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Securing Panama's Canal: The Controversial Rio Indio Dam and Its Potential Consequences

Maggie Johnson

By Maggie Johnson

December 4, 2024


The Rio Indio dam project, first proposed two decades ago, has gained new urgency in light of increasingly frequent extreme weather events, including a severe drought last year that disrupted vessel traffic along Panama's iconic canal. As climate change accelerates, the project is seen as a critical solution to secure the canal’s water supply and maintain its crucial role in global trade.

The Panama Canal, which accounts for 3.1% of the country’s GDP, sees up to 14,000 ships pass through annually, handling 2.5% of global seaborne trade. Its importance to U.S. imports, including automobiles and containerized goods from Asia, and exports such as liquefied natural gas (LNG), makes its operation essential to the global economy.

According to Ilya Espino de Marotta, deputy administrator of the Panama Canal, the Rio Indio reservoir could be a comprehensive solution to the rising frequency of droughts over the next 50 years, ensuring the canal’s water supply for decades to come.

The proposal's journey to approval involves a thorough and extensive process, including public consultations, cabinet discussions, and final approval from the National Assembly. Panama’s President, Jose Mulino, has announced that the project will be under discussion through next year. However, the shipping industry is watching with some anxiety, given the delays and suspensions of major projects in recent years, such as the controversial mining contract with Canada’s First Quantum Minerals. Following widespread opposition, the Supreme Court declared the mining contract unconstitutional last year, leading to the closure of the mine.

The number of people affected by the dam project is relatively small, but a vocal activist group called the Countrymen Coordinator for Life, which played a role in blocking the mining contract, is opposing the relocation plans.

Cesar Petit, senior economist at BancTrust & Co., an investment bank specializing in emerging markets, highlighted the political consensus behind the project. However, he cautioned that the government must establish a credible plan to compensate those displaced or affected by the reservoir. Petit warned that the project could face delays or suspension without a clear communication strategy and adequate incentives for those impacted.

Jose Icaza, Panama’s minister for Canal Affairs, reassured the public, acknowledging concerns and emphasizing the government’s commitment to minimizing the project’s impact on residents. “Our priority is not to disrupt the living conditions or peace of the basin's residents,” he stated. “We will continue to work directly with them to meet their needs as we move forward.”

The Panama Canal Authority envisions building a massive dam, 840 meters long and 80.5 meters high, to secure freshwater for the canal's locks. With a proposed reservoir holding 1.25 billion cubic meters of water, it could enable up to 15 additional vessel transits per day during the dry season and provide drinking water to Panama’s growing population of 4.5 million. The expansion of capacity could boost the canal’s revenue and spur economic growth in Panama.

Unlike the Suez Canal, which does not rely on locks, the Panama Canal needs fresh water to operate three sets of locks that connect the Pacific and Atlantic Oceans.

If approved, the dam could be completed by 2030 or 2031. However, time is of the essence: Last year was the third driest year in the canal’s 110-year history, with meteorologists predicting that Panama will experience more severe droughts due to rising temperatures in the future.

In July, the Supreme Court ruled in favor of the Panama Canal Authority, granting it a geographic area nearly double its size, potentially allowing for further expansion and securing water sources for the dam project.

An initial survey indicated that about 2,260 people would be relocated, with an additional 2,000 people potentially impacted by the reservoir. A census to more accurately determine the number of affected individuals is expected to be completed in January.

Infrastructure work in the Tres Hermanas area, including a new bridge to accommodate heavy equipment, has already begun. However, the most challenging aspect of the project remains the resettlement of affected families, which requires sensitive and personalized conversations with each household.

Environmentalists, however, have raised concerns about the dam’s potential environmental impact, particularly in terms of deforestation and biodiversity loss in areas such as Capira, located west of Panama City. Critics argue that the destruction of natural habitats could have significant ecological consequences.

The Rio Indio project includes a $400 million budget for its social component, focusing primarily on relocations. While some residents are willing to sell their land and move, others are resisting the project. “No farmer wants to live in a slum,” said Dilubino Agraje, representing the Rio Indio communities through the Countrymen Coordinator for Life. The group is seeking more details on the relocation plans, including compensation and the proposed new living conditions.

“We were born and raised here,” said Paulino Alabarca, a 60-year-old rice farmer from Tres Hermanas. “If we leave, it’s not because we want to, but because we’ll have to.”

An alternative plan involving the transfer of water from the Bayano River reservoir was considered years ago but discarded due to its higher costs and the less favorable location. Espino noted that the Bayano project was not strategically beneficial for the canal.

Environmental concerns regarding the Rio Indio dam project were echoed by Professor LeRoy Poff, an aquatic ecology expert from Colorado State University. He warned that the dam could cause significant damage to aquatic ecosystems, downstream fish populations, and forests. “Maintaining healthy rivers is crucial in the face of climate change, as they have the greatest potential to adapt to changing environments,” he stated.

The Bayano alternative has gained support among many residents of Tres Hermanas, who argue that it could mitigate the disruption caused by the Rio Indio dam. However, the Bayano project also involves challenges related to negotiations with AES Panama, the company that owns the hydroelectric infrastructure.

In a statement, AES Panama indicated that while it is not currently involved in the sale of its stakes, it remains open to discussions with the state to explore potential solutions.

Despite opposition and challenges, Canal Minister Icaza emphasized the importance of the Rio Indio dam for the canal’s survival. “It is the most viable option for ensuring the canal’s continued operation,” he said.

Espino, for her part, believes that both projects may be necessary in the long run. “Climate change has altered the natural navigation channels,” she explained.

The recurrence of the El Niño weather phenomenon has accelerated, further exacerbating Panama’s water scarcity. The canal is already preparing for the next drought by adjusting its reservation model, calling on shippers to consolidate cargoes, and implementing water recycling measures.

Environmentalists, however, warn that the canal’s increasing demand for freshwater, compounded by expanding housing near the waterway, may intensify competition with surrounding communities. “The canal must operate as efficiently as possible,” said Raisa Banfield, an environmentalist in Panama City. “But the question is… How much will we sacrifice to continue passing more ships, bigger ships?”

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