Expansion of the Panama Canal to bring fresh opportunities for domestic ports

The soon-to-be-completed enlargement of the Panama Canal is driving a wave of new policy on sea transport in the region. Several countries are expanding their port infrastructure and, in some cases, even developing options to compete directly with the canal itself. Colombia, with its coast opening up to both the Pacific and the Atlantic Oceans and an increasing number of foreign trade agreements to its name, has much to gain from aligning its strategy with the expansion, which once complete will allow the canal to handle vessels carrying 13,000 twenty-foot equivalent units (TEUs), almost triple its current capacity of 5000 TEUs. Awareness of this has led to a handful of projects to raise capacity at Colombia’s main entry points on the sea.

Getting Ready

The country’s preparations have been bubbling for several years. As the need to boost the volume of foreign trade has driven improvements in port infrastructure, investment in the public areas of the country’s ports (excluding private investment by concession-holders) rose from $168m in 2010 to $379m in 2013. By the end of 2014, the government expects to take investment levels up to $451m, according to figures by the National Infrastructure Agency, which is in charge of all port concessions in Colombia. In addition to these public investments, several private terminal operators have been expanding capacity on their concession sites.

Increasing Traffic Flow

The much-anticipated enlargement of the 50-mile Panama Canal is expected to change sea trade patterns on a global scale. Built in 1914, the canal currently sees 5% of world trade pass through its locks. The $5.2bn expansion, begun in 2007 and set for completion in 2015, involves a widening and deepening of the canal to allow bigger ships. It is being carried out by Panama and European contractors through a consortium called Groups United for the Canal (GUPC).

Fears of grave delays arose in January 2014, when GUPC, in charge of building new locking mechanisms on both ends of the canal, demanded to be compensated by Panama for cost overruns totalling $1.6bn. When local authorities rejected the claim, the GUPC froze work activity. According to the Panama Canal Authority, any cost overrun claims would have to be decided through an independent board to determine who would be liable to pay for them. The ensuing contention led the authority to threaten to look for other contractors to finish the job. The GUPC responded that this would knock back the initial completion date by three years. After a deadlock lasting several weeks, work resumed in February.

The region breathed a sigh of relief. For Colombia, as for its neighbours, the project will be essential to increasing cargo flows. “The Panama Canal expansion is important because of its major impact on the development of the transport industry,” Liborio Cuellar, managing director of Hamburg Sud, a shipping company, told OBG. “Crossing the Panama Canal today implies a cost of $400,000 and requires vessels that are thin and long. Boats that can cross are very inefficient because of their design. Let’s remember that the canal was built in 1914.”

Port Expansions

For some of Colombia’s ports, a higher-capacity Panama Canal is good news. But the potential to increase traffic exponentially has been accompanied by the corollary need to revamp infrastructure. A major focus point of these expansion projects is happening on the Atlantic coast, especially at the Cartagena Port.

Already Colombia’s main container port, Cartagena has been expanding capacity with an investment of $500m in new equipment and logistics space. The bay access to the port is currently being dredged – a $60m project that will enable it to receive larger vessels – and the port has also recently installed new loading cranes. Once the larger ships coming from Asia are able to cross over to the Atlantic via the expanded Panama Canal, Cartagena will be competing with other regional ports to attract a maximum amount of trans-shipment traffic, which already comprises 80% of cargo handled. Authorities expect the port to handle 5m containers a year by 2017.

Cartagena has been spurred on by insufficient service levels at some neighbouring ports. Its own large investments in technology and equipment in recent years helped widen this differentiation. “Inefficiency of neighbouring ports that are not capable of receiving large ships, such as those in Venezuela, helps Cartagena to leverage its competitiveness as a centre for re-export,” Cuellar told OBG.

The neighbouring port of Santa Marta, for its part, has installed two new cranes to handle post-Panamax ships. A modernisation drive has seen the Sociedad Portuaria de Santa Marta, which operates the port, invest $127m in infrastructure expansion, which will allow it to increase the port’s storage capacity from 300,000 to 420,000 containers. Also on the Caribbean coast, the port of Barranquilla has been growing to raise its container handling capacity from 160,000 to 350,000 containers a year.

On the Pacific Coast, the port of Buenaventura is finishing a programme of dredging work, to increase its depth to 50 feet in order to receive larger vessels. Along with this, the port also received two new post-Panamax container cranes in early 2013, which involved an investment of $16.7m. These will allow the port to increase its role as a trans-shipment hub on the Pacific coast of South America, and distribute cargo to the smaller ports that are incapable of handling post-Panamax vessels.

Traffic Re-Route

Extension of the canal will also change trade patterns in the US. Currently, a full 70% of container traffic from Asia to the US is shipped towards its West Coast ports, and subsequently arrives on the eastern side of the country either by truck or by train. But with the expansion of the Panama Canal opening up room for the larger ships to cross to the Atlantic, shipping companies will have the option to dock directly into some of the major ports on the other side of the country, such as New York, Baltimore and Houston.

Miami, for example, is enacting an investment plan to equip its port to handle larger vessels. A $220m dredging project begun in late 2013 will increase the port’s depth to 50 feet, allowing the infrastructure to handle the post-Panamax cargo ships. Revamping work will include the introduction of new cranes as well as a $1bn tunnel that will link the port with the city’s highway network. Overall investment in Miami’s port infrastructure is expected to reach $2bn. Other port expansion projects are taking place in Costa Rica, the Dominican Republic and Cuba.

Regional Competition

As ports gear up for new traffic, expansion of the canal has brought potential competing projects to the surface. News of Nicaragua establishing its own link between the Atlantic and Pacific oceans has been circulating for several years. That project, fuelled by a strong political and financial engagement from China, was awarded to Hong Kong Nicaragua Canal Development Investment Company (HKND) in June 2013, and will cost an estimated $40bn. The concession agreement is set for a 50-year duration, with the possibility of being renewed for another 50 years. The Nicaraguan president, Daniel Ortega, has said publicly that construction will begin in December 2014.

The Gran Canal de Nicaragua, as the project was christened, is nonetheless proving to be highly contentious. The new waterway is projected to be three times longer than the Panama Canal, and would have a heavy environmental impact in the region, due to its utilisation of Lake Nicaragua, one of Central America’s most important fresh water reserves. Questions have also been raised over whether HKND has the capacity and experience to manage a project of this magnitude. Furthermore, the overall cost-effectiveness of the Gran Canal is questionable, as the new crossing would have to compete with the accumulated efficiencies and expanded capacity of a shorter Panama Canal.

In Colombia, another project that could potentially compete with the Panama Canal has gathered some interest. Initial plans for a land canal took shape in 2011, which involved the establishment of a 220-km railway link between the Atlantic and the Pacific oceans in northern Colombia. Although the project was discussed at the highest level between Colombian and Chinese officials, the government has given no additional information on whether the land canal is still a realistic option to further improve trade movements in the country and better position Colombia in the transport sector.

The Panama Canal project presents significant opportunities for Colombia. Private sector involvement has already brought increased efficiencies to several of the country’s ports as concession deals have multiplied. As the region gears up to attract traffic, especially in container trans-shipment, investments in Colombian port infrastructure should help ensure it remains competitive over the long term.