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The Promise of Panama a potential "economic lifeblood", the Panama Canal will have much to offer, once construction is complete

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By: Ken Mark
2014-03-01

Panama’s recent flurry of transportation infrastructure projects will leverage the advantages of a widened canal and transform the entire country into a logistics dynamo.

“The canal is the economic lifeblood of our country,” Roberto Roy, chairman of the board of directors, Panama Canal Authority and Minister for Canal Affairs, recently told a Toronto audience. He cited its direct contribution to Panama’s annual GDP at about 10%. The indirect contribution is closer to 25%.

“Our business plan is to capture the full value of the canal,” he said.

Consequently, the entire country has become one gigantic construction site. Projects include updating the port facilities in Colon at the Atlantic Ocean canal entrance and in Balboa on the Pacific Ocean side, expanding existing free trade zones, and opening up new ones as well as updating its transportation and logistics network. Besides ocean traffic, Panama also offers intermodal services involving air, road, rail, and pipeline links. It will also introduce new value-added services such as container-on-barge and top-off (using smaller ships to move containers to and from larger carriers).

Thanks to its strategic location, Panama is already the crossroads of world shipping. The canal links 144 maritime routes involving 110 countries. The scheduled launch date for the canal is 2016 after completion in December 2015.

However, as Canadian Shipper went to press, canal construction was only just set to resume following two weeks of delays due to a contract dispute.

According to the Panama Canal Authority (ACP), the new locks contractor Grupo Unidos por el Canal, S.A. (GUPC) had accepted ACP’s repeated request and agreed to restart on the construction of the Third Set of Locks project as of Thursday, February 20.

The GUPC consortium is comprised of companies Sacyr Vallehermoso, S.A (Spain), Impregilo, S.p.A. (Italy), Jan de Nul Group (Belgium) and Constructora Urbana, S.A. (CUSA) (Panama).

As soon as works are resumed, ACP will pay GUPC $36.8 million for December invoices to ensure that GUPC cancels pending payments and obligations to suppliers, said ACP.

Additionally, the parties agreed to discuss other points such as the dates for the delivery of the gates, an implementation schedule for the remainder of the works, a timetable of repayment moratorium and other key aspects for the project’s development.

At press time there were still some issues on which an agreement had not been reached, and the dispute could threaten to delay the project by at least three years beyond the proposed completion date of December 2015, said ACP.

The Panama Canal’s investments aim to expand and strengthen logistics and business services involving freight forwarding, insurance and data management transmitted through the canal’s first-world digital network.

To capitalize further on its strategic location, Panama will build new facilities to receive, store and distribute LNG (liquid natural gas). By accommodating modern LNG tankers, the new canal will cut the distance to ship US LNG to Asia to about 9,000 miles from the current 16,000 miles.

Thanks to the free trade agreement that came into force on April 1, 2013, it should be simpler for Canadian firms to do business in Panama. The FTA and parallel treaties will facilitate market access for goods, crossborder trade in services, investment, financial services, telecommunications and government procurement. “It eliminates tariffs on 95% of non-agricultural products immediately and the rest over the next five to 10 years,” says Jean-Sebastien Charron, Ottawa-based EDC regional manager, Mexico, Central American and the Caribbean. “We are just waking up to the opportunities (Panama) offers as a regional manufacturing hub.”

Panama has ambitious plans to make those dreams a reality. These include addressing ecological concerns related to widening the canal. For example, currently it requires 208 million litres (55 million US gallons) of fresh lake water for each ship passing through the lock system. Before, after ships passed through, the water simply drained into the ocean.

In future, three drainage basins adjacent to the locks will capture the water for re-use. This will save 60% of the water while using 7% less volume. As well, the basins are designed to enable water to flow in and out of the locks naturally without requiring pumps thus eliminating energy costs and further reducing greenhouse gas emissions.

Moreover, since assuming control of the canal in 2000 from the US, the new management has switched the business model to operating it as a revenue source rather than as a military installation. Consequently, the canal’s EBITDA (earnings before interest, taxes, depreciation and amortization) has jumped to US$1.3 billion from US$184 million when it was under US control.

Segregated pricing has led to higher revenues. The Americans simply charged one price for all commodities including deadheading empty ships. Now administrators charge more for container ships than for iron ore carriers and less for empty ships.

To keep canal operations politics-free, the government amended the constitution to reorganize the canal authority as an independent body. Its board of directors is now filled with entrepreneurs and business veterans while engineers and other professionals form the executive group. However, the government receives 100% of all profits.

In 2012, the government also established a national logistics cabinet to develop policies together with private enterprise, to prepare a master plan for promoting Panama as an international logistics centre. The Minister of Trade and Industry chairs the group consisting of the minister of finance, minister of public works and the heads of the Panama Canal Authority and The Civil Aviation Authority.

Tocumen International Airport, Latin America’s largest, is emerging as the region’s go-to air hub. Copa Airlines, Panama’s flag carrier, currently serves 66 cities in 29 New World countries, including four flights per week to Toronto.

Since 1999, it has enjoyed a strategic partnership with US Continental Airlines. Currently, Copa’s modern fleet of 90 aircraft includes 46 Boeing 737-800s with an average capacity of 3,000 kilos of belly-hold cargo per plane. Daily, they transport some 75,000 kilos of cargo, mail and courier items.

Beefed up free trade zones (FTZs) will play a larger role in Panama’s future prosperity. In logistics, the name of the game is moving goods in and out of distribution centres as quickly as possible. FTZs, however, must also attract overseas producers as well as research and development players to create more local high-skilled jobs.

Foreign firms enjoy a wide variety of choices. The original one is the Colon Free Zone (CFZ), the largest free trade zone in the Americas, established in 1948. It now occupies close to 405 hectares (1,000 acres) of space. Each year, the value of imports and exports registered there exceeds US$5 billion dollars. It houses close to 2,000 enterprises attracted there by a number of generous tax incentives.

The adjacent Manzanillo International Terminal provides a direct, secure link from the CFZ to all the local transportation nodes. Direct bond-to-bond transfers streamline deliveries from the port to the CFZ, reducing truck turn-times and overall costs to shippers, consignees and carriers. The terminal’s 52-hectare yard can store 37,000 TEUs of goods.

Panama Pacifico is a mixed-use real estate development on the site of a former US Air Force base that serves multinational giants such as 3M, Dell and BASF.

New distribution centres, office buildings as well as residential and commercial sites are under construction.

Still, decision makers realize that the new canal will face competition including a proposed alternative canal through Nicaragua, the US “land bridge”- rail and trucking routes linking both coasts- and emerging Northwest Passage shipping lanes through the Arctic Ocean.

But for now, the eyes of the logistics world are all fixed on Panama and a resolution around the canal’s completion and launch.

Ken Mark is a veteran technology expert, who has covered supply chain management  since it was called distribution and has documented its legitimization as a critical business function. He holds an MBA from York University.



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