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Cablegate: Status of Former Usg Properties in the Panama

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PANAMA 000632

SIPDIS


SENSITIVE


E.O. 12958: N/A
TAGS: ECON EINV PGOV PM ECONOMIC AFFAIRS
SUBJECT: STATUS OF FORMER USG PROPERTIES IN THE PANAMA
CANAL ZONE--A MIXED RECORD OF SUCCESS


SENSITIVE BUT UNCLASSIFIED, PLEASE PROTECT ACCORDINGLY


1. (SBU) Summary: Panama,s Interoceanic Region Authority
(ARI) is responsible for converting former USG property in
the Panama Canal area to private and commercial use. It has
had a number of significant successes, and current and future
investment in these "reverted" areas could total $2.5
billion. Even so, ARI is plagued by slow bureaucracy,
accusations of corruption, and ham-handedness in planning,
which have caused numerous investor disputes and complaints,
while significant portions of the lands remain undeveloped.
Despite its problems, ARI has certainly had a positive effect
on Panama,s economy, but much remains to be done in the
remaining two years of its mandate. End Summmary.


--------------------------------------------- -----------
A Huge Development Goal: Former USG Facilities and Lands
--------------------------------------------- -----------


2. (SBU) Charged with marketing former U.S. military bases
in the former Canal Zone that reverted to the GoP under the
terms of the 1977 Carter-Torrijos treaty and negotiating
deals to convert them to productive civilian use, ARI manages
59,300 hectares of land (1 hectare equals 2.47 acres). Some
46,000ha are zoned and set aside for environmental protection
and forestry projects. Of the remaining 13,300ha, 4,500ha
are in housing developments and 8,800ha are commercially
developable. ARI also controls 13,573 former USG structures,
including 8,584 houses and 1082 commercially developable
buildings, plus 3,907 "other" units such as storage tanks.
There has been no clear methodology to calculate the total
value of the structures, and overestimation of their
functional value and investor interest led some experts to
conclude in 1999 that the reverted areas' buildings were
worth an improbable $30 billion, though now the GoP uses a
more modest $5 billion figure, not accounting for
depreciation.


--------------------------------------------- ------------
ARI Has Made Significant Advances Converting the Property
--------------------------------------------- ------------


3. (SBU) As of May 2003, private enterprise has invested or
signed contracts to invest approximately $1.5 billion in the
reverted areas, with a projected additional $1 billion more
through 2006. The maritime industry leads the pack with $771
million in current investment, followed by infrastructure
projects at $164 million and tourism at $130 million.
Businesses in the reverted areas employ 52,000 workers--a
three-fold increase since the USG relinquished control of the
Canal, according to ARI. In the maritime sector
particularly, the new investment has had a significant
impact. Container ports such as Manzaniilo International
Terminal (MIT- owned by Stevedoring Services of America) and
Evergreen on the Atlantic side, and Panama Ports on the
Pacific have all averaged more than $200 million in
investment with plans for more. Whereas in 1994 ports in
Panama moved 400,000 containers, capacity in 2003 was 2.8
million, and capacity may reach 4 million containers by 2006.
Investment in cruise ship ports on the Atlantic and Pacific
entrances totals $100 million. In the 2002-2003 season, a
total of 145 cruise ships made port calls with 160,000
passengers visiting Panama.


4. (SBU) The City of Knowledge, based at the former Ft.
Clayton, is a business and technology incubator. Currently
some 40 companies focused on research, telecommunications,
software development have set up shop there. In addition,
Canada,s McGill University grad school labs, UNICEF and UNDP
regional headquarters, and the Smithsonian Tropical Research
Institute have offices there. Companies on-site receive
sizeable tax breaks, duty free import of goods, and exemption
from income tax.


5. (SBU) Fort Amador at the Pacific entrance of the Canal is
ARI's most visible and clearly successful project. It has
seen $140 million in investment so far, and the useable
terrain is 90% occupied. In addition to the cruise ship
port, the development includes four hotels, two marinas,
multiple restaurants and shops plus a biodiversity museum
partnered with the Smithsonian. A convention center that
anchors the development was the site of the Miss Universe
pageant this past May. But success doesn,t stop there- the
former Albrook air base is now Panama City's domestic airport
as well as the home to a multi-million dollar international
bus terminal. A new $100 million shopping mall is about to
open as well. Other facilities throughout the reverted areas
include the ecotourism-based Gamboa Rainforest Resort, and
the five-star Melia Panama Canal Hotel on the site of the
former School of the Americas.


--------------------------------------------- ---------------
Unfortunately the Success Belies Serious Investment Problems
--------------------------------------------- ---------------


6. (SBU) Numbers work both ways, however. Almost all of
ARI,s success stories date from before the formal turnover
in 1999 or immediately after. A key indicator of ARI,s
slowing success is its net revenue contribution to the GoP--
income from concession fees and property sales minus
operating costs and investments--which has totaled a paltry
$100 million from July 2000 to July 2003. Further, there
were 323 property transfers for a total of $40 million in
2000, but in the period January-July 2003, ARI approved only
48 property transfers worth a total of $3 million--a mere
fraction of the 2000 figure. By one estimate, 70% of the
former USG housing lies vacant in a country where 41% of the
population lives in poverty and in substandard housing
conditions.


7. (SBU) Investors are generally critical of ARI,s
performance, complaining of bureaucratic delays and failure
to follow through on investor interest. And though no
smoking gun has ever been discovered, there are persistent
charges that ARI officials are corrupt, requiring kickback
"fees" on concessions that are approved. Symbolic of these
difficulties, the Embassy currently monitors six separate
U.S. investor disputes that involve ARI. For example,
MIT--touted by ARI as a major success--has been trying to
expand its operations by purchasing land adjacent to its
current concession, but ARI has consistently overpriced the
value of the property than its commercial value and has
forced MIT to shelve the project. Florida State University,
resident in Panama for over 40 years, has unsuccessfully
sought to purchase its leased property from ARI. Again,
reneging on a previous agreement with FSU, ARI revalued and
overpriced the concession. As a result, FSU is seriously
considering leaving Panama.


8. (SBU) In another project called the Bridge of the
Americas Cultural Center, ARI delayed granting the concession
to a U.S. investor for over two years, and even then in a
much-reduced form, while prime areas of the original project
were awarded to a relative of the current Colon Free Zone
manager. ARI officials granted a marina concession at Ft.
Amador that trespasses on a Ministry of Economy and Finance
license that could potentially cause serious damage to Global
Crossing,s intercontinental fiber-optic cable and hinder
telephone and internet connection between North and South
America. Anecdotally, Econoffs have heard of individual
homebuyers who have paid over half the value of the house
they purchased and after several years of delays still do not
have a title. The concerns are not isolated to foreign
investors--ARI has asked the GoP,s National Maritime Service
(SMN) to move from its current site at the former
Caribbean-side Ft. Sherman which ARI controls and views as a
potentially lucrative tourism development. While
negotiations are ongoing and the future SMN base will most
likely be of similar size and utility, initially many worried
that ARI was foregoing the importance of Canal security for
economic expediency.


--------------------------------------------- -------------
Expectations/Pressures Result in "Grand Scheme" Thinking
--------------------------------------------- -------------


9. (SBU) Early successes have unfortunately led to
unrealistic expectations about what ARI can accomplish and
exacerbated pressure on ARI to produce visible results
leading up to the 2004 Presidential elections. As a result,
ARI has made a number of inconsistent decisions and resource
allocations that appear more questionable than those made a
few years ago. Indeed, ARI appears to favor a series of
"grand scheme" projects, while small projects are being
rebuffed and hence no investment momentum is being created.
As an example, ARI has taken an "all or nothing" approach to
develop the former Howard Air Base for $400 million.


10. (SBU) Tenders for Howard as one giant development have
closed without bidders, and several other concepts for use
have been stillborn. Only in March of this year did ARI
succeed in attracting a Dell Computer Call Center to Howard
as the anchor of a proposed multimodal-shipping hub. A GoP
proposal on September 5 to the Legislative Assembly to turn
to turn Howard into an Economic Development Zone has
generated howls of protest from the Colon Free Zone about an
unbalanced legal framework. Worsening the situation, ARI has
approved construction of several high-rise buildings near
Howard that could obstruct the landing approach to the
airstrip on the former base, which could inhibit that aspect
of development altogether.


--------------------------------------------- ----------
COMMENT: Troubled victories, confused priorities, unclear
future
--------------------------------------------- ----------
11. (SBU) Clearly, the reverted areas have been an economic
boon to Panama, and there is significant potential to develop
the remaining areas that haven,t been auctioned. In ARI,s
defense, no government agency could have been completely
prepared for the massive tidal wave of property and
infrastructure transferred just before the December 1999
handover. Further, some projects are very tough to
adjudicate quickly, often needing to pass muster by multiple
GoP agencies--valuations approved by the Comptroller,
environmental impact statements by the Environmental
Authority, port improvements by the Maritime Authority, etc.
Even so, investor disgruntlement and accusations of
corruption are tough to ignore. Current investors complain
of serious problems and potential investors find their ideas
ignored while ARI pursues grandiose development plans. It is
important to remember that the revertes areas include
significant capital investments by the USG--investments that
were handed to the GoP for free, and that any conversion to
private hands is pure profit for ARI.


12. (SBU) Perhaps most importantly, ARI,s mandate ends on
December 31, 2005. With substantial land and infrastructure
yet to be transferred to private hands, ARI would have much
to accomplish in such a short period of time--a goal that it
is unlikely to achieve. However, Panama,s Legislative
Assembly has made no move to extend the mandate, and ARI,s
future is unclear.
WATT

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