A geostrategic location and the presence of the Panama Canal make Panama a natural centre for transportation and logistics. In fact, the transportation, logistics and communication sector combined is easily the largest contributor to GDP, a fact recognised by the current administration. In its Strategic Economic Plan 2010-14, the logistics sector, along with finance, agriculture and tourism, was identified as one of the country’s four pillars of economic growth. To secure the future of the sector the administration is investing $9.6bn, equivalent to 70% of public sector investment, from 2010 to 2014 in infrastructure upgrades alone. Public spending on infrastructure extends well beyond the flagship $5.25bn Panama Canal Expansion and includes the construction of a line on the Panama City Metro, a large overhaul of the national road network and several upgrades to maritime and airport infrastructure. With the canal’s ability to attract global trade, the country has been working for nearly a decade to create a business-friendly regulatory framework – replete with special economic areas and incentives for multinational headquarters – which should serve in attracting further investment as it continues developing the transport and logistics hub. While on the one hand the government is moving quickly to ensure its infrastructure networks are capable of providing a platform for the growing logistics and value-added manufacturing industries, on the other it is aggressively revamping airport infrastructure and further pushing to establish itself as a major aviation centre.
Quantifying Progress
Figures published by the National Statistics Agency (Instituto Nacional De Estadí stica y Censo, INEC) aptly portray the sector’s wider role within the rapidly growing economy. According to the latest available figures from INEC at the time of writing, the transportation and communication sector accounted for 24.1% of the nation’s total GDP (at 1996 prices) in 2012. Moreover, the sector has grown at double-digit rates in each of the past five years apart from 2009 when the global financial crisis slowed progress in the sector to 8.2%. The sector’s average annual growth rate from 2008 to 2012 was an impressive 12.7%. It has also been a major attractor of foreign direct investment (FDI) as logistics, construction and infrastructure firms look to take advantage of the country’s expanding role in regional and global transport. FDI stock in the transportation, logistics and communication sector reached $4.52bn in 2011 and represented 19.6% of the national total of $23.1bn, according to data from the National Comptroller.
Global Rankings
Heavy spending on infrastructure development has yielded improved scores in the World Economic Forum’s “Global Competitiveness Report 2013-14”. Indeed, Panama’s score in the report’s metric on overall quality of infrastructure has improved drastically under the current administration from 67th in the 2009-10 iteration of the report to 30th in the 2013-14 edition. Other related categories also paint a similar picture. Panama improved from 54th in the 2009-10 index to 35th in 2013-14 in goods market efficiency, from 18th to sixth in quality of port infrastructure, from 32nd to fifth in air transport infrastructure, from 62nd to 30th in railroad infrastructure, and from 62nd to 48th in road infrastructure.
Sector Structure
Despite steadily improving infrastructure across the country, the transportation and logistics sector lacks a titular head in the form of a dedicated Ministry of Transportation and Logistics. In its place is the Ministry of Public Works (Ministerio de Obras Públicas, MOP) which oversees the construction and maintenance of the national public infrastructure network, though in practice the MOP is primarily responsible for the national road network together with the autonomous Terrestrial Transport and Transit Authority. Numerous additional public entities with varying degrees of autonomy oversee the rest of the sector, including the Metro de Panamá Secretariat, a special secretariat created in 2009 to monitor the planning, construction and administration of the Panama City Metro. The Panama Canal Authority (Autoridad del Canal de Panamá, ACP) has been in complete control of the Panama Canal and its finances since the country took over control in 1999. Although it possesses a board consisting of various ministerial heads, another autonomous government agency, the Panama Maritime Authority (Autoridad Marítima de Panamá, AMP) is charged with overseeing all things maritime. Meanwhile, in the aviation sector it is the Civil Aviation Authority (Autoridad Aeronáutica Civil, AAC), which also boasts a diverse board full of governmental leaders, that supervises the country’s aeronautical activity.
In October 2010 the Ministry of Industry and Commerce (Ministerio de Comercio e Industrias, MICI), together with the Georgia Tech Panama Logistics Innovation and Research Centre, launched the National Logistics Council (Consejo Nacional de Logística, CNL). The CNL was created to establish a platform for collaboration among the government, private sector and academic institutions and eventually facilitate the development of the country into “the logistics and trade hub of the Americas”. However, the lack of a governmental ministry or secretariat charged with overseeing the long-term development of all infrastructures and responsible for coordinating inter-agency stratagem and budgets is a common complaint from the private sector given the already large and growing impact of the sector on the wider economy. Indeed, though the creation of the CNL represents a step forward in the logistics segment, it still falls short of the sort of authority granted the Secretary of Science, Technology and Information, for example, in driving the growth of the information and communication sector.
Legislation
The legislative environment in Panama has for the most part been conducive to business and investment in the country. Legal and tax incentives have been established through several laws for companies basing themselves in one of the country’s free or special economic and trade zones.
The Colón Free Zone (CFZ), the second-largest of its kind in the world, is a strong example of the importance of creating such areas, in particular for logistic and reexport companies. New special economic areas including Panama Pacifico and the City of Knowledge have also been created and should lead the way forward in the future (see Economy chapter).
However, in the second quarter of 2012 a new piece of legislation passed through the national legislature and was signed by the president. Known as Act 41, the legislation could cause issues with international investors within the maritime sector. The law stipulates that 75% of shares and personnel within the maritime services and auxiliary fuel distribution sector be sourced domestically. The rule sparked backlash from the EU, which considers it to be in violation of international commitments already made by Panama.
The Hub & Spoke
Panama’s location bodes well not only for its status as a trading hub, but also for its growing stature as a major regional centre of aviation. Indeed, Panama City’s location is within “narrow-body” range, the typical distance that the single-aisle airplanes which dominate the Latin American market can travel, of nearly all major cities within the Americas. Additionally, its improving airport infrastructure, expanding tourism sector and rapid economic growth are all supporting the country’s efforts to become the most important transit hub in the region.
Commercial Aviation
The impressive growth of Panama’s only major airline, Copa Airlines, also points towards a bright future for the sector. Founded in 1947, the Compañía Panameña de Aviación (Copa) is now the flagship airline of the country and one of the most prominent airlines in the expanding, yet still underserved, Latin America region.
Following the 2005 purchase of AeroRepublica in Colombia and the company’s initial public offering on the New York Stock Exchange, making Copa the third Latin American airline to list on the exchange, growth has been impressive. According to figures from Copa, from 2005 to 2013 capacity has increased at a compound annual growth rate (CAGR) of 17%, while earnings have experienced a CAGR of 21% during the same timeframe. As a result Copa has become one of the most profitable airlines on the planet, recording an operating profit margin of 17.9% for 2012. According to the latest data from the International Air Transport Association’s 2010 airline profitability report, the carrier ranked 10th in 2007 and fourth in 2008, with operating profit margins around 18-20%.
Meanwhile, the airline’s expansion plans include increasing its numbers in terms of fleet, route and frequency over the next five years. Indeed, Copa’s fleet plan includes the addition of 44 (30 firm orders and 14 optional) new aircraft between 2013 and 2018, most of which are single-aisle Boeing 737-800s with a range of 3000 nautical miles.
International Connections
Although Copa is responsible for more than 80% of daily operations at Tocumen International Airport, several international airlines also operate out of Tocumen including KLM, United Airlines, American Airlines, Iberia and Delta Airlines. In total, commercial airlines flying from Panama City service around 70 destinations – up from 29 in 2004.
The AAC has been working together with the Ministry of Foreign Relations and the executive branch to firm up accords with foreign nations over air traffic rights. According to Ivan Vergara, director of air transport at the AAC, “Over the past several years we have signed agreements with Brazil, Ecuador and Peru and expanded our accord with Mexico. In 2013 we also added or expanded agreements with Costa Rica and France as well.” Indeed, with Air France joining KLM and Iberia in operating transatlantic flights to Europe in November of 2013, Panama City could soon establish itself as a transit hub not only for travellers going from South America to North America, but to Europe as well.
Metro
One of the flagship projects of President Ricardo Martinelli’s administration, the construction of the $1.88bn Metro de Panamá should help to alleviate traffic congestion within the capital. The first line is expected to be inaugurated on March 5, 2014. The long-term master plan for the system’s development calls for the construction of four separate lines and one tramway line by 2035, though thus far construction has been started only on the first line (see analysis).
Urban Transport
In fact, the metro is just one part of a complete renovation of Panama City’s transportation system as the MOP has been in the midst of a major overhaul to the capital city’s road network since 2011. Meanwhile, structural changes to the existing public transportation system – mainly the replacement of the city’s diablo rojo (red devil) bus network – should also ease congestion in the medium to long term.
Over the course of the past few years numerous projects to improve road connectivity and traffic flow have seen various parts of Panama City turned into construction zones. In total the MOP reported in June 2013 that a combined eight road projects totalling $1.7bn were under way in the capital city. The largest project is the $782m construction of an underground connection between Avenida Balboa and Avenida Los Poetas, which was awarded to Brazil’s Odebrecht. It not only involves the construction of a new tunnel, but also renovations to Los Poetas, the construction of new sports facilities, bike lanes, gardens and even a sporting arena, the Maracanã Stadium. However, the project has become a source of controversy as it will also include the extension of the Cinta Costera (Coastal Beltway), a highway constructed a few years ago to relieve congestion inside the city and whose extension will wrap around the city’s Casco Viejo (Historic District).
While the project includes green areas and pedestrian walks it has drawn criticism as the beltway is seen as an eye sore and counterproductive to ongoing efforts to renovate the historic district. Fears that it would lead to the removal of Casco Viejo from UNESCO’s list of World Heritage Sites – due to the destruction of the centuries-old sea wall to make way for the highway – have been allayed as UNESCO announced in June 2013 the project would not impact Casco Viejo’s status.
The preservation of the historic district itself is a $175m project also being completed by Odebrecht and is seen as a key part of the country’s tourism development plan. Apart from renovating the area’s small streets and alleyways, the project also includes the construction of a new road dubbed Vía Cincuentenario. Both projects are expected to be completed in 2014.
Other projects include the $237m improvement and expansion of Avenida Domingo Díaz, which consists of the construction of three vehicular and three pedestrian bridges and the expansion of the road to six lanes.
Via Brasil, another major artery, is also being renovated in a two-phase project to the tune of $217m and $181m for each respective phase. The remainder of the investment, $76.5m, was poured into the construction of three underpasses, which are now fully operational.
On The Road
Outside Panama City, the road network is also under development as connectivity in the interior of the country continually improves. From 2009 to 2013 the MOP reported investing $3.4bn in road and public infrastructure projects, though the majority of that figure ($2.25bn) has been used to overhaul Panama City’s road network. Outside the capital the heaviest investment was found in Chiriquí, which received $262m, most of which was used to upgrade two highways from David to Boquete ($119m) and from Paso Canoas to Port Armuelles ($114m). Meanwhile, Veraguas received $179m; Herrera and Los Santos, each $156m; Coclé, $136m; Bocas del Toro, $72m; Colón, $64m; Comarca, $66m; and Darién, $61m.
In 2012 the introduction of a new stretch of highway from Panama City to Colón – easily the most important intra-city highway in Panama – reduced travel time from the capital to the Colón Free Zone to just 45 minutes. The project began in 2010, and when construction was completed in 2012, investment in the project reached $186m, MOP figures show. The $80.7m renovation of the Bridge of the Americas – which spans the Pacific entrance to the Panama Canal – is another major project which was started in 2010, though it will not be completed until the end of 2014.
Maritime Transport
Obviously many of the maritime transport activities revolve around the Panama Canal, which has extensive port facilities at both entrances in the Port of Cristóbal (Atlantic), the Manzanillo International Container Terminal (MIT, Atlantic), the Colón Container Terminal (Atlantic) and the Port of Balboa (Pacific). In total Panama boasts 14 private and 14 state-owned and operated ports. Ensuring the country is able to meet demand increases following the arrival of post-Panamax ships after the completion of the Panama Canal expansion project is crucial to sustaining the long-term growth of the sector.
“Panama needs to have more terminals built in order to continue growing, especially a new post-Panamax port inside the canal,” Ricardo Lince Boyd, the executive president of Agencias Continental, a local ports and shipping logistics firm, told OBG.
Both the Port of Cristobal and the Port of Balboa are receiving an upgrade by the Panama Ports Company, operator of both ports, at a cost of $1bn. All expansion projects at both ports are expected to be completed by 2015 and will improve their combined capacity to 6.5m twenty-foot equivalent units (TEUs).
Meanwhile, the MIT and the Colón Container Terminal (CCT) serve the CFZ and have also received sizeable investments in recent years. According to information published by Georgia Tech, the CCT recently spent $100m upgrading its terminal to its current capacity of 1.3m TEUs. The MIT is currently investing $270m to upgrade capacity to a total of 4m TEUs per year.
Logistics
Identified as one of the four pillars of future economic growth, the logistics sector is arguably the most integral piece in further developing the Panamanian economy. According to Proinvex, the investment promotion agency, roughly 3% of global maritime trade, including 10% of US international seaborne trade, passed through the canal in 2013. These figures are likely to swell upon the doubling of the canal’s cargo capacity once the expansion project is complete. This fact alone gives the country an edge over competing logistics centres in the Caribbean and along the Atlantic coasts of the US and South America. Still, obstacles do stand in the way, mainly a lack of qualified personnel.
Outlook
All of the ingredients for Panama to become a centre for transportation and logistics are beginning to coalesce. Domestic connectivity is being upgraded via major infrastructure projects such as the Metro de Panamá, the Panama-Colón Highway and an overhaul of the national road system. Meanwhile, international connectivity is also being improved thanks to continued investment in airports and seaports. Nevertheless, if the goal of improving national transportation infrastructure is to capitalise on goods moving through the canal by expanding the logistics and transport sectors, there are still obstacles to overcome such as the short supply of labour and strong regional competition.
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