Foreign Relations of the United States, 1977–1980, Volume XXIX, Panama

69. Memorandum From Secretary of State Vance to President Carter¹

Washington, July 28, 1977

SUBJECT

• Panama Canal Treaty Negotiations

ISSUE

This memoradum sets forth the PRC conclusions regarding economic arrangements that might be offered to Panama in the context of the treaty negotiations.

PRC RECOMMENDATIONS

1. A treaty provision for a variable annuity payment of 30 cents per Panama Canal ton transiting the Canal.² This annuity payment would be expected to yield Panama an average income of about $45–50 million per year. This offer anticipates an initial toll increase of 30 to 35 percent over existing levels. (There is uncertainty regarding future cost and revenue projections.)

2. A best-effort commitment to a $295 million economic cooperation program which would be implemented by separate economic arrangements including:

a. An Eximbank pre-commitment of up to $200 million for a five-year period.³ This arrangement would be attractive to Panama because of its plans for large projects that will require sizeable imports which would come from the United States. Eximbank appears to favor increasing its “exposure” in Panama once the treaty issues is settled.

b. AID housing investment guarantees totaling $75 million over a five-year period. This instrument would require Congressional consultation (for example, Congressman Fascell of Florida, a treaty supporter, opposes the use of housing guarantees for resource transfer purposes).

c. An OPIC guarantee of $20 million for borrowing in United States capital markets by Panama’s public development bank. Although there is no precedent for a foreign entity guarantee, OPIC has such authority if it wishes to exercise it. We would anticipate a guarantee of approximately $20 million for a loan meeting OPIC’s normal requirements. The program would be well received by Panama because it would quintuple the development bank’s lending capacity.

3. A supplement to either the annuity payment or the economic cooperation program by use of money now received as interest on U.S. net direct investment in the Canal. These payments are expected to amount to about $20 million a year (legislation establishing the new Panama Canal Administration could be designed to provide for these payments to be continued during the treaty period) and could, if you approve, be used in either of the following ways:

a. The U.S. and Panama could engage in co-financing of revenue-producing capital development projects in the Canal area. Projects would be selected and developed by a U.S.-Panamanian government commission. The U.S. share of co-financing (which would not exceed 50 percent of any single project) would be lent by the Panama Canal Administration (PCA), which would borrow as needed up to $200 million from the Federal Financing Bank (FFB). (Congressional authority would be required for this.) The $200 million borrowing would be secured by the $20 million annual payment from Canal Administration revenues which would be held in a special account at the Treasury. Loan repayment schedules would provide for project and FFB loans to be repaid before the end of the treaty period. A variation on this arrangement would allow the FFB to re-lend to the PCA during the treaty period as loans are repaid, as long as no more than $200 million in loans from the FFB were outstanding at one time. This variation would increase the total amount of finance available, but would require that another U.S. agency guarantee repayment of amounts falling due beyond the treaty period.

b. Alternatively, the U.S. could offer Panama an additional fixed annual payment. The money for this payment would come from the amount received annually by the U.S. from the Canal Administration. Panama might attribute part of this payment as military base “rental”.

We recommend that this payment be either (according to the judgment of the U.S. Negotiators):

(i) $10 million per year ($220 million over the lifetime of the treaty), or

(ii) $20 million per year, payable only if Canal revenues permit (up to $440 million over the lifetime of the treaty.)

These two arrangements, 3a and 3b, share a common difficulty. The only complete projections we have of Canal Administration revenues and expenses show moderate losses during the early treaty years, and these projections are not presently reliable with regard to revenues and expenses over a greater number of years. Yet since 3a and 3b depend on Canal revenues, their success could be threatened by the possibility of losses.

We would therefore take the following cautionary measures:

With regard to the Federal Financing Bank co-financing proposal: Should it not be possible to meet shortfalls by such means as raising tolls, cutting operating costs, or borrowing, the $20 million U.S. interest payment should have at least an equal claim as Panama’s annuity payments on the Canal Administration revenues. Thus, if the Canal Administration, in an in extremis situation, were forced to reduce U.S. interest payments that year, Panama’s annuity payments should be reduced pari passu.

With regard to the fixed payment alternative, we would offer Panama only half the U.S. interest payment—$10 million annually on a firm basis, or the full $20 million annually only if Canal Administration revenues permit. Treasury opposes the former because it believes that if substantial deficits occur and if costs cannot be cut or tolls raised further, the only way to meet a fixed payment to Panama would then be borrowing from the Treasury—which would mean that the payment would be financed from U.S. rather than Canal revenues. Ambassadors Bunker and Linowitz favor the former because of their view that a pledge of funds on an “if available” basis will be unacceptable to the Panamanians so long as the U.S. maintains control of management of the Canal. Furthermore, we believe that the remaining $10 million in interest payments to the Treasury, combined with possibilities for cost-cutting from current projections of Canal expenses or toll increases provide ample assurance against the need to borrow to cover the $10 million payment to Panama.

In either case, payments not received by Panama could be made up when Canal Aministration surpluses are sufficient to cover them.

DISCUSSION

The package proposed by the PRC is realistic in light of our constraints. It is also flexible in that it can be tailored to Panama’s needs and aspirations, as well as its capacity to absorb developmental assistance.

We have not, however, consulted Congress on the details of a financial package, and would emphasize that consultation would be desirable before the package is put to the Panamanians. Congress clearly does not relish the idea of paying anything to give up the Canal, but this package, consisting of loans and guarantees rather than grants, can probably be sold on the Hill. Each element of the package expands the number of committee jurisdictions affected, and therefore increases the opportunities for hostile Members to attack the package. Fortunately, however, treaty supporters will play major roles in the oversight committees with jurisdiction over the package. For example, Chairmen of the key subcommittees on Eximbank matters—Congressman Neal and Senator Stevenson—are basically favorable to the treaty. And, as has been mentioned, Congressman Fascell, who generally objects to the use of housing guarantees for resource transfer purposes, is favorable to the treaty, and could well drop his opposition in this case in deference to the treaty.

Panama has asked for a $460 million lump-sum payment at the treaty’s start and annual payments of $150 million. In contrast, the suggested U.S. position would provide Panama no grants, but $300 million in loans and guarantees and annual annuity payments of $45–50 million per year. This could be supplemented by either $200 million of additional loan commitments or $220–440 million in added annuity payments over the life of the treaty. While the package is consistent with our objective of not paying Panama excessively (and paying them only from Canal revenues), it is possible that Panama will reject it.

In developing the recommended package, several additional elements (AID-supporting assistance, Panamanian taxation of U.S. citizen employees, and a larger annuity) were considered in order to make the package more appealing to Panama. They were rejected, however, as too politically sensitive or, in the case of a larger annuity, possibly not supportable by Canal revenues.

Existing AID program levels will continue to be recommended to the Congress. Increases of $5–10 million in this program are possible, but have not been included because Panama already has a high level of assistance relative to its size and per capita income.

We believe that Panama’s current position is not its “bottom line.” Whatever the case, ours is a reasonable offer. While Panama might not accept that offer, we should make it to demonstrate our good faith and reasonableness.

ACTION REQUESTED:

That you indicate your preference for the following elements of the economic arrangements proposal, bearing in mind that our presentation to the Panamanians will be contingent on successful Congressional consultations.⁴

	Approve	Disapprove
A. Variable annuity of 30 cents/ton ($45–50 million/year)	______	______
B. Eximbank pre-commitment of $200 million	______	______
C. AID housing investment guarantees of $75 million	______	______
D. OPIC guarantee of $20 million	______	______
E. Military assistance of $50 million	______	______
F. Use of U.S. interest payment: Either 1. To secure FFB lending ($200 million) Or 2. To make fixed annuity payments of up to $20 million per year if Canal revenues permit (up to $440 million) Or 3. To make fixed annuity payments without condition of $10 million per year ($220 million)

For use at the discretion of the Negotiators:

Approve all	______
Approve 1 and 2 only	______
Approve 1 and 3 only	______
Approve 2 and 3 only	______
Disapprove all	______

1. Source: Carter Library, National Security Council Institutional Files, Box 63, PRC 027 Panama 7/22/77. Secret. Carter initialed the memorandum.
2. Carter placed a checkmark in the right margin next to this sentence.
3. Carter placed a checkmark in the right margin next to this sentence.
4. There is no indication of approval or disapproval of the recommendations, but in an August 3 memorandum to Vance, Brzezinski wrote: “Pursuant to the President’s discussions with Ambassadors Bunker and Linowitz on Friday, July 29, the President approved in general the approach outlined in your memorandum of July 28, 1977, subject to further reports.” (National Archives, RG 59, Official and Personal Files of Ambassador at Large Ellsworth Bunker, Lot 78D300, Box 4, Panama Key Documents, 1977)