USAID CP '98: Panama

Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).

PANAMA

FY 1998 Development Assistance . . . . . . . . . . . . . . . . . $3,300,000

Introduction
The principal justification for the USAID/PANAMA program remains as it was when USAID resumed activities in Panama in early 1990: to support U.S. foreign policy objectives aimed at successful implementation of the Panama Canal treaties. Under the treaties, Panama will assume full ownership, control and operation of the Canal on December 31, 1999. In the interim, the U.S. has begun transferring extensive U.S. military bases and Canal operating areas to Panamanian control.
Assistance to Panama at this critical juncture is clearly in the U.S. national interest. A substantial amount of U.S. (12% - 14%) and world (4%) ocean going cargo transits the Panama Canal. A democratic, transparent, prosperous and stable Panama will help ensure smooth transfer of Canal ownership and control, contributing to efficient Canal operations well into the 21st Century. Environmental protection of the Panama Canal Watershed is vital to safeguarding the fresh water resources upon which Canal hydrology depends. Well planned, productive use of the reverted areas can help offset the loss of income resulting from the closure of the U.S. military bases, contribute to political stability and help preserve the ecology of the Canal Watershed.
The Development Challenge
Fresh water powers the Panama Canal. Every ship that transits the Canal requires 52 million gallons of gravity-fed, fresh water which is then lost to the sea. The operation of the Panama Canal uses as much fresh water daily as a city of 11 million people. Widening of the Canal, which is now underway to permit additional transits, will further increase the demand for water. Additionally, fast-growing urban populations at each entrance to the Canal and residents within the Canal Watershed depend upon the same sources of fresh water for individual and industrial needs, and their demands are increasing.
The Panama Canal Watershed is the only water source available to meet these needs. Its five rivers feed two large lakes which are indispensable to Canal operations and to supply urban potable water. Unfortunately, over the past fifty years, the Watershed has suffered massive deforestation, reducing its forest cover to slightly less than 40% and eroding its river valleys and lake shores. As a result, the fresh water supplies of the Canal Watershed are increasingly vulnerable to siltation, sedimentation and the reduction of storage capacity of the lakes.
Protection of existing forest cover and extensive reforestation throughout the Canal Watershed is an urgent priority.
Imminent transfer of the Canal and the reverted areas presents Panama with great opportunities as well as challenges to its system of democratic governance. The extensive U.S. military bases and Canal operating areas which border the Canal from the Atlantic to the Pacific are already reverting to Panamanian control. Some of these areas retain thick forest cover, most have prime real estate potential and all have been carefully safeguarded and controlled over the years by the U.S. military and by the Panama Canal Commission.
With the scheduled reversion of all properties to the Government of Panama (GOP) before the end of 1999, Panama must strengthen the central and municipal government institutions responsible for managing and protecting these areas. Mounting population pressure and encroachment from nearby urban concentrations threaten long term protection, planning and productive use.
Strong democratic governance and community participation will be required to ensure that future use of the reverted areas is compatible with environmental protection of the Canal Watershed, yet also generates continuing sources of employment, income and enjoyment for future generations of Panamanian citizens.
Other Donors
The Inter-American Development Bank (IDB) is the lead donor in Panama, with a projected $900 million loan program over the next several years. The IDB is optimally positioned to move into sectors which USAID will soon leave. These include: financial management reform, administration of justice and economic policy development. USAID-IDB coordination efforts ensure continuity between prior accomplishments in these sectors and future plans.
The IDB also provides loan funding for major new initiatives in rural road construction, energy development, agriculture, secondary and technical education, health services, housing and improved systems for urban potable water and sanitation. In addition, the IDB has played a key role in helping the GOP develop its General Use and Regional Plans for the reverted areas, scheduled for adoption by The National Assembly early in 1997.
Germany, Spain, the European Union and Japan provide a total of approximately $40 million annually in grant assistance. All are involved to some extent in supporting environmental protection, although none has focused its assistance upon the Panama Canal Watershed.

FY 1998 Program
Over the past six years, USAID/PANAMA has contributed to the restoration of Panamanian democracy and to the resumption of Panama's broad-based economic growth. USAID programs at the central level of government helped re-establish sound financial management, supported free market economic reforms, improved administration of justice and strengthened the administrative framework for the free and fair national elections of 1994.
With earlier tasks now accomplished, USAID refocussed its program on the Strategic Objective of Protecting the Panama Canal Watershed while supporting the related Special Objective of Facilitating Efficient Transfer of the Canal and Sustainable Productive Use of the Reverted Areas. This focus on environmental protection and democratic governance will guide USAID activities through the end of FY 1999.
Agency Goal: Protecting the Environment
Panama is exceptionally rich in biodiversity. Its tropical forests, reaching from the western border with Costa Rica to the eastern border with Colombia, form a unique "biological corridor" for Central and South America. Thousands of species which exist here are found nowhere else. Unfortunately, deforestation in Panama is proceeding at the rate of 57,000 hectares a year, due to legal and illegal logging, mining operations and the clearing of forest for cattle ranches and subsistence farming. Forest cover, estimated at 70% in 1947, will be less than 30% by the year 2000 if current trends continue.
The FY 1988 program will focus resources on the Panama Canal Watershed. Protection of the Watershed is vital to the long term operation of the Panama Canal, since the Watershed supplies all of the water upon which Canal hydrology depends. In addition, one and a half million people depend upon the Watershed lakes for potable water.
The Canal Watershed has seen its forest cover fall from 80% of the total area in 1947 to just under 40% today. Further deforestation could pose a threat to the water supply and future operation of the Panama Canal, particularly during the dry season when the Canal must rely upon stored water. Deforestation increases erosion within the Watershed, leading to greater levels of siltation in Watershed rivers and lakes. This decreases storage capacity. With deforestation, water runoff also accelerates, and less water is retained for future use.
USAID, in early 1995, established with the GOP and The Nature Conservancy a $25 million environmental trust fund, invested largely in U.S. securities. During the past year, the Fund generated $1.4 million which financed environmental activities implemented by (INRENARE), Panamanian non- governmental organizations (NGOs), and community groups in reforestation and protection of the Panama Canal Watershed and other important areas of Panama.
During the past year, USAID/PANAMA helped the [GOP's National Institute for Renewable Natural Resources] INRENARE complete the surveying and demarcation of the boundaries for the five national parks within the Panama Canal Watershed. This will help the GOP protect 85,000 hectares of park land.
In 1996 USAID supported a joint Smithsonian Tropical Research Institute/INRENARE initiative to establish a permanent environmental monitoring system in the Canal Watershed to continuously measure key indicators including forest cover changes, deforestation, reforestation, demographic pressures, water quality, sedimentation, siltation and biodiversity.
The key to providing lasting protection for the Panama Canal Watershed is strengthening the responsible central government institutions so that they can work effectively with the municipalities and local communities within the Watershed. In FY 1998 and beyond, USAID will continue to support the institutional strengthening of INRENARE and key municipalities within and bordering the Canal Watershed. USAID will also work with local NGOs, schools and community groups to enlist their participation in reforestation efforts and to discourage encroachment in the national parks.

Strategic Objective 1: Improved Management and Environmental Protection of the Panama Canal Watershed.
Agency Goal: Building Democracy
Democratic governance in Panama will be put to the test over the next few years as Panama prepares itself for ownership, control and operation of the Panama Canal and the reversion of extensive U.S. military bases and Canal operating areas which border the Canal from the Atlantic to the Pacific. It is essential to Panama's future political stability that this process be carried out in an open, transparent and efficient fashion, and produce results in which all Panamanians from all social classes clearly benefit.
Recent U.S. Government Accounting Office studies of base closures in the U.S. demonstrate the difficulties and lag times associated with transforming these properties to other productive use. Panama faces an unprecedented challenge in the reversion of ten major military installations over a five year time period. In addition, Panama must replace the $250 to $370 million a year it gains at present from the salaries to Panamanian employees, local purchase of goods and services, construction and repair contracts and personal expenditures which the U.S. military currently provides. This represents between 8% and 13% of GDP.
During the past year, the GOP Panama Canal Transition Commission drafted the legislation required to create the Panama Canal Authority. It is expected to be approved by the Legislature in early 1997. Also during the past year, USAID assisted in developing the terms of reference and funded the GOP's Transition Plan that guides current planning.
During the past year the GOP Inter-Oceanic Authority (ARI), with USAID support, completed feasibility studies for tourism development in Fort Amador, optimal uses for the Albrook Air Force Station andprivatization of Gorgas Military Hospital. In addition, ARI implemented planning, marketing and sales activities for private sector productive use of the U.S. military bases and certain Canal operating areas that are being transferred to Panamanian control.
The private sector, through Fundación ANDE, a non-profit Panamanian organization, developed with USAID assistance, an incentive law for tourism development in the reverted areas and a law for streamlining GOP business licensing procedures, as a contribution to the improvement of the business climate, particularly as it relates to the Canal and reverted areas.
During FY 1998, ARI faces the challenge of further strengthening its financial management and control systems, marketing its newly acquired properties worldwide and working with municipal governments to ensure the protection and equitable distribution of benefits from development of Fort Davis, Fort Espinar, Fort Amador, Gorgas hospital and Albrook Air Force Station, among others.
USAID will continue to target limited resources to support the strengthening of the GOP Canal Transition Commission and its successor, the Panama Canal Authority which will come into existence during early 1997 and assume operational control of the Panama Canal on December 31, 1999. USAID will continue to support specific objectives of (ARI) which is responsible for the planning, privatization and productive use of the reverted areas as well as for the environmental protection of the Canal Watershed.
Special Objective 1: Efficient Transfer of the Panama Canal and Productive Use of the Reverted Areas Facilitated.

PANAMA
1998 PROGRAM SUMMARY
(000's)

USAID Strategic Objective: Encourage Economic Growth Stabilize Population Growth Protecting the Environment Building
Democracy
Providing
Human.
Assist.

Total

1. I mprove Management and Protection of Canal Watershed

2,800 2,800

USAID Special Objective:

1. Ensure Smooth Transfer of the Panama Canal and Productive Use of the Reverted Areas. 500

500

Total
Dev. Assistance

500

2,800

3,300

Acting USAID Mission Director: Robert Hellyer

ACTIVITY DATA SHEET
PROGRAM: PANAMA
STRATEGIC OBJECTIVE: Improved Management and Environmental Protection of the Panama Canal Watershed
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $2,800,000 DA
INITIAL OBLIGATION: ESTIMATED COMPLETION DATE: FY 1999
Purpose: To protect and preserve fresh water sources vital to the operation of the Panama Canal.
Background: The Panama Canal is dependent upon on abundant and continual source of fresh water for its operations. Every ship that passes through the locks requires 52 million gallons of fresh water which is then lost to the sea. In addition, over one and a half million people depend upon the Canal Watershed for potable water. The forests, lakes and rivers which provide this water lie within a Watershed whose area covers 326,000 hectares. In 1947, about 70% of the Watershed was protected by thick forest cover. Today, less than 40% of the Watershed is forested. Moreover, deforestation continues, due to population pressures from the nearby urban concentrations of Panama City and Colon, the spread of cattle ranching and the persistence of slash-and-burn agriculture. If this process continues, erosion in the river valleys and siltation and loss of storage capacity in the Canal lakes will jeopardize the future operation of the Panama Canal.
USAID Role and Achievements to Date: USAID supported a Government of Panama (GOP) development plan for coordinated protection and sustainable development of the Panama Canal Watershed. The GOP Inter-Oceanic Authority (ARI), the GOP Institute for the Management of Renewable Natural Resources (INRENARE) and the Smithsonian Tropical Research Institute (STRI) are our principal partners in this effort.
In 1995, USAID, the GOP and The Nature Conservancy established a $25 million Environmental Trust Fund whose investments in U.S. securities generate additional financial resources each year to fund environmental protection activities implemented by INRENARE and Panamanian non-governmental organizations. In 1996 the Trust Fund supported 13 grants to NGOs and provided INRENARE with US$750,000 for protection, maintenance and conservation in National Parks and Protected Areas throughout the Country, but with a priority on the Panama Canal Watershed. In 1996, USAID funded the initiation of a joint STRI/INRENARE environmental monitoring system within the Canal Watershed to measure, on a continuous basis, changes in forest cover, water quality sedimentation, siltation, demographic pressures and biodiversity.
In 1996, USAID also financed a program to survey the five national parks in the Canal Watershed and to demarcate their boundaries. In 1996, USAID worked with the principal municipalities in the Watershed to develop technical assistance and training for municipal officials and local communities so that they can play an active role in the protection of the Watershed. In 1996 USAID modified its Financial Management Reform Project to include a focus on environmental accounting. This project will develop an environmental accounting system and audit standards under the auspices of the Controller General of the Republic and several environmental NGOs.

Description: During FY 1998, USAID will continue to work directly with key municipalities within and bordering the Canal Watershed to enlist community participation in discouraging encroachment into national parks, encouraging reforestation and improving solid waste management within the Watershed. USAID will work with the private sector to reforest more than a thousand hectares of reverted lands bordering the Canal. USAID will assist farmers and cattle ranchers who have legal title to land within the Watershed in reforesting significant portions of their land holdings. USAID willsupport the GOP with technical assistance and in the continued construction of ranger and guard facilities. USAID will support environmental education programs for municipalities, schools and communities within and bordering the Watershed. USAID will work with local NGOs and INRENARE to strengthen stewardship of natural resources.
Host Country and Other Donors: USAID is the principal donor supporting management of natural resources in Panama, although Germany, Spain, the European Union and Japan are increasingly active elsewhere in the country. USAID is the only donor supporting major conservation efforts within the Panama Canal Watershed. The GOP Institute for the Management of Renewable Natural Resources (INRENARE) has a national budget of $18 million for 1996.
Beneficiaries: Preservation of the Panama Canal Watershed will benefit the U.S. and other international users of the Panama Canal; the 7,500 permanent Canal employees; the people of Panama who derive 8% of GDP from current Canal operations; and, the 1.5 million population of Panama City and Colon which depends upon the Canal lakes for potable water.
Principal Contractors, Grantees or Agencies: USAID implements activities through a grant with Smithsonian Institution and cooperative agreements with U.S. and Panamanian NGOs.

Major Results Indicators: Baseline Target

All waterways and forested areas in the Canal Watershed declared legally protected
(in hectares)
156,000 (1990) 245,000 (1999)

Forest cover in the Canal Watershed
(in hectares)
122,575 (1992) 126,000 (1999)

Land Area reforested in the Canal Watershed by private sector
(in hectares - cumulative)
100 (1993) 6,400 (1999)

Funding disbursed from Ecological Trust
Fund to NGO's, community associations, education groups and GOP entities for conservation/environmental activities ($000 - cumulative)
$000 (1994) $6,100 (1999)

ACTIVITY DATA SHEET
PROGRAM: PANAMA
TITLE AND NUMBER: Efficient Transfer of the Panama Canal and Productive Use of the Reverted Areas Facilitated, 525-Sp001
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998 $500,000 DA
INITIAL OBLIGATION: FY 1995 ESTIMATED COMPLETION DATE: FY 1999
Purpose: The purpose of this special objective is to prepare for a seamless transition of the Panama Canal to Panamanian ownership, control and operation, and to offset the loss of employment and income resulting from the closure of U.S. military bases.
Background: The Panama Canal Treaties, signed in 1977, provide for the transfer of the Panama Canal to Panama and for the closure and transfer of all U.S. military bases by December 31, 1999. Democratic governance issues are central to this process as well as the need to resolve conflicts between development and preservation of Protected Areas and National Parks, in particular, and population pressures on the reverted areas.
In order to assist the Government of Panama (GOP) respond to the challenges of the reversion process and the smooth transfer of the Panama Canal, USAID has two grant agreements in place corresponding to the Economic Policy Development Project and the Trade and Investment Development Project. The former focuses on the institutional strengthening of the Transition Commission for the Transfer of the Canal into the Panama Canal Authority (CTTC/ACP) and the Interoceanic Regional Authority (ARI), and the latter is directed at public policies and regulations that impact private sector investment. In this context, the GOP's administrative procedures for investment and business-related activities must be streamlined. Fundación ANDE, a private non-profit Panamanian organization provides leadership and encourages coordination of the private sector and the GOP.
USAID Role and Achievements to Date: USAID is acting primarily as a facilitator in the Canal transfer and reversion processes in those areas of expertise where the U.S. possesses a particular, comparative advantage to help speed this up, and to ensure high quality of the technical assistance "products" that ARI and the CTTC/ACP need to evaluate management and asset disposition options.
USAID helped to develop the terms of reference and funded the development of the GOP's Canal Transition Plan which guides current planning. Over the past year, the CTTC has developed the draft framework law to operationalize the new ACP, and this law is expected to be approved by the GOP Legislature by early 1997. USAID has also assisted the CTTC by funding technical assistance efforts to: develop a public information plan to explain to a world-wide audience the role of the ACP; determine the programming, monitoring and control mechanisms required to manage the transition process; establish a documentation and translation center with Internet outreach; and, analyze insurance/risk management and labor issues.
USAID is actively supporting the institutional strengthening of ARI as the primary interlocutor of the GOP for reversion and investment. USAID also funded feasibility studies for tourism development for Fort Amador, optimal uses for Albrook Air Force Station, and privatization of Gorgas Military Hospital. Concerning the "reversion of U.S. military properties", ARI has carried out planning, marketing and sales activities for private sector productive use of the U.S. military bases and certain Canal operating areas that are being transferred to Panamanian control. Towards this end, the GOP-initiated "General and Regional Plans" have been completed and related legislation (empowering ARI to manage disposition of these assets) is expected to be approved by the Legislature by early 1997, as in the case of the framework law to establish the ACP. More recently, USAID facilitated the establishment of a self-sustaining relationship between ARI and the International Exexcutive Service Corps (IESC) byfinancing a Grant Agreement that will enable IESC to provide technical assistance to strengthen ARI's strategic planning and marketing of reverted properties to the private sector.
The Fundación ANDE has encouraged the private sector's partnership with the GOP in a fair and transparent reversion process, through improvements to the business climate, particularly as they relate to the Canal and reverted areas. Fundación ANDE, has produced an incentive law for tourism development in the reverted areas and another law for streamlining procedures for business licensing by the GOP.
Description: In FY 1988, short-term technical assistance will be provided to the GOP's CTTC to strengthen financial management, including budgeting, accounting, procurement and auditing. Long-term, demand-driven technical assistance is anticipated for matters such as labor relations, insurance/risk management and a documentation/translation center.
The International Executive Service Corps will provide highly experienced U.S. technical experts on a short-term basis to address a wide range of specific base conversion issues identified by ARI, e.g., optional uses, opportunity costs, market feasibility, marketing appropriate areas for tourism, light industry, maritime uses, and research/educational development needs.
Fundación ANDE, in cooperation with the GOP's Ministry of Commerce and other GOP entities, is revitalizing the public registry, operating regulations for the newly legislated intellectual property rights (IPR) law, draft legislation to guarantee legal security/stability for investments, developing plans for a tourist convention center and a framework law for the securities market.
The Inter-American Development Bank has provided ARI with loan-funded technical assistance to develop a General Use and Regional Plans for the reverted areas, and is expected to make available under its Multilateral Investment Fund (MIF) a small grant to finance investment banking costs, complementary to USAID's assistance to ARI through the IESC grant. The United Nations Development Program (UNDP) has financed workshops and seminars between the GOP and selected civil society NGOs to encourage participation in the Canal and military property reversion process and to develop a unified Panamanian "visionary" approach to these processes.
Beneficiaries: The beneficiaries are the U.S. and other international users of the Panama Canal; the Panamanian people, who depend on revenues derived from the U.S. military bases and the Panama Canal, and its 8%-15% contribution to gross domestic product; and the Panamanian labor force, including 7,500 permanent Panama Canal Commission employees, 3,500 U.S. military civilian employees, and 8,000 U.S. military contract and concession employees.
Principal Contractors, Grantees or Agencies: The primary implementor is the U.S.-based NGO, the International Executive Service Corps. USAID is also providing services of advisors through the Free Market Development Advisory Program to a number of Panamanian institutions involved in various aspects of the reversion process and the transfer of the Canal.
these NGOs be drawn into the reversion process as well in areas such as community-based involvement in land use and development and effective use of reverted properties.
Major Results Indicators:                             Baseline        Target

New jobs created replacing those lost by closure
of U.S. military bases (cumulative)                    0 (1995)      10,000 (1999)

New revenues generated replacing income lost by
closure of U.S. military bases ($000 - cumulative)     0 (1995)    $125,000 (1999)

Additional Wages Generated offsetting losts due
to U.S. Military bases closure ($000 - cumulative)     0 (1995)      63,000 (1999)
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USAID Strategic Objective:	Encourage Economic Growth	Stabilize Population Growth	Protecting the Environment	Building Democracy	Providing Human. Assist.	Total

1. I mprove Management and Protection of Canal Watershed			2,800			2,800
USAID Special Objective:
1. Ensure Smooth Transfer of the Panama Canal and Productive Use of the Reverted Areas.	500					500
Total Dev. Assistance	500		2,800			3,300

Major Results Indicators:	Baseline		Target
All waterways and forested areas in the Canal Watershed declared legally protected (in hectares)	156,000	(1990)	245,000	(1999)
Forest cover in the Canal Watershed (in hectares)	122,575	(1992)	126,000	(1999)
Land Area reforested in the Canal Watershed by private sector (in hectares - cumulative)	100	(1993)	6,400	(1999)
Funding disbursed from Ecological Trust Fund to NGO's, community associations, education groups and GOP entities for conservation/environmental activities ($000 - cumulative)	$000	(1994)	$6,100	(1999)