at $3.118 billion which would appear to be $500 million over their estimate at that time. I suppose on a project of this scale a half a billion or so over is to be expected. There certainly was a large difference between the bids of the other two bidders in the process.

In any case, congratulations go out to the ACP and the winning consortium of Grupo Unidos por el Canal.

Excerpts from La Prensa: 

The audience reacted with applause when the bid from Grupo Unidos por el Canal was revealed. The consortium estimated its costs at $3.1 billion, $361 million under the threshold set by the Panama Canal Authority. The bid by Bechtel, Taisei, Mitsubishi Corporation came in at $4.1 billion, $705 million above the threshold set by the Authority, while the bid from Grupo C.A.N.A.L. was almost $5.1 billion.

Grupo Unidos por el Canal also received the best technical scores for its bid, leading Canal officials to comment that they felt comfortable with the way the process unfolded.

"The company that won is going to provide the best value to the Canal, both in terms of price and technical expertise," said Jorge Luis Quijano, head of the Canal expansion program. "We feel comfortable with the outcome today."

Canal expansion bids expected this week

Tomorrow is the big day that the bids will be opened for the first time. Although the ACP expects the bids to come in within budgetary allowances, many are not so sure. In any case, the suspense will be lifted and the bids will be known win a few days. La Prensa carries a good article about the process and another extended article from Reuters deals with bidders expectations.

Excerpts from La Prensa:Wednesday, the committee's findings will be released, with the score assigned to each proposal making up 45 percent of the score each bidder will receive. The remainder of the score will come from the price that each company has assigned to the project. That part of the bids have been held under tight security, and will be revealed in public when the envelopes containing the bid prices are opened.

Excerpts from Reuters:

MILAN/PANAMA CITY, July 7 (Reuters) - A team led by U.S. group Bechtel is financially best placed to win the race for an estimated $3.3 billion contract to expand the Panama Canal, analysts said.

The Panama Canal Authority (ACP) overseeing the bidding will open price bids on Wednesday but may take several weeks before announcing a winner. This $3.3 billion contract is the largest chunk of a $5.25 billion project to expand the canal.

OOPS! Houston, we have a problem!

Darn it! Just when I decided to swing over the positive camp on the canal expansion this article comes out the very next day in Bloomberg. According to the story, the quotes for the largest contract (big locks) have come out 35% higher than was anticipated. Apparently all three bids were well over the number hoped for by the ACP, which now puts the project in limbo. My understanding was that the meat of the project was expected to be under $2.5 billion, but if they are 35% over that it would add about a billion more dollars to the project. Although this may have come as a surprise to the ACP, most engineers who studied the project are not at all surprised as they expected the cost of this mega project to far exceed expectations. If it is only 35% then I say it is still well below realistic expectations and we should go for it. Remember my ten reasons put aside costs and only look at the benefits.

Panama Canal Expansion Bids Overshoot Budget 35%, Cinco Reports

By Gianluca Baratti

May 25 (Bloomberg) -- Three bids to widen the Panama Canal are as much as 35 percent over the budget set by the canal’s administrators and may delay building, Cinco Dias reported, citing an unidentified executive at a Spanish company involved in the bidding.

Bids from partnerships that include Mitsubishi Corp., Hochtief AG and Sacyr Vallehermoso SA are higher than the $5.2 billion valuation of the project by the Panama Canal Authority and may push the award of the project beyond a July deadline, the paper said.

10 reasons why Panama needs the canal expansion

As most readers of this blog know, I have been rather outspoken against the canal expansion project and the obvious flaws in the economic aspects of the project. I seem to be a lone voice out here in the blogosphere and for good reason. Those who fought against it before the referendum, when there was a chance to defeat it, have long since folded their tents and gone home. They are smart enough to know that once the juggernaut of government gets a mandate from the people, to fight it is to swim against a tsunami. Not to mention the fact that being right about negative things does not make many new friends or keep old ones.

My change of heart is not because of any change in the economic aspects of the project. The fact is, they have gotten worse. But, when I put aside the economic aspects and pretend that it is free gift, I am in favor of such a gift for a number of reasons.

1. As a fellow with an engineering and design background I have always been fascinated by giant projects, like the Chunnel and the three rivers dam in China. The amount of engineering and technology that goes into these projects is fascinating. This project will surely rank as one of the top of this century and will generate many hours of Hallmark and History channel programing.
2. The fact is that the canal mechanics are almost 100 years old. It is a testimony to the engineering feats and American know-how that  the canal is basically operating mechanically as it has for over a hundred years. But time takes it toll and as one person has pointed out to me, there are areas of the locks that time has ravaged that could lead to disaster if not corrected. With the addition of new locks, they will be able to maintenance the others without shutting down the entire waterway.
3. A construction project of this magnitude will continue to bring Panama prestige and make us news worthy over the construction period and beyond and that is still 6-8 years out. Lots of free publicity will help Panama during this time of economic turmoil for the rest of the world.
4. Panama will get at least 50% of the funding interest free for 10years. If the IMF keeps its word such a deal is hard to beat, especially in today's world of tight credit.
5. The expansion will require many workers which will greatly help Panama economy. With building construction slowing rapidly, labor will need work and idle hands are the devils workshop. Hopefully, some of the thousands of jobs will go to Panamanians in the metro area and help keep them off the streets so we can drive on them without dodging bricks.
6. The need for skilled foreign workers will force changes in immigration that have to be better than what they are right now. This injection of new DNA in the gene pool will be great for Panamanians. They desperately need to learn how things are done abroad and begin to practice them here.
7. A canal expansion will help sell at least some of the many condo's that will be coming on the market over the next two-three years. There will be more general business bringing more foreigners here and that should help the absorption rate of apartments in the city.
8. Much of the new infrastructure has been based on the growth forecast which have been based on new available housing. Bureaucrats did not realize that apartment numbers did not necessarily equate to city dwellers. That means much of the infrastructure will be used sooner than it would if things came to a standstill. This will help with increased property tax revenue to pay for it.
9. Standstill-If it were not for the expansion, Panama would be back to basics of banking, free zones, international business formations, ship registry along with the old canal. Not much more would be happening, and with all the buzz and hype we have had over the last two years, we need Panama to be happening and still be the center of the universe.
10. Get it now, pay for it late or never- I am 57 and will be in my mid 60's when the new canal begins operations. Whatever business I am in will do better with the canal expansion than without it. And unless they do something drastic with taxation, it should not really affect my pocket book except in a positive way. I will let my kids deal with the possible repercussions down the road, but at least for the next ten years or so, let the good times roll.

And, who knows, maybe I have been wrong all along and the canal will go on to be one of the best investments any small country has ever made, and we all get even richer than we thought possible.

Canal income for the state drops 80%

Over the last three months I have been looking at the canal tonnages and traffic volumes trying to determine the significance of the economic downturn on the canal. Even though the ACP continues to tell us that things are on track and on budget, they have not been very forthcoming in their projections or adjusted budgets. But in this one short article about non tax revenues for the state we find a very alarming number. State revenue from the canal was $73 million for the first quarter of 2008, but the first quarter of 2009, the revenue has dropped to only $16 million. Wow, that's a decrease of 80%!

If we continue to see this kind of revenue for the rest of the year, income for the canal will be less than $50 million instead of the $600 million it has produced in years past. I am amazed that no one seems to be concerned about this when this revenue is desperately needed by the state and will surely put additional burdens of debt service for the canal expansion.

La Prensa

The central government tax revenues continue to grow (13%), but other income plummeted: from 286 million in the first quarter of 2008 to 209 million during the same period of 2009, according to preliminary figures from the Ministry of Economy and Finance 

This implies a contraction of almost 77 million or 26%, due mainly to a decrease in dividends received from the State Canal and businesses where it has equity participation.

Dividends reported by Cable & Wireless, for example, was halved: from 30 million in 2008 to 15 million this year.  And the Panama Canal Authority (ACP) fell even more: 73 million in 2008 to 16 million in 2009.

"The fall in non-tax revenues reflect a smaller payment by the ACP in terms of tonnage duty, among other factors, said economist Guillermo Chapman, a partner in unintended and board member of the ACP

The interests of the Trust Fund for Development also shrinks 16%.

Canal slowdown , no problem

Although the news for canal transits and the world economy continue to point to a long term negative outlook, the canal administration continues to say things are working as anticipated and there is no problem. Take this statement from the ACP spokesman on the Steel Guru website after a rather dismal report on the transits for the first quarter of 2009. "Mr Manuel Benítez ACP executive VP of operations said that "Our results for this quarter paint a favorable picture of how the Canal continues to weather the global economic crisis. Q2 numbers remained steady and we do not expect to see major fluctuations. The ACP will continue to follow these developments closely and remains fully committed to meeting the needs of its customers and the industry."

Nothing is revealed on how they will make up for the shortfall in revenues that are to be used to pay for the canal expansion project, or any possibility that things may even get worse. Just the same old BS that things are on track and under control.

If you look at the other headlines on the Steel Guru websites it clearly shows a long term outlook by most of the worlds shipping industry that things are going to get a lot worse.

 

Slowdown signs - Turkish unemployment rate jumps to record 15.5%

 

Slowdown signs - Chinese new ship orders slide 94% in Q1

 

Slowdown signs - Ukraine Q1 output plunges by 32% YoY

 

Slowdown signs - Russian industrial production fell 14.3% in Q1

 

Slowdown signs - Azerbaijan postpone sea port construction

Here is what the Steel Guru statistics on the canal performance pointed out.

Transits of Panama Canal slipped 1.4% YoY in the Canal's second fiscal quarter. A total of 3,914 ships passed through the Canal in January to March 2009 period. Tonnage fell further as fewer large ships came through. Transits of supers declined 2.9% to 1,815 transits from 1,869. Overall tonnage dropped by 3.3% YoY to 75.7 million tonnes from 78.4 million. General cargo, dry bulk and tanker transits increased, while refrigerated, container, vehicle carrier and passenger transits decreased.

Average time it takes a vessel to transit the Canal decreased by 27.9% YoY to 26.22 hours from 36.39 hours. Canal Waters Time for booked vessels decreased by 19.5% YoY to 15.83 hours from 19.66 hours. Use of the booking system decreased by 15.6% to 79.56% utilization from 94.31%. The official accident rate declined 32.4% to 1.02 accidents per 1,000 transits from 1.51 per 1,000 transits.

Panama stimulus package 5 times that of the U.S.

An article in the Statesman has a fairly balanced view of the situation in Panama. I think it is an interesting analogy to compare the canal expansion as  a stimulus package equal to 25% of the Panama GDP as opposed to the U.S. package of 5%. With this kind of debt being burdened on a small country like Panama I really don't believe this is a good thing. Spending when your deep in debt and the economy is sinking seems contrary to logic. But when it comes to government spending, there is always little logic. I guess one thing will be settled in the long run. If Panama continues with the expansion, and booms, and is able to pay off the debt then spending your way to prosperity will be proven.

Excerpts: Percentage wise, the canal expansion dwarfs any stimulus project the United States is planning. The project represents nearly a quarter of Panama's $23 billion gross domestic product. By comparison, the $787 billion stimulus package in the U.S. represents about 5 percent of America's $14 trillion gross domestic product.

Read the whole story here...

Should investors depend on Panama's Fitch ratings?

Today Fitch rating agency came out with a BB+ positive rating on Panama mostly weighted on the canal expansion project driving the economy. This of course helps Panama in borrowing money for the canal and any other projects it may want. Don't get me wrong, it is great to have good credit and I applaud Panama if they indeed deserve the rating but, given the track record of Fitch over the past year I question how much due diligence they do on the countries they rate. After all, Lehman Brothers, Bear Stearns, AIG and Merril Lynch were among the financial companies which went bankrupt even after being positively graded by Fitch.

""Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market " - US Congressman Gary Ackerman"

"The smooth functioning of global financial markets depends, in part, upon reliable assessments of investment risks, and Credit Rating Agencies play a significant role in boosting investor confidence in those markets.The above rhetoric, although harsh, beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles, as enunciated below, make it all the more important to scrutinize the claim of Credit Rating Agencies as fair assessors."

When we read the martketwatch press release from Fitch on Panama we get these statements:
Panama's macroeconomic and structural strengths will continue to set it apart from 'BB' peers.
Higher savings and investment, partly due to the ongoing Canal widening project, should help Panama maintain stronger economic growth this year relative to the global slowdown in 2001/02 and also compared to regional peers. As such, Fitch believes that Panama should be able to absorb future increases in public debt related to the expansion of the canal without precipitating downward pressure on the ratings given its growth prospects and the expectation that fiscal discipline will be maintained even during an election year.

They go on to say;
"Panama's key credit metrics continue to strengthen, with growth averaging 8.8% for the five years ending in 2008, one of the highest rates in the world," according to Theresa Paiz Fredel, Senior Director in Fitch's Sovereign Ratings team. This has contributed to the convergence of per capita income with that of low investment grade sovereigns. "As a result of Panama's robust growth performance, as well as its improved fiscal and external position, the country is well situated to face a reduction in external demand and international capital flows," added Paiz Fredel.

Ms. Fredel obviously is not looking beyond government provided date and press releases to come up with these and other such statements.

She must not be considering the fact that Panama's debt stands at $11 billion and the canal expansion will easily raise this by between 50-100% within 7 years. All the while the world economy is sinking further and shipping is dropping dramatically. The canal commission promised the people during the referendum that the money would come from higher tolls and an ever increasing demand for transits. Now it all will have to come from borrowing which will put a severe crimp on public spending on important areas such as health and education for the population of the country. All this when cracks are showing in just about every segment of the countries financial landscape. The real estate market is dead, layoffs in construction will begin in earnest in the coming months. Projections of growth have been cut in half twice and defaults on consumer credit are climbing fast. All of these billboards are clear for any ratings agency to see if they took the time to look beneath the official B.S. coming from the ACP and PRD.

Here is what Senator Pementil from the Phillipines had to say about the recent Fitch ratings for their country.

Pimentel: How reliable are credit rating agencies?
Senate Minority Leader Aquilino Q. Pimentel, Jr. (PDP-Laban) said the people should not be lulled into believing that the national economy is in a fine shape just because it received positive marks from international credit agencies.

Pimentel made this comment following reports that the London-based Fitch Ratings has maintained its stable outlook for the Philippines, saying its economy is "reasonably healthy" despite the crisis in global finance.

Pimentel said this comment smacks of an unfounded flattery considering that the Arroyo administration was forced to abandon its zero budget deficit goal in 2008 due to the failure of revenue agencies to meet collection targets.

He said the amount of public debt hardly decreased even if the government was religiously repaying its loans because it kept on contracting new borrowings.

Sounds like Panama to me.

Ships begin to bypass the canal

As fuel prices decrease and canal tolls increase shipping companies naturally begin to look carefully at the high cost of transiting the canal. One shipping company has concluded it is cheaper to take the long way back rather than pay the $300,000 to take the shortcut. As the worlds economy continues to deteriorate, the speed at which products get to market is not nearly as important as it used to be. You can be sure more shipping companies will be taking the long way to market over the coming years.

It is clear from the statements put out by the ACP that they believe because they gave out the notice of toll increases two years ago, the industry had time to prepare and should be OK with it. Of course the industry is operating in the real world with a collapsing economy and low fuel prices. It is also clear that the canal authority will maintain the line that this economic downturn is just a bump in the road and things will be back on track within a few years. This line of thought would not be so flawed if it wern't for the fact that the canal expansion project depended heavily on increasing canal transits and toll increasing EVERY SINGLE YEAR to pay for the more than $5.25 billion dollar project. This is a perfect example of what happens when the real world economy meets fantasy and hopeful wishes. Somthing is going to give and I bet in the end it will be fantaseyland.

Excerpts from Journal of commerce online: The Panama Canal Authority is sticking to its scheduled May 1 toll increase in the face of plans by some of the world's largest container lines to route their vessels the long way around the Central American Isthmus.

"We have scheduled the toll increases that were agreed upon after a long period of consultation with the industry in 2006," Rodolfo Sabonge, the canal authority's director of corporate planning and marketing, said in an interview. "We make sure that everybody knows long ahead of time what we're doing. That has a lot of stability for the shipping industry and the shippers themselves."

"Our calculations do indicate that it might very well be beneficial to go south of the Horn with some of our vessels," Morten Englestoft, chief operating officer of Maersk Line in Copenhagen, said in a telephone interview earlier this month. "Given the significant cost of going through the (Panama) canal, we have to explore all the alternatives."

Excerpts from SeaTrade Asia:

Avoiding the Suez Canal by sailing round the Cape of Good Hope has become a common tactic to save transit fees and absorb excess tonnage in the current cargo slowdown but now CMA CGM has decided to bypass the Panama Canal on the homebound leg of its PEX2 service linking Asia to the Caribbean and sail east around Africa.

The PEX 2 service currently employs nine vessels of 4,000teu - eight from CMA CGM and one from China Shipping. The French carrier will add an extra vessel when the homebound leg changes direction this week, but will still achieve considerable savings given the approximate $350,000 cost of a Panama Canal transit for a vessel this size.