For most of the last century, the world’s shipping industry depended on the Panama Canal. Today, the survival of that 20th-century engineering marvel is threatened by rapid air transport and the use of massive cargo ships too large to navigate its locks. By upgrading ports and container terminals, improving rail and air transport, and expanding duty-free zones, the Panamanian government and foreign investors hope to leverage the waterway as the centerpiece of a new trade center that will revitalize the Canal Zone and Panama’s struggling port cities.

About 1,400 ships still transit the canal every year, 350 of which are cruise ships. The waterway transported 196 million tons of cargo in 1999 and generated of tolls $569 million, accounting for 7.4% of Panama’s GDP. Due in part to US control of the waterway and surrounding areas however, Panama was never able to profit much from the passing ships. In fact, in the words of one writer, Panama had become “the world’s first drive-through country.”

Since taking full control of the Panama Canal in December 1999, Panama has set out to boost its status as the Americas’ transportation hub. Perhaps the country can now retain some of the prosperity derived from that role. The country wants to attract foreign investment and new jobs, transforming the former Canal Zone into Latin America’s premier distribution and re-exportation center. The government expects investment in Panama’s multi-modal distribution center to reach $1.1 billion. To date, $410 million have been invested in ports on the Caribbean side alone.

The multi-modal center has four main areas of concentration: maritime, land, air, and railroad. “The Free Zone is one of the largest participants in the importation and re-exportation system, importing, assembling, and re-exporting merchandise,” says Sae Ahn Park, legal advisor to Panama’s Colón Free Zone, the world’s largest duty-free zone after Hong Kong.

Panama’s Free Zone is located on the Caribbean coast in Colón, the country’s second-largest city. Companies can import, assemble, and re-export merchandise there with no tax penalties. The Davis Export Processing Zone, for example, imports raw materials and exports manufactured products such as glassware, blue jeans, umbrellas, lighters and auto parts.

A Key Income SourceThe free zone is an important source of income for Panama, hosting 1,350 international trading companies that employ about 1,400 workers. The zone imports $4 billion worth of merchandise and re-exports $4.8 billion. Its activity accounts for more than 9.5% of Panama’s GDP. Foreign and local investors are constructing three other export-processing zones in the Caribbean port area, aiming to attract light industries, assembly plants and seafood processing centers.

Colón’s four ports are connected to Panama City on the Pacific coast by railroad. Panama privatized its ports in 1996, along with a concession to refurbish and operate the country’s transcontinental railroad. Since then, Stevedoring Services of America, a Seattle-based marine terminal operator, along with local partners, has built one of Latin America’s most modern container-handling operations. The Manzanillo International Terminal (MIT) now processes more than 700,000 containers a year. MIT employs 800 people-important for Colón, which has much higher unemployment rates than the capital.

Andy McLaughlin, Stevedoring’s vice president of marketing and business development, says 25% of containers handled at MIT have products destined for sale in the Colón Free Zone. The remaining containers are unloaded for redistribution through the US and South America.

Total investments in construction and equipment for MIT approach $300 million. Stevedoring, which owns 85% of the terminal, and its Panamanian partners financed the development of the port operation through a $120 million project finance loan in 1998 arranged by ABN AMRO. Part of the loan was used to construct a berth for roll-on and roll-off vessels. In March, MIT received a refinancing deal arranged by ABN AMRO for $115 million, split between an $80 million tranche and a $35 million tranche with seven- and nine-year maturities.

MIT is expanding, planning a new 12-hectare container storage yard and renovating the grounds of the former US military high school for a new rail yard and ramp for transporting containers by train. The rail facility will be serviced by Panama Canal Railroad Company, which is refurbishing Panama’s trans-isthmus railroad to transport shipping containers between the country’s Pacific and Atlantic ports.

Hong Kong’s Hutchison Port Holdings operates ports on both ends of the Panama Canal through its subsidiary, Panama Ports Company (PPC). In November, Hutchison inaugurated the Balboa Container Terminal, the only commercial port on the canal’s Pacific side. Balboa boasts the deep-water capacity and equipment to berth the new-generation Panamax ships that are too large to navigate the canal.

PPC has invested $120 million in Balboa. In 1998, it received an $80 million loan from Midland Bank and Bank of Nova Scotia for crane equipment. John Meredith, a Hutchison managing director says the number of ships calling at Balboa has been much higher than expected. Large international shipping companies, such as Denmark’s Maersk Sealand, make up to five weekly calls. Balboa caters mostly to ships originating from the US West Coast, Asia, Australia and western South America.

PPC also operates the Cristóbal Cruise Terminal at the Pier 6 in Colón, a new duty-free shopping area and tourism center offering excursions to Panama’s Caribbean coast and indigenous areas. Panama gives tax benefits to tourism developers, including 20-year tax breaks on imported material, vehicles and real estate purchases. The cruise terminal is part of a larger attempt at urban renewal in Colón, where unemployment and crime blight the once vibrant commercial trading district.

Riding the Rails
Upgrading the railroad is a key element of Panama’s plan for its multi-modal distribution center. Kansas City Southern Industries and Mi-Jack Products of Illinois won a concession in 1998 to rehabilitate and modernize the 150-year-old transcontinental railroad for $60 million, with a commitment to invest an additional $30 million. Construction should be completed by mid-2001. The Panama Canal Railway plans to operate 10 trains a day in each direction.

A trans-isthmus railroad is expected to provide fast ocean-to-ocean transportation for shipping and transportation materials. Currently, waiting time for canal transit can last up to eight hours. Train stations on both sides of the railroad are strategically placed near the ports for easy access and loading of goods. Panama also hopes the railroad will serve to shuttle tourists between Colón and Panama City.

The 47-mile, two-way track is designed to transport 75,000 containers in its first year of operation, eventually reaching 250,000 containers per year. Last year, the International Finance Corporation (IFC), the commercial lending arm of the World Bank, lent the consortium $45 million to upgrade existing infrastructure remaining from the railroad’s original tracks, used to transport gold and prospectors during the gold rush of the 1850s. The total investment in is expected reach $75 million, according to Kansas City Southern Industries.

The railway passes through the Colón Free Zone near the proposed new cargo terminal, maritime ports, and the Enrique A. Jiménez Airport. Hutchison Port Holdings’ Meredith is skeptical over the railroad’s role in Panama’s multi-modal distribution center. “Transporting a container from Balboa to Colón by railroad requires handling the box four times and liners don’t like moving containers too much. You can easily run a shuttle by road and transport the boxes directly to the ship,” he says. But poor highway infrastructure and traffic congestion often make the 50-mile drive take up to 2 hours.

The government hopes to attract at least $180 million in foreign investment to expand Colon’s overworked domestic airport, enabling it to receive international flights and cargo jets. Currently the airport primarily transports employees who work in Colón but live in Panama City. Most Free Zone employees actually prefer to commute rather than live in Colón-a reality that the government hopes its revitalization initiatives will change.