Panama Set to Plunge Into Big Public-Private Project

Panama’s laws are drafted, modified and, finally, recorded in a building with the ambience of a storage depot.

Clerks at the Legislative Assembly navigate past overstuffed shelves, file cabinets and boxes of papers with the agility of dancers. “You have to be thin to work here,” joked one secretary.

Thin and sure of your luck. Black electrical tape Xs mark shorted-out light switches and electricity outlets. Air conditioners hang precariously from windows, buzzing and clanking ominously.

Legislators say this decrepit structure cannot shelter and nurture the dreams of democracy spawned by the U.S. invasion that overthrew military dictator Manuel A. Noriega in 1989. But impoverished Panama cannot afford new legislative quarters.

In order to get a building worthy of their aspirations, lawmakers have approved an alliance with Southern California developers that opponents warn is risky and could land Panamanian taxpayers a white elephant--and paying the $30.4-million price tag. Further, like most government projects here, this one has sparked speculation that some legislators are dreaming not of democracy but of personal enrichment or returning political favors.

The uproar over the new building--whose design is scheduled to be presented to the Assembly this autumn--exemplifies the difficult choices that tiny Central American countries face as they struggle to make ends meet in an era of smaller government and free-market economics.

Since the Latin American debt crisis of the 1980s, creditors have been reluctant to lend to developing nations. The money the countries can borrow is usually conditioned on balancing national budgets and generally maintaining a no-frills government.

Not unlike city governments and school districts in the United States, these small countries are trying to apply the latest economic buzzwords and “leverage their assets” to “do more with less.”

Developers who pioneered joint public- and private-sector projects in California are eager to export their expertise to an international market. The result can be audacious plans that promise ingenious solutions but threaten disaster.

The problem with exporting this type of expertise, observers warn, is that the results are still unproven. “We don’t know how this is going to come out,” said Assemblyman Scott Wildman (D-Los Angeles), who, as chairman of the joint Legislative Audit Committee, is investigating such public-private projects.

The investigation has found that in California, the projects have suffered from huge cost overruns, even when they were successful, and sometimes resulted in tax burdens to pay off bonds for developments that were never finished.

In Panama’s case, the Legislative Assembly is trying to “leverage” a piece of prime real estate: 42 acres in what used to be the U.S.-controlled Panama Canal Zone.

Deal Was Offered in ’97

Eager to be awarded its first project in Panama, an Orange County consortium led by HNTB Design/Build offered the Panamanians a deal last year. In return for being allowed to build a $50-million hotel-business center complex on an adjoining 25 acres, it would put together a financing package that would give Panama a majestic, four-building legislative campus virtually cost-free.

That scenario might sound familiar to the Los Angeles Unified School District board members who approved plans for the Belmont Learning Complex, now under construction near downtown Los Angeles. In fact, Wildman said, “That sounds like the same plan.”

As the price tag on Belmont has soared past the $200-million mark, the learning center has become the centerpiece of the audit committee’s investigation into school construction practices.

In Panama and in Los Angeles, a cash-strapped government entity was looking for an imaginative way to pay for a public building. Developers offered public officials a chance to be innovators by constructing an elaborate, community-oriented complex, including commercial buildings that will make money, funding the entire project.

In fact, the arguments for the two projects are so similar that it is hardly surprising that two of the key players in the Belmont Learning Complex project also are behind plans for the new center here.

Wayne D. Wedin, the Los Angeles school district’s private enterprise consultant when the project began, and Ernesto M. Vasquez, the in-house architect who quit as a school district consultant to go to work for the winning bidder on the controversial Belmont project, are playing important roles in Panama.

Wedin put together the Panama financial package, which includes a U.S. Export-Import Bank loan, and Vasquez is in charge of architecture and master planning.

“This provides an alternative to help generate revenue from either underutilized or nonutilized property,” Wedin said in a telephone interview. “It could be very helpful as [government agencies] look at ways of providing public service without increasing the tax burden on constituents.”

Innovative financing techniques similar to that used by some California cities and school districts can also help small countries solve their own problems of scarce resources, he said.

No Commitment

But Wildman has found serious problems along with the innovation in California. In Belmont’s case, construction has begun on the project without a commitment from a state oversight committee to pick up half the tab, as the state customarily does for all high school projects.

The purpose of Wildman’s investigation is to create guidelines for modernizing and tightening up California’s school construction laws because of concerns over projects like Belmont, the assemblyman said. “There are systemic problems that allow people with expertise to take advantage,” he said.

Opposition legislators in Panama have similar concerns about the Assembly building contract awarded in November to the consortium of five Orange County companies.

“They used a mechanism, a special law, that broke with the entire scheme of public contracting,” said Arturo Vallarino, an assemblyman who has been among the most vocal critics of the project. “All of the controls that are used to construct public works projects disappeared.”

The special law circumventing the normal bidding practices was needed to provide the flexibility to make the project work, asserted Jose Daniel Alvarado, executive coordinator of the legislature’s modernization program, which oversees the development project.

“This is a unique, first experience for this country,” he said during an interview in one corner of a crowded conference room, a haven he chose because the air conditioner in his office was not working. “As governments become smaller . . . and with the potential to obtain more agile financing, these kind of turnkey projects are ideal.”

Current laws on competitive bidding do not work for turnkey projects, he said. Competitive bidding was never even considered for the Assembly building because the procedure is too cumbersome and conditions in the current building make the need for new facilities urgent, he added.

So, five international contenders, all with politically well-connected local representatives, presented alternative proposals to a committee of Assembly members and representatives of the Treasury and Planning ministries.

That committee evaluated the proposals, giving HNTB the highest overall ranking. Then, in October 1997, their findings were presented to the Assembly.

The financing scheme was not part of the committee’s evaluation. But it became an important part of the legislative debate.

“They told us the building was not going to cost the Assembly anything,” Vallarino said. “Besides, we were going to have an income from leasing the [adjoining] land for a tourism project.”

But opponents are worried that the private hotel-business center may not be successful enough to provide the $54.8 million in rent over 28 years that Panama has been promised. And lawmakers are counting on that rent to pay off their debt plus interest for the assembly complex.

“There is a lot of suspicion and a lot of doubt about the process for [approving] this building, where there is $30 million at stake,” Vallarino said. “All this has created the sensation that there have been bribes.”

Undocumented accusations printed in Panamanian newspapers, including La Prensa, one of the country’s most reputable papers, have ranged from allegations that Jorge Chandeck, HNTB’s representative in Panama, handed out $5 million in bribes to lawmakers to claims that this country is being overcharged by $10 million and that key officials are splitting the money with developers.

Chandeck scoffs at the notion of bribes. “If I had been given $5 million in bribes to distribute, as they are saying, I wouldn’t be sitting here having coffee,” he declared. “I would be on an island in the Caribbean spending my $5 million.”

Ignacio Mallol, the Panamanian architect subcontracted to design the Assembly complex portion of the project, bristled at a colleague’s accusation that the building will actually cost only $20 million and that the rest of the money is being skimmed.

“That is ignorance,” he said. “It will cost every penny of $30.4 million to construct what I have designed, and that is a bare minimum. I would need $100 million to do it right.”

The allegations add to the uneasiness of legislators in both Panama and California when they evaluate public-private projects, especially the most ambitious, innovative ones. But even without those factors, the problems of such associations may ultimately outweigh the potential advantages, some observers fear.

“There is a difference involved in evaluating risk in private investment and public funds,” Wildman said. “Companies can go out of business if they make bad decisions. We, as the state of California, do not have that option.”

Ultimately, the viable public-private partnerships may be more modest undertakings. For example, the alliance to build Panama’s new baseball stadium has hardly raised an eyebrow.

The government donated land in the old Canal Zone and $3 million. The remaining $8-million cost is being raised by selling 90 suite-style box seats, offering concessions and requesting donations.

Some sophisticated Panamanians have criticized the lack of innovation in the design, which was the undergraduate thesis of Carla de Bello, daughter of Baseball Federation President Eduardo de Bello. But no one questioned the financing or feasibility.

“There are world-class stadiums that cost $200 million,” Mallol said, “but this is the kind of facility that Panama needed. . . . I always tried to be realistic, to think of what we needed and what we could pay for.”