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Panama: Enjoying Canal-Reversion Investment Boom
Area Development / June 1998

By Larry Luxner

PANAMA CITY -- With less than two years remaining before the United States hands control of the Panama Canal to the Panamanian government, key officials here are portraying the momentous event as a once-in-a-lifetime chance to invest in a dizzying array of manufacturing, railroad, maritime, tourism and other infrastructure projects.

Under terms of the 1976-77 Torrijos-Carter Panama Canal Treaties, the canal itself won't revert to Panamanian sovereignty until Dec. 31, 1999. But multinationals eager to get a head start aren't sitting around waiting. All told, more than $900 million has already been poured in the former U.S. Canal Zone as Panama gradually assumes control of thousands of former U.S. military buildings, installations and other facilities, as well as 233,000 acres of prime real-estate.

"This is a unique opportunity not only for Panama but for investors in a wide range of industries around the world," says Nicolas Ardito-Barletta, executive director of the Autoridad Regional Interoceanica (ARI), the government agency created to supervise the incorporation of the so-called "reverted areas" into Panama's service-based economy.

"As the Panama Canal areas revert to Panamanian control, we have the chance to transform this country and its economy," he said. "We cannot do it without the strong support of the international business and finance communities who, I strongly believe, will immediately recognize the remarkable possibilities involved."

Ardito-Barletta, a former president of Panama, noted that so far, over $400 million has been invested in the maritime industry alone. The biggest single project is the Manzanillo International Terminal, a huge container port on the Atlantic side handling over 30,000 container moves a month.

Manzanillo (known as MIT) has the good fortune of sitting across the Colón Free Zone, right at the Atlantic entrance to the Panama Canal. Inaugurated in April 1995, the project is a 50-50 partnership between Panama-based Motores Internacionales S.A. and the local affiliate of Seattle-based Stevedoring Services of America.

The port's marketing manager, Carlos Urriola, says the joint venture has poured $210 million into what was originally envisioned as a $10 million project.

At present, Manzanillo boasts a 225-meter Ro-Ro berth; two Panamax and four post-Panamax gantry cranes; a 600-meter container berth; a dedicated opening in the breakwater (separate from the Panama Canal's Atlantic entrance); various terminal handling equipment for ground operations; automated computer system for terminal, vessel and gate activities; 25 hectares of adjoining stacking and container yard area, and 83 hectares available for automobile and container storage.

"Our commitment with the government was to create 300 jobs in three years. We've created three times that amount," says Urriola, adding that "even though Colón has a bad labor reputation, we took people with no experience whatsoever, and today -- three years later -- they're sitting at a computer talking EDI with a ship captain."

Volume figures are impressive as well.

Last year, Manzanillo moved 359,516 containers (586,452 TEUs) -- up from 220,188 containers (355,857 TEUs) in 1996 and 104,339 (165,626 TEUs) in 1995. Port officials expect those volumes to grow between 10% and 20% annually over the next five years as Manzanillo draws business away from other competing transshipment centers such as Kingston, Jamaica; Freeport, Bahamas; Miami and San Juan, Puerto Rico.

Likewise, in August 1996, Hong Kong-based Hutchison Port Holdings Group (HPH) won the concession to run Panama's two largest ports, Balboa and Cristobal. HPH -- the world's largest independent port operators with interestes in Asia, Europe and the Americas -- has pledged $170 million for operations and port improvements

"Both of our governments are very keen on making this an exemplary transition," Ardito-Barletta said in a recent interview at ARI's headquarters in Balboa Heights, just outside Panama City. "President Clinton is very conscious of the message the United States is sending to the whole world, so that when the canal is turned over to Panama on Dec. 31, 1999, it'll be a smooth, seamless transition."

Other large projects either completed or in the works include:

* Evergreen's Colón Container Terminal. On Oct. 30, 1997, Taiwan's Evergreen Shipping opened its new port at the Atlantic entrance to the canal. The company has invested $100 million to date, and is planning to complete the project by 2002, when CCT will have a handling capacity of one million TEUs (20-foot equivalents).

* Alireza-Mobil Terminals S.A. This company, a venture between Mobil Sales & Supply Corp. and Saudi-based Haji Abdulla Alireza & Co. Ltd., has assumed management of a fuel complex at Arraijan, near Panama City, where it'll establish a regional oil terminal capable of storing 1.1 million barrels. Investment should reach $25 million over the next three years.

* United Enterprise Commercial Group. UECG, a U.S.-Korean consor-tium, will build a $300 million resort complex at Fort Amador. A 16-floor hotel and casino will sit on an island linked to the mainland by a palm-lined causeway. The company also plans a monorail system, shopping mall, convention center and 250 timeshare condo units.

* Panama Canal Railway Co. Construction will start this July on a new $60 million railroad linking Panama City on the Pacific with Colón on the Atlantic, making it possible to move freight from one ocean to the other in just 90 minutes. The project -- a joint venture between Kansas City Southern Industries Inc. and Mi-Jack Products Inc. of Chicago -- is designed to relieve heavy traffic through the canal.

* Davis Export Processing Zone. Panama's first EPZ, established in May 1996 at the former U.S. military base of Davis, is a Taiwanese-Panamanian joint venture. The 247-acre industrial park represents a $13 million investment by the two governments. Toyotachi Motor, Yih Hsin Plastic and other Taiwanese firms now operate at the EPZ, where their female workers, earning around $1 an hour, produce glassware, blue jeans, umbrellas, auto parts and cigarette lighters.

"The Dominican Republic, Costa Rica, Honduras and Jamaica have been quite successful in the last 15 years with export processing zones. We are starting to do that with the Davis EPZ. Today there are eight Taiwanese companies manufacturing there," says Ardito-Barletta. "We plan more EPZs in Clayton, Corozal and Howard. We are also negotiating EPZs with Korean and U.S. firms over the next few years."

Panama is already home to the Colón Free Zone, the largest merchandise distribution center of its kind in Latin America.

The free zone, founded 50 years ago, imported $5.3 billion and re-exported $6.2 billion worth of goods in 1997. The 1,070-acre entity, known as "an island of wealth surrounded by a sea of poverty," is home to 1,600 businesses and attracts 300,000 visitors a year. Government figures show that in 1997, electronic appliances made up 20.9% of the zone's total trade, followed by clothing (17.3%); textiles (6%); watches (5%); shoes (5%); gold jewelry (4.3%); perfumes and cosmetics (4%); pharmaceuticals (3.4%); liquor and tobacco (2.3%) and bedding (1.3%). Other products accounted for the remaining 30%.

Ricardo Alemán, the zone's newly appointed general manager, chuckles at sugges-tions that business will dry up as Mercosur, the Andean Community and other regional trade blocs make tax-free shopping a thing of the past.

"Five or six years ago, people were saying that the Colón Free Zone would disappear with open markets. But that has not happened," he says. "The only time we went down was in 1996, when the government raised our tax from 7.5% to 15%. They quickly realized their mistake and now the tax is zero."

Besides the above projects, the Panamanian government has plans for the Panama Canal itself once it assumes control of the waterway. The most important is the widening of Gaillard Cut at a cost of $300 million, as well as the allocation of $600 million to maintain the canal over the next five years. In addition, Panama is considering the construction of a third set of locks to accommodate post-Panamax ships -- vessels that are too wide to pass through the current canal. A third set of locks would cost between $5 billion and $7 billion.

Tourism is also a key part of ARI's strategy, as the agency hopes to take advantage of Panama's favorable climate and geography, cultural traditions and use of the U.S. dollar as its national currency.

"Over 250 cruise ships go through the canal," said Ardito-Barletta. "The canal is our No. 1 attraction, but they don't stop in Panama because we don't have the facilities. By 2002, maybe 200 ships a year with 400,000 passengers will stop in Panama. Some will come on the Pacific side and take the train as their ship waits for them on the other side."

Backing ARI's efforts is a pro-business stance on the part of Panama's govern-ment, led by President Ernesto Pérez Balladares. The Balladares government supports laws and decrees that provide deregulation, tax and investment incentives, more open trade policies, more flexible labor conditions and privatizations (the most recent of which was last year's sale of state telephone monopoly Intel to Cable & Wireless for $652 million).

According to ARI, all projects that arise from the transfer of U.S. military properties also must make a contribution to the Panamanian economy by contributing to exports, generating local employment and making use of local materials and input whenever possible.

Remarks Alberto Navarro, a senior adviser at ARI: "We have only two things going for us: our location and our brains. If we don't develop both, we'll be out of the race."

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