PANAMA (Economist) October 23, 2006 — Voters in Panama have decided, by a margin of four-to-one, to go ahead with a proposal to expand their famous canal. Although relatively few turned out for the referendum on Sunday October 22nd, the result was decisive, with some 78% in favor of the plan to open the route to more and bigger ships.

Almost half of the vessels that pass through the Panama Canal fit its locks perfectly. And yet, with a scant half meter on either side, and not much more space fore and aft, the perfect fit serves only to make these “Panamax” ships look out of place. They are penned in: lifted and lowered by enormous surges of water in and out of the locks, while tied to locomotives to prevent them touching the sides. They seem far too big to be surrounded by land.

That so many of the ships that transit the canal have been specifically designed to make the most of it is testimony to its importance to world trade. Some 5% of the world's seagoing traffic passed through it in 2005, including over a third (by weight) of cargo going from north-east Asia to the United States' east coast.

Rapid growth in world trade means that the canal is suffering congestion. A modernization program costing $500m is under way, involving new locomotives, lights and safety systems. But the Panama Canal Authority, a semi-autonomous government agency which has run the canal since the United States handed it over to Panama in 2000, says that the waterway will be running at its full capacity by 2009.

The authority has drawn up an ambitious plan to double capacity and to accommodate “post-Panamax” ships, which are increasingly common. It says the expansion will cost $5.2 billion. The plan includes building a third pair of locks—one at each end of the canal—to take ships that are more than twice as big. In addition, the navigational channel would be deepened and widened. The authority hopes to finance the plan by raising its tolls.

Panama's president, Martín Torrijos, whose father negotiated the handover of the canal to Panama, campaigned hard and successfully for the plan. The referendum was in part a vote of confidence in Mr. Torrijos's government, admits Samuel Lewis Navarro, the foreign minister. The vote had been repeatedly delayed, one reason being that the government was unpopular after it pushed through a much-needed pension reform.

Opponents of the plan, who are less well-funded than its supporters, make three points. They say it is unnecessary, that it will cost more than $5.2 billion and that it might have a negative impact on the environment. Mr. Lewis dismisses all three points. He says that the budget for the expansion includes a 30% allowance for unforeseen cost overruns, and that the plan has been well-studied, both to ensure that sufficient demand exists and to minimize the environmental impact.

Francisco Míguez, an engineer who is coordinating the expansion plan for the authority, stresses that it is not a “greenfield” project. The geology is well-understood, and some of the excavation for the new locks was done in an aborted American effort in the 1940s. Because the new locks will have recycling chambers, they will use 7% less water than the existing locks, despite their larger size. Although some environmentalists say the proposed expansion might cause salt levels to rise in Lake Gatun, through which the canal passes, mainstream environmental groups have all endorsed the proposal.

It seems clear that trade will increase on the routes the canal serves. But as ever, there are plenty of blueprints for rival crossings of the Central American isthmus whose promoters would have loved to see Panamanians reject expansion. A hoary plan to build a canal in Nicaragua was dusted off last month, surely not by coincidence. Enrique Bolaños, Nicaragua's president, who backs the scheme, says it would cost $18 billion and take 12 years to build.

“If we have the capacity, they have no chance,” says Mr. Míguez of the Nicaraguan scheme. He adds that plans for transisthmian railways in Mexico and Central America are not real competitors because moving a container from the Pacific to the Caribbean would cost ten times more than through the expanded canal.

But for Panama much is riding on whether the authority has got its sums right. If demand rises as forecast, the expansion can be delivered to budget, and if shippers do not balk at higher tolls, the canal will be even better business for the government. Payments from the canal currently account for 17% of government revenues, according to Guillermo Chapman, an economist in Panama City.

Large infrastructure projects almost invariably go over budget. The attempt to build a canal in Panama bankrupted Ferdinand de Lesseps and many French investors, as well as costing the lives of thousands of construction workers. But once Theodore Roosevelt had “won the isthmus” by creating Panama as an American neo-colony, the final construction of the canal cost less than budgeted, as Mr. Míguez likes to point out.