Abstract
This Selected Issues paper for Panama reports that the administration is developing a strategy to enhance growth and competitiveness in the Panamanian economy. Corruption is perceived as a widespread phenomenon that has affected both private and public sectors in Panama at various levels of decision making. Even though Panama currently attracts substantial foreign direct investment, corruption may prove an obstacle to a medium-term growth strategy based on foreign investment. One important component of Panama's medium-term strategy is the prospect of a free-trade agreement with the United States.
IV. The Panama Canal Authority: Fiscal Accounting and Policy Issues32
A. Introduction
47. Panama’s new administration in September 2004 decided to exclude the balance of the Panama Canal Authority (PCA) from the measure of the fiscal deficit utilized for policy purposes and future fiscal rules. The PCA, a public entity whose autonomy is guaranteed by the Constitution, has full control over the administration of its assets and does not engage in quasi-fiscal activities. While its retained profits have grown markedly in recent years, looking forward, it may need to borrow substantial amounts over the medium term to finance an ambitious program to widen the waterway. The authorities’ goal is to secure an investment grade credit rating for the PCA, and they view the separation of the PCA from fiscal accounts as key to convincing financial markets of PCA’s commercial soundness and ability to maintain managerial and financial autonomy.
48. This chapter will discuss the PCA’s treatment in the fiscal accounts, and its implication for the appropriate measure of the fiscal deficit and the optimal coverage of a revised FRL. The Fund’s Executive Board recently recognized that excluding the operations of commercially run public enterprises allows an alternative measure of the fiscal stance. However, the PCA appears not to meet the Fund’s minimum criteria for being considered commercially run; on this basis, it would not qualify for exclusion from fiscal accounts and public debt. It nevertheless appears to be a profitable, efficient, and well-managed undertaking. If the canal expansion project proceeds, future assessments of public debt sustainability will partly depend upon the extent of explicit or implicit government guarantees for the financing of the project.33 There is no firm evidence at this stage to judge whether markets would be willing to finance the PCA without an explicit government guarantee. Given the canal’s macroeconomic importance, an implicit government guarantee, to be assessed in light of the financing plan for expansion of the canal, may not be ruled out in a hypothetical worst-case scenario, such as a natural catastrophe.
B. Finances of the Canal Authority
49. The PCA was established by the Constitution and its structure set by law 19 of June 1997 in preparation for the transfer of the canal from the United States. On December 31, 1999, the PCA assumed full responsibility for the administration and operations of the waterway. The Constitution and Law 19/1997 provided for the PCA’s financial autonomy and the right to administer its assets (Box 1). It was set up to be run efficiently with sound business practices. While the canal under U.S. administration sought to recover costs, the PCA has generated profits and increased the canal’s contribution to Panama’s economy.
50. The PCA’s gross operating surplus, before transfers to the central government, has grown steadily in recent years. Operating expenses were kept under control throughout 2000–04, through significant increases in efficiency. Over the period 2000–03, PCA employment declined (by 3 percent between 2001 and 2003), operating expenses increased by about 3 percent in real terms, while traffic (measured in net tonnage) rose by over 5 percent. Operating income rose markedly, starting in 2002, as a result of a toll increase, higher fees for transit services, and rising transit tonnage (Appendix and Table 1). The operating surplus, before transfers of fees and dividends to the central government, increased from 3.3 percent of GDP in 2000 to 4.8 percent in 2004.
Panama: Operations of Panama Canal Authority
(accrual basis)
Article 39 of the Organic Law establishes that Panama Canal Authority (PCA) shall pay annually to the Panamanian Treasury a fee per net ton, or its equivalent, collected from vessels paying tolls for the use of the Canal. This fee is set by the PCA.
Pre-tax income is the overall balance, equal to retained profits plus dividends.
Panama: Operations of Panama Canal Authority
(accrual basis)
| Prel. | ||||||
|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | 2003 | 2004 | ||
| (In millions of balboas) | ||||||
| Operating surplus | 380.0 | 349.0 | 434.0 | 533.0 | 660.0 | |
| Operating revenue | 785.0 | 775.0 | 830.0 | 953.0 | 1086 | |
| Operating expenses | 405.0 | 426.0 | 396.0 | 420.0 | 426 | |
| Less: transfers to central government | 203.1 | 203.5 | 271.0 | 278.5 | 311.9 | |
| Fees based on net tonnage 1/ | 142.4 | 141.1 | 152.1 | 144.6 | 142.6 | |
| Service fee | 30.0 | 26.6 | 30.2 | 28.6 | 28.6 | |
| Dividends | 30.8 | 35.8 | 88.8 | 105.3 | 140.7 | |
| Remaining operating surplus | 176.9 | 145.5 | 163.0 | 254.5 | 348.1 | |
| Fixed investment | 97.0 | 112.0 | 131.0 | 129.0 | 121.0 | |
| Retained profits | 79.9 | 33.5 | 32.0 | 125.5 | 227.1 | |
| (In percent of GDP) | ||||||
| Operating surplus | 3.3 | 3.0 | 3.5 | 4.1 | 4.8 | |
| Operating revenue | 6.8 | 6.6 | 6.8 | 7.4 | 7.9 | |
| Operating expenses | 3.5 | 3.6 | 3.2 | 3.3 | 3.1 | |
| Less: transfers to Central Government | 1.7 | 1.7 | 2.2 | 2.2 | 2.3 | |
| Fees based on net tonnage 1/ | 1.2 | 1.2 | 1.2 | 1.1 | 1.0 | |
| Service fee | 0.3 | 0.2 | 0.2 | 0.2 | 0.2 | |
| Dividends | 0.3 | 0.3 | 0.7 | 0.8 | 1.0 | |
| Remaining operating surplus | 1.5 | 1.2 | 1.3 | 2.0 | 2.5 | |
| Fixed investment | 0.8 | 0.9 | 1.1 | 1.0 | 0.9 | |
| Retained profits | 0.7 | 0.3 | 0.3 | 1.0 | 1.6 | |
| Memorandum items: | ||||||
| Overall balance, before dividend payments (percent of GDP) | 1.0 | 0.6 | 1.0 | 1.8 | 2.7 | |
| Ratio of dividends to pre-tax income (percent) 2/ | 27.8 | 51.6 | 73.5 | 45.6 | 38.3 | |
| GDP, millions of balboas | 11,620 | 11,808 | 12,272 | 12,862 | 13,793 | |
Article 39 of the Organic Law establishes that Panama Canal Authority (PCA) shall pay annually to the Panamanian Treasury a fee per net ton, or its equivalent, collected from vessels paying tolls for the use of the Canal. This fee is set by the PCA.
Pre-tax income is the overall balance, equal to retained profits plus dividends.
Panama: Operations of Panama Canal Authority
(accrual basis)
| Prel. | ||||||
|---|---|---|---|---|---|---|
| 2000 | 2001 | 2002 | 2003 | 2004 | ||
| (In millions of balboas) | ||||||
| Operating surplus | 380.0 | 349.0 | 434.0 | 533.0 | 660.0 | |
| Operating revenue | 785.0 | 775.0 | 830.0 | 953.0 | 1086 | |
| Operating expenses | 405.0 | 426.0 | 396.0 | 420.0 | 426 | |
| Less: transfers to central government | 203.1 | 203.5 | 271.0 | 278.5 | 311.9 | |
| Fees based on net tonnage 1/ | 142.4 | 141.1 | 152.1 | 144.6 | 142.6 | |
| Service fee | 30.0 | 26.6 | 30.2 | 28.6 | 28.6 | |
| Dividends | 30.8 | 35.8 | 88.8 | 105.3 | 140.7 | |
| Remaining operating surplus | 176.9 | 145.5 | 163.0 | 254.5 | 348.1 | |
| Fixed investment | 97.0 | 112.0 | 131.0 | 129.0 | 121.0 | |
| Retained profits | 79.9 | 33.5 | 32.0 | 125.5 | 227.1 | |
| (In percent of GDP) | ||||||
| Operating surplus | 3.3 | 3.0 | 3.5 | 4.1 | 4.8 | |
| Operating revenue | 6.8 | 6.6 | 6.8 | 7.4 | 7.9 | |
| Operating expenses | 3.5 | 3.6 | 3.2 | 3.3 | 3.1 | |
| Less: transfers to Central Government | 1.7 | 1.7 | 2.2 | 2.2 | 2.3 | |
| Fees based on net tonnage 1/ | 1.2 | 1.2 | 1.2 | 1.1 | 1.0 | |
| Service fee | 0.3 | 0.2 | 0.2 | 0.2 | 0.2 | |
| Dividends | 0.3 | 0.3 | 0.7 | 0.8 | 1.0 | |
| Remaining operating surplus | 1.5 | 1.2 | 1.3 | 2.0 | 2.5 | |
| Fixed investment | 0.8 | 0.9 | 1.1 | 1.0 | 0.9 | |
| Retained profits | 0.7 | 0.3 | 0.3 | 1.0 | 1.6 | |
| Memorandum items: | ||||||
| Overall balance, before dividend payments (percent of GDP) | 1.0 | 0.6 | 1.0 | 1.8 | 2.7 | |
| Ratio of dividends to pre-tax income (percent) 2/ | 27.8 | 51.6 | 73.5 | 45.6 | 38.3 | |
| GDP, millions of balboas | 11,620 | 11,808 | 12,272 | 12,862 | 13,793 | |
Article 39 of the Organic Law establishes that Panama Canal Authority (PCA) shall pay annually to the Panamanian Treasury a fee per net ton, or its equivalent, collected from vessels paying tolls for the use of the Canal. This fee is set by the PCA.
Pre-tax income is the overall balance, equal to retained profits plus dividends.
51. Transfers to the central government have risen as dividend payments have become substantial. In addition to income tax withheld on employees’ wages, transfers from the PCA recorded in central government revenue include: a fee for power, water, and other utilities provided by the rest of the public sector (about 0.2 percent of GDP); a fee based on transit tonnage (about 1.1 percent of GDP); and dividends. Dividends have grown markedly, from 0.3 percent of GDP in 2000–01 to over 1 percent of GDP in 2004.
52. In anticipation of future investments, the PCA’s retained profits were increased to well over 1 percent of GDP in 2003–04. The PCA’s financial assets (about US$800 million at end-2004) are not available to finance central government deficits; the bulk of these assets are invested abroad. However, consistent with the treatment of other public enterprises in the fiscal accounts, the policy until late 2004 was to include this growing flow of profits in the accounts of the nonfinancial public sector (NFPS), on a nonconsolidated basis, as a revenue and a financing item. This substantially reduced the overall fiscal deficit reported in recent years.
53. A recent decision to exclude the PCA from the fiscal balance has raised a fiscal accounting issue with policy implications. The government that came to office in September 2004 decided to exclude the PCA from the fiscal balance monitored for policy purposes and future fiscal rules, as it felt that its inclusion was giving an inappropriate measure of the deficit, inconsistent with the Fiscal Responsibility Law.34 The broader measure of the fiscal balance, which includes the PCA, continues to be used for national accounts purposes and for comprehensive public sector statistics.
54. The PCA’s strong financial performance warrants a discussion whether it can be considered commercially run, and whether excluding it from fiscal accounts is a sensible option. A prospective widening and modernization of the canal at a cost of possibly 30–35 percent of GDP would likely be financed in part through borrowing by the PCA (see Appendix). The PCA’s prospective large borrowing over a number of years will need to be considered in future assessments of public debt sustainability. At present, there are no clear indications about the market’s rating of PCA’s commercial soundness and credit risk that would provide a basis for assessing whether PCA’s future borrowing would impact on public debt sustainability through an explicit guarantee.
C. Assessing the PCA’s Commercial Orientation
55. The Fund recently advanced the view that a country’s fiscal stance could be measured for policy purposes by excluding the operations of commercially run public enterprises.35 Preliminary criteria have been developed to assess the commercial orientation of public enterprises, to be reviewed by the Executive Board after experience has been gained. These criteria rely on readily available data, and need to be monitored to ensure continuing compliance, as even commercially run enterprises can borrow and invest in ways that could pose macroeconomic risks. At any rate, accounts of all public enterprises—commercial or not—should be reported to the public and covered in fiscal accounts under the Fund’s surveillance activities and for statistical purposes.
56. A public entity that relies substantially on government financial support, or on extensive government guarantees, would not be considered a commercial enterprise. The authorities’ goal is to secure an investment grade credit rating for the PCA by convincing markets that it is a commercially sound undertaking with no need for a government guarantee. Under the Fund’s criteria, to be considered commercially run, an enterprise’s profitability and creditworthiness should be comparable to the industry-wide average. Its personnel policy should be independent of civil service laws and free of government intervention. It should be subject to the same regulations and taxes as private firms in the same industry, and there should be no special transfers to or from the government. The firm should be audited externally and publish comprehensive annual reports, and minority shareholders’ rights should be protected.
57. The PCA appears not to meet the minimum criteria for being considered commercially run, in part because it is fully state-owned (Box 2). Some criteria on governance do not apply, as there are no minority shareholders and no listing on the stock exchange. The PCA’s profitability and creditworthiness indicators cannot be compared to industry-wide indicators in the country; and a comparison with other major canals (in particular the Suez Canal) is difficult as operating conditions and constraints are different. One criterion that is not met concerns tax exemptions. The PCA is not subject to the same tax regime as private firms, as it is exempt from corporate income tax (though it transfers fees to the central government).36 Its annual budget has to be approved by the Cabinet, which conceivably could give rise to a conflict of interest in the determination of dividends.
58. The PCA’s business operations are considered to be financially sound and profitable. In economic terms, the PCA is a monopoly supplying a transportation service. It is facing competition, as the elasticity of demand for its service is affected by the cost of alternative routes. Its pricing policy (see Appendix) appears to be geared toward increasing profits, as evidenced by the marked rise in profits before dividend payments (see table). Its debt is presently very low. The PCA has an independent personnel policy, based on a merit system. It is financially autonomous and prepares an annual budget. Following cabinet approval (see above), the National Assembly must approve or reject its budget without modifications by a majority of votes.
59. The conduct of canal operations, PCA’s primary mission, is widely regarded as safe and efficient. Given the waterway’s pivotal role for global trade and shipping, ensuring safety and efficiency of transit, is PCA’s key responsibility. The PCA has developed a set of performance indicators to assess progress in these and other areas. Safety, as measured by the rate of accidents, has improved in recent years, to reach historical records.37 Transit efficiency has increased, with crossing time reduced to 26.7 hours in FY 2004 from about 33 hours in 1999. These improvements reflected ongoing substantial investment in maintenance and equipment (about US$180 million annually), the widening of the narrowest part of the waterway (completed in 2001), workforce training, and the adoption of modern management techniques.
60. Transparent procedures and reporting are indicative of good governance. The PCA is audited externally and publishes a comprehensive annual report. Its procurement system is transparent, with tenders online; names of successful bidders and those suspended or debarred from receiving contracts are available on the web as well.
D. Concluding Remarks
61. While the accounting treatment is an important issue, ensuring debt sustainability is paramount. Whether the PCA’s debt would be included in public or private debt, Panama needs to ensure that the returns on canal expansion allow servicing of PCA’s debt. This requires that the project be economically sound; that its implementation be well managed; and that PCA’s financial autonomy be maintained. The careful preparation of the canal’s master plan, the PCA’s record of efficient management, and the government’s commitment to the PCA’s autonomy seem to augur well in these respects.
62. The PCA’s indebtedness, even if sustainable, would increase Panama’s vulnerability. While the canal expansion may be greatly beneficial to Panama, it involves various types of financial and other risks, as would be true for any large investment project. The market would have to price these risks into the debt. Nevertheless, given the canal’s strategic importance for Panama’s economy and international trade, one cannot discard the possibility that, in a hypothetical worst-case scenario, an implicit government guarantee would be called. This possibility creates a source of potential vulnerability, independent of the public ownership of the canal.
63. The appropriate way to measure the impact of prospective PCA borrowing on public debt sustainability is an open issue, assuming an implicit guarantee. By established international standards, an explicit government guarantee to PCA’s debt would result in its inclusion in public debt statistics. Performing a debt sustainability exercise on government and government-guaranteed debt is useful. The likelihood that an implicit guarantee would be called depends in part on factors outside Panama’s control, such as a natural disaster or major bottlenecks in U.S. ports, which for some are difficult to predict and susceptible to change over time. An informed discussion of the appropriate weight to be attached to an implicit guarantee could only take place after the details of the prospective financing of the canal expansion would be known.
64. Achieving and maintaining fiscal discipline is often the appropriate response to increased vulnerability. Implementation of the authorities’ reform plans to achieve sound public finances would help guarantee that the PCA would not be pressured to engage into quasi-fiscal activities. Maintaining ongoing fiscal discipline would reduce the risk of a possible conflict of interest at the Cabinet level; and with healthy public finances, government support under a hypothetical worst-case scenario would be less susceptible to be destabilizing.
65. Measuring the fiscal deficit, both including the PCA and excluding it, would enhance fiscal transparency. The case for excluding the PCA from the measure of the fiscal deficit utilized for policy purposes would be strengthened if the canal expansion project could be financed without an explicit government guarantee. But even so it would be useful to publish both measures of the deficit, as well as other fiscal measures related to the public sector’s net worth, consistent with the GFS recommendation to present various fiscal concepts, geared toward different analytical purposes. The narrower measure would facilitate a monitoring of the implementation of the February 2005 fiscal reform. The broader measure would be relevant for national accounts compilation and statistical reporting of public sector accounts.
66. Fiscal discipline may be strengthened by excluding the PCA from a revised FRL. The canal expansion program is a well-defined project. After its scope and financing plan would be approved by referendum, it would be binding on future governments. In this context, excluding PCA’s operations from the FRL’s umbrella might give a clear signal that the central government’s efforts at observing statutory deficit and debt ceilings would not be allowed to interfere with the canal project’s implementation.
Key Financial Provisions of the Constitution and the Organic Law of the Panama Canal Authority (PCA)
| Legal provision | |||
|---|---|---|---|
| Provision | Constitution | Law 19/1997 | |
| Tax and regulatory exemptions | |||
| • | The PCA budget is not part of the government budget, and is not subject to the provisions of the budget law of the government. | Article 36 | |
| • | The PCA will pay the government fees to be charged on ships transiting through the canal (fee per ton). | Article 315 | Article 39 |
| • | The PCA will transfer annually to the central government the excess of income over operating costs, investment outlays, provisions for investment (left to PCA’s discretion) and depreciation, and other legal provisions. | Article 41 | |
| • | The PCA is exempt from taxes and duties, except contributions to social security and fees as defined in Article 39 of law 19/1997. | Article 310 | Article 43 |
| Other financial provisions | |||
| • | The use of PCA’s revenues or assets as a guarantee to government borrowing is prohibited. | Article 45 | |
| • | Canal tolls will be set to recover operating costs and investment needs. | Article 75 | |
| • | The PCA’s employment regime is based on employees’ performance, separate from the general labor code. | Article 316 | Article 81 |
| Corporate governance | |||
| • | The 11 members of the executive board will be appointed for nine years; 10 are appointed by the President (nine subject to parliamentary approval and one with the rank of minister), and one by the National Assembly. | Article 312 | Article 13 |
| • | The PCA is headed by a managing director and a deputy managing director, appointed for seven years. | ||
| • | A financial report will be issued annually. | Article 21 | |
| • | The PCA will be audited externally. | Article 40 | |
| Legal provision | |||
|---|---|---|---|
| Provision | Constitution | Law 19/1997 | |
| Tax and regulatory exemptions | |||
| • | The PCA budget is not part of the government budget, and is not subject to the provisions of the budget law of the government. | Article 36 | |
| • | The PCA will pay the government fees to be charged on ships transiting through the canal (fee per ton). | Article 315 | Article 39 |
| • | The PCA will transfer annually to the central government the excess of income over operating costs, investment outlays, provisions for investment (left to PCA’s discretion) and depreciation, and other legal provisions. | Article 41 | |
| • | The PCA is exempt from taxes and duties, except contributions to social security and fees as defined in Article 39 of law 19/1997. | Article 310 | Article 43 |
| Other financial provisions | |||
| • | The use of PCA’s revenues or assets as a guarantee to government borrowing is prohibited. | Article 45 | |
| • | Canal tolls will be set to recover operating costs and investment needs. | Article 75 | |
| • | The PCA’s employment regime is based on employees’ performance, separate from the general labor code. | Article 316 | Article 81 |
| Corporate governance | |||
| • | The 11 members of the executive board will be appointed for nine years; 10 are appointed by the President (nine subject to parliamentary approval and one with the rank of minister), and one by the National Assembly. | Article 312 | Article 13 |
| • | The PCA is headed by a managing director and a deputy managing director, appointed for seven years. | ||
| • | A financial report will be issued annually. | Article 21 | |
| • | The PCA will be audited externally. | Article 40 | |
Commercial Orientation of the Panama Canal Authority 1/
For a public enterprise to be considered commercially run, criteria 1–4 would have to be met, plus at least one of the criteria related to financial conditions and at least one related to the governance structure.
A new tolls pricing structure was approved in August 2002, and a two-phase toll increase was implemented, by an average of 8 percent in October 2002 and an additional 4.5 percent in July 2003. Operating results of the ACP during FY 2003 showed an increase in net income and profitability as a result of the toll and transit tonnage increase.
The employment regime is based on a merit system; the provisions of the Labor Code do not apply.
In addition to the listed criteria, the Canal Authority’s budget has to be submitted to Parliament, which must approve or reject it without modifications.
The Canal Authority is exempt from corporate income tax. However, it transfers tolls and fees to the government (1.1 percent of GDP in 2003), and distributes part of its net profit to the government as a dividend (0.8 percent of GDP in 2003).
Net profits as a percentage of net worth during fiscal year 2003 (ended September 30, 2003).
Liabilities in percent of total assets.
Debt comprises payables that do not bear interest.
The high profitability and low debt cannot be compared to industry-wide average in the country.
There are no minority shareholders.
| Status | Consistent With Criterion? | ||||
|---|---|---|---|---|---|
| Managerial Independence | |||||
| 1. | Pricing policy | ||||
| Prices reflect costs 2/ | yes | yes | |||
| Subsidized prices | no | yes | |||
| 2. | Employment policy | ||||
| Personnel policy independent of civil service rules 3/ | yes | yes | |||
| Civil servants in management positions | no | yes | |||
| Relations with Government 4/ | |||||
| 3. | Subsidies and loan guarantees | no | yes | ||
| 4. | Tax and regulatory exemptions 5/ | yes | no | ||
| Financial Conditions | |||||
| 5. | Profitability 6/ | 10.8 | yes 9/ | ||
| 6. | Creditworthiness | ||||
| Debt level 7/ | 6.3 | yes 9/ | |||
| Debt cost 8/ | 0 | yes 9/ | |||
| Governance Structure | |||||
| 7. | Stock listing | no | no | ||
| 8. | Outside audits and annual reports | yes | yes | ||
| 9. | Protects shareholders rights | … 10/ | no | ||
For a public enterprise to be considered commercially run, criteria 1–4 would have to be met, plus at least one of the criteria related to financial conditions and at least one related to the governance structure.
A new tolls pricing structure was approved in August 2002, and a two-phase toll increase was implemented, by an average of 8 percent in October 2002 and an additional 4.5 percent in July 2003. Operating results of the ACP during FY 2003 showed an increase in net income and profitability as a result of the toll and transit tonnage increase.
The employment regime is based on a merit system; the provisions of the Labor Code do not apply.
In addition to the listed criteria, the Canal Authority’s budget has to be submitted to Parliament, which must approve or reject it without modifications.
The Canal Authority is exempt from corporate income tax. However, it transfers tolls and fees to the government (1.1 percent of GDP in 2003), and distributes part of its net profit to the government as a dividend (0.8 percent of GDP in 2003).
Net profits as a percentage of net worth during fiscal year 2003 (ended September 30, 2003).
Liabilities in percent of total assets.
Debt comprises payables that do not bear interest.
The high profitability and low debt cannot be compared to industry-wide average in the country.
There are no minority shareholders.
| Status | Consistent With Criterion? | ||||
|---|---|---|---|---|---|
| Managerial Independence | |||||
| 1. | Pricing policy | ||||
| Prices reflect costs 2/ | yes | yes | |||
| Subsidized prices | no | yes | |||
| 2. | Employment policy | ||||
| Personnel policy independent of civil service rules 3/ | yes | yes | |||
| Civil servants in management positions | no | yes | |||
| Relations with Government 4/ | |||||
| 3. | Subsidies and loan guarantees | no | yes | ||
| 4. | Tax and regulatory exemptions 5/ | yes | no | ||
| Financial Conditions | |||||
| 5. | Profitability 6/ | 10.8 | yes 9/ | ||
| 6. | Creditworthiness | ||||
| Debt level 7/ | 6.3 | yes 9/ | |||
| Debt cost 8/ | 0 | yes 9/ | |||
| Governance Structure | |||||
| 7. | Stock listing | no | no | ||
| 8. | Outside audits and annual reports | yes | yes | ||
| 9. | Protects shareholders rights | … 10/ | no | ||
For a public enterprise to be considered commercially run, criteria 1–4 would have to be met, plus at least one of the criteria related to financial conditions and at least one related to the governance structure.
A new tolls pricing structure was approved in August 2002, and a two-phase toll increase was implemented, by an average of 8 percent in October 2002 and an additional 4.5 percent in July 2003. Operating results of the ACP during FY 2003 showed an increase in net income and profitability as a result of the toll and transit tonnage increase.
The employment regime is based on a merit system; the provisions of the Labor Code do not apply.
In addition to the listed criteria, the Canal Authority’s budget has to be submitted to Parliament, which must approve or reject it without modifications.
The Canal Authority is exempt from corporate income tax. However, it transfers tolls and fees to the government (1.1 percent of GDP in 2003), and distributes part of its net profit to the government as a dividend (0.8 percent of GDP in 2003).
Net profits as a percentage of net worth during fiscal year 2003 (ended September 30, 2003).
Liabilities in percent of total assets.
Debt comprises payables that do not bear interest.
The high profitability and low debt cannot be compared to industry-wide average in the country.
There are no minority shareholders.
APPENDIX: The Panama Canal: Main Features and Prospects
Highlights of the Panama Canal
67. Hailed as an engineering and human achievement, the Panama Canal has been a major artery of international trade since its opening in 1914. It is estimated that about 5 percent of world trade transits through the canal. Petroleum products, grains, and containerized cargo represent more than half of the total transit tonnage, with the latter cargo the fastest growing segment. The main shipping route through the waterway connects the east coast of the Unites States with Asia. This route accounts for more than 40 percent of the transit cargo and is expanding rapidly.
68. The canal operates essentially as its designers envisioned a century ago. About 50 miles long, the canal has three sets of locks that elevate ships to a large central artificial lake fed by a river and then lower them to sea level. The waterway is dependent on a regular flow of fresh water, thus on the maintenance of the ecological health of its basin, but throughout its history even extreme droughts have not markedly reduced transit capacity. Transit currently takes on average 8 to 10 hours (about 23 to 27 hours in total, including the approach and queuing).
69. Ownership of the Canal Zone and management of the waterway were transferred from the United States in a process that culminated in December 1999. Following a 1977 treaty (known as the “Torrijos-Carter Treaty”) providing for the gradual transfer of the Canal Zone to Panama during the following two decades, between 1979 and 1999 the canal was operated with growing participation of Panamanians in its administration. The land and facilities of the zone, renamed the “reverted areas,” were gradually handed over to Panama during the 1990s. An autonomous government entity, the Panama Canal Authority (PCA), was established by the Constitution to manage the waterway, and organized by law 19 of June 1997 (Ley Organica de la Autoridad del Canal de Panama). On December 31, 1999, the PCA assumed full responsibility for the administration and operations of the canal.
70. The canal is a natural resource that plays a key role in the development of Panama’s service-based economy. The value-added produced directly by the canal is significant.38 In addition, the large traffic passing through the waterway (about 14,000 ships annually) has created opportunities in ship handling and maritime insurance and financing. Port activity has been stimulated by the economic activity in the Colon Free Zone and the canal traffic. Two large port complexes, which are specialized in containerized cargo transshipment, have been expanding recently on land in the “reverted areas” at both entrances to the canal.39 Reflecting these and other projects, including a new railway transoceanic connection, the transportation sector accounted for about 17 percent of GDP in 2003.
71. Canal tolls were restructured and toll rates were raised in 2002–03 without noticeable impact on the number of transits. A reform of the canal tolls structure was approved in August 2002, which replaced the uniform toll structure in force since the start of the canal operations, with differentiated rates according to tonnage.40 Toll rates were increased in two stages, by 8 percent in October 2002 and an additional 4.5 percent in July 2003.41 Moreover, fees for ancillary services (such as the use of locomotives and tug boats) were raised. Spurred in part by the recovery in the world economy, the transit of large vessels increased in 2003, and income and operating results of the PCA rose as a result of the toll and transit tonnage increase. Further transit growth led to a 10 percent increase in tonnage during 2004.
The Challenge Ahead
72. Traffic growth and trends in the shipping industry pose a challenge to future operations. Owing to continuous modernization and improvements,42 the canal has been able to accommodate recent traffic growth satisfactorily. However, it is gradually getting closer to maximum capacity, which may be reached within the next several years unless major investment is carried out.43 Moreover, with the trend toward building larger cargo ships, the proportion of “Post-Panamax” vessels in the world shipping fleet is projected to increase substantially in the next decade, which may divert traffic to other shipping routes.44
73. The PCA is finalizing a long-term master plan for canal modernization. The plan aims at meeting future transit demand, allowing the largest cargo ships (up to 160 feet wide) to use the canal, while enhancing water conservation. Numerous studies were commissioned, including industry studies; environmental, financial, and economic impact assessments; and engineering feasibility studies. Options for modernizing the waterway would include increasing the capacity of ports; and building an additional set of locks. Execution is projected to take 10 to 15 years, at an estimated cost of possibly 30 to 35 percent of GDP.
74. The master plan would be submitted to a national referendum. The master plan is projected to be submitted to the PCA’s board in the first half of 2005. Following its approval, it would be sent to the cabinet and in the final stage to the National Assembly. The National Assembly would then call a referendum on the canal expansion plan, possibly in late 2005. The population would be asked to accept or reject the plan. Opinion polls conducted in early 2005 indicated a high rate of approval.
75. Increases in toll fees in 2005–07 would contribute to financing expansion plans. A new toll pricing structure applicable to container ships was approved in February 2005 after consultations with users. The PC/UMS-based toll will be replaced by a unit fee per container above deck and raised in three stages, to reach US$54 by January 1, 2007, from the equivalent of US$31 at end-2004. The toll reform will be effective May 1, 2005 and lead to a toll increase on container traffic, by 35 percent in May 2005, and an additional 17 percent and 10 percent in January 2006 and January 2007, respectively.
Prepared by Eric Verreydt.
Article 309 of Panama’s Constitution and Article 3 of PCA’s Organic Law state that the canal belongs to the Panamanian nation, and prohibit the sale, mortgaging, or any transaction that would reduce sovereignty over the canal.
The PCA’s surplus created an inconsistency between the deficit and the gross debt targets. See Chapter II.
See Public Information Notice 04/45 for a summary of the views of the Executive Board, at an informal seminar on April 2, 2004, based on the reports “Public Investment and Fiscal Policy” and “Public-Private Partnerships.”
The ratio of dividends to pre-tax income (47 percent on average; see table) was above the corporate income tax rate (30 percent).
There were 10 accidents out of 14,035 transits in FY 2004 (ending September 30, 2004), the lowest rate in the canal’s history.
4.9 percent of GDP in 2003, composed to a large extent of wages paid to about 9,000 permanent workers (about 5 percent of employment in the public sector), and profits.
In addition to the waterway, facilities in the reverted areas included former military bases, two airports, schools, hospitals, residential areas, industrial areas, storage facilities, and recreational facilities.
Tonnage as defined under the Panama Canal Universal Measurement System (PC/UMS), equivalent to 100 cubic feet of capacity. The rate is lower for an empty ship, however.
According to the PCA’s estimates, the cost of transiting through the canal amounts to about 10 percent of the total shipping cost of users.
Widening of the narrowest part of the canal (the “Gaillard Cut”), deepening of parts of the navigational channel to increase water resources, more powerful tugboats and towing locomotives, locks machinery, traffic control system, traffic maximization techniques.
In 2004, the canal handled on average about 38 to 40 ships daily. According to the PCA, this was about 90 percent of the waterway’s maximum daily capacity under optimal circumstances and assuming the completion of ongoing investment projects.
Ships built with the maximum allowable width to pass through the current locks of the canal (106 feet wide) are referred to as “Panamax,” and vessels too wide to pass are “Post-Panamax.” There were about 5,300 transits of Panamax vessels in FY 2004 (38 percent of the total).