Panama Strives to Add Value

The importance of Panama’s strategic location has been clear since Vasco Núñez de Balboa, became the first European to see the Pacific Ocean in 1513. In subsequent centuries, the transport technology has changed but the core concept remains – use Panama as a shortcut between the Atlantic and Pacific oceans. Spanish mule trains, were followed by a 19th century Colombian railway and then a 20th-century US-built Canal. Now, in the 21st century, Panama is upgrading the concept. It doesn’t just want to transport cargo but also add value to the goods passing through the Canal.

So, when the US handed over control of the Howard Air Base, Panama decided to use the 2,000-hectare site, strategically located next to the Canal and capital city, to foster a new type of economic growth. In 2007, UK real estate developer, London & Regional was part of a consortium that won a bid to develop and manage the project. The result is Panama Pacifico. The technical description is a mixed-use commercial, industrial and residential zone that is being developed through a public-private partnership and has its own beneficial tax regime. A simpler way to understand Panama Pacifico is a brand-new city being built in Latin America’s fastest-growing economy.

Panama Pacifico

Panama Pacifico’s scale and location are the most obvious advantages but the reason the government invited private-sector expertise was to get a world-class development. London & Regional created a masterplan in 2007, which ensures that Panama Pacifico’s ordered growth stands out from the capital city’s chaotic expansion.

In the 15 years since being awarded the contract, Panama Pacifico has built hundreds of thousands of square metres of warehouses, thousands of homes and attracted shops, schools and restaurants. Yet the true test of the masterplan came in March 2020 when the pandemic struck and Panama entered one of the world’s strictest lockdowns, which caused the economy to contract by 18% that year. One would imagine that such a severe recession would be bad news for such a wide-ranging project that encompasses so many parts of the economy, yet Panama Pacifico thrived, says CEO, Henry Kardonski.

“Panama is a logistics centre by nature and during the pandemic logistics became a much more important element in the value chain. Many of our clients’ businesses grew during the pandemic. Panama’s role in logistics became more relevant, companies are considering nearshoring, to produce and store closer to their markets and many understand the convenience of using Panama as a regional distribution hub. Clients are demanding larger warehouses and expanding their footprint. Both multinational and medium-size companies are consolidating their logistics operations, and trust Panama Pacifico as the place to grow their business.”

Panama’s relatively small labour force limits the amount of this nearshoring it can take. So does its minimum wage, which varies depending on the sector but can be as much as $970 per month – by far the highest in the region. But its location is a huge advantage. Moreover, the country has leveraged that location by building logistics infrastructure – the Canal, the Copa air hub, five world-class ports – that give it incredible connectivity.

That is further enhanced by a network of trade deals, explains Carmen Gisela Vergara, Executive Director of PROPANAMA. “It helps that we have 23 trade agreements that give us access to 59 countries and 1.5billion potential consumers. The UK is one of them, of course, through its agreement with Central America. And thus, we started to promote in this new world scenario. Today, our export sector is growing and so is our GDP, set to have a 12% growth in 2021.”

EMMA

One important factor in Panama’s economic success – it was Latin America’s fastest-growing economy between 2010 and 2020 – is its ability to persuade multinationals to set up their regional headquarters in Panama. Since passing the SEM Law in 2007 Panama has attracted more than 160 international firms to set up a base in the country. There are also lots of examples of UK organisations – from the British Embassy to Diageo – that already use Panama as a hub.

Now Panama wants to repeat its SEM success in manufacturing. “Panama has reacted [to the post-pandemic nearshoring trend] by passing the EMMA incentives framework”, says Aimee Sentmat, CEO of Banistmo, Panama’s second-largest bank. “This is like the successful SEM Law but for manufacturers that can add value to the cargo passing through the country. As global supply chains are reshaped, Panama will emerge as a strategic option for the Americas.”

In theory EMMA could pose a threat to Panama Pacifico because firms that take advantage of the law don’t have to be based inside the project. But Kardonski isn’t worried. “At this stage in our development, businesses don’t just choose Panama Pacifico for the tax advantages they get from operating here. Of course, our unique fiscal regime helps, but now it’s more about benefiting from the industrial and logistics ecosystem. We are the only world class business park in the country, so therefore the only top business park in the world that enjoys Panama’s amazing location. Panama Pacifico’s logistic park, was designed according to world class standards, we continue to operate it that way. We are continually innovating with our clients’ needs in mind, and we improve continually every aspect of construction and operations that will help our clients operate more efficiently.”

Indeed, Kardosnki believes EMMA could actually help Panama Pacifico. “The EMMA Law is based on the success of Panama Pacifico’s value added activities, we look forward to our country attracting more companies that are looking to do value added operations. The law is also positive for Panama Pacifico, providing a skilled workforce, efficiency, and competitive costs.”

But if Panama wants to add value to the cargo passing through the country it needs to do more than just offer incentives, says Kardonski. “The right conversation with companies looking to establish value added operations is about, talent search, world class infrastructure, sustainability, and efficiency, we know these are the issues that matter. At Panama Pacifico we have been creating a system to identify the availability of skilled workforce. The Panamanian workforce is talented and highly trainable, universities and vocational schools are graduating professionals in the required fields. We make sure to have the data available when companies are in their site selection process. Companies with strong cultures of training their workforce accomplish amazing results, when they compare the efficiency of Panamanian workforce to operation in other locations. We have witnessed first-hand the amazing job multinational companies do in developing local talent. In addition, Panama Pacifico’s one-stop shop, support companies in all ranges of permitting and government interaction, from work permits, to immigration, construction permits, etc.”

Emerging industries

Panama is keen to foster new industries by attracting international companies to Panama. One promising area is digital, as the country has incredible international data connections. Eight international fibreoptic cables pass through Panama. These cables handle 100% of regional internet traffic, 97% of regional voice traffic and 90% of data transmission, making it the ideal location for tech firms. José Ramón Icaza Clémen, President of the Cámara de Comercio, Industrias y Agricultura, believes the biggest challenge to Panama becoming a digital hub is the work force. “We need to be realistic because it will take time. First, we need to improve the human talent. One important step in that direction is that our training institute, ITSE, recently signed an agreement with Microsoft.”

The companies at Panama Pacifico, give us a sneak preview of what could be possible elsewhere in the country. The project is already home to IT and data firms, for example Quest, which is owned by Dell, is based in Panama Pacifico.

The key to fostering new industries is to create an ecosystem where they can access key inputs, such as human talent and research. Kardonski believes that Panama Pacifico will deliver that. “By 2030 Panama Pacifico will be an innovation hub as Panama can attract research and development initiatives from the region. By then the metro project will serve the Panama Pacifico station, that will access, a futuristic transit-orientated development at the gate of our project, involving the creation of universities, hospitals, large scale employment, entertainment, retail, and affordable housing. We envision becoming a research and development hub for the region, bringing together academia, businesses, and entrepreneurs. Moreover, Panama Pacifico will now be perfectly situated between the million-person city of Panama to the east and the 500,000 people who living in the commuter suburbs to our west. A population that will have access to world class entertainment, jobs, education and healthcare, connected by the metro and for sure the new bridge over the Panama Canal.”

When Panama first gained control of the Canal and seaports it invested heavily in new infrastructure to boost the capacity of its logistics platform. The Canal was expanded, the existing ports were upgraded and new ones were built. The ports investment turned Panama into a regional transhipment hub, while the Canal expansion helped it regain market share against its old rival the Suez. Now that Panama has cemented its vital position in world trade it is ready for the next stage in its development – adding value to that cargo. It’s not something that will happen overnight – but Panama has been working on this for more than a decade. The early signs at Panama Pacifico suggest that international companies are already starting to believe.