THE BILLION DOLLAR BOX.

The 54-mile strip along the Panama Canal becomes a center for moving containers among ships, trucks and, shortly, trains and planes.

MAERSK SEALAND MAY BE SENDING FEWER SHIPS through the Panama Canal, but the world's biggest container line now uses more Panamanian infrastructure than before.

Maersk deposits cargo at Balboa on the Pacific coast, where it is taken by road (and soon rail) across the isthmus to Colon or reloaded on another ship at Balboa for transit to the U.S. east coast and Europe. The same process works in reverse, and container loads can also be consolidated in Colon on the Atlantic coast. Small feeder ships then distribute loads through the Caribbean islands and Central America.

"Panama is already a transshipment hub of global significance," says Hans Stig Moller, managing director of Maersk Panama. "This model has worked for us. Whether other lines will now do the same is up to them."

More than 14,000 ships go through the canal every year, but most have to wait up to 14 hours for a transit, and draft and line-of-sight restrictions mean the largest ships cannot go through fully loaded. But that's not necessarily hindering cargo movement. Heavy duty terminal investments in recent years are now turning the canal's 54-mile coast-to-coast strip into the "billion dollar box" for moving containers among ships, trucks and, shortly, trains and planes.

"We bring everything in from Korea and can split containers or consolidate cargo here for distribution," says Sergio Barrios, regional marketing director of Korean electronics giant Samsung, which is using a warehouse in the Colon Free Zone to distribute its products to Colombia, Venezuela, Ecuador, Central America and the Caribbean, "It is very flexible and saves money."

Atlantic advances. Panam's five container terminals have seen a leap in business since the port sector was privatized in the mid-1990s. The US$80 million reopening of the Panama railway in June or July as a freight line is expected to bring them even more work, primarily moving containers between ships plying different trade routes. There are also plans to use airports left behind by the U.S. Air Force as distribution centers.

Last year, Manzanillo International Terminal became the No. 1 container port in Latin America, moving more than 1 million 20-foot equivalent units (TEUs), the standard size of a container. Manzanillo, together with Cristobal and Colon Container Terminal, the other two Atlantic coast ports at Colon, transported 1.35 million TEUs, up from 1.18 million in 1999, according to the United Nations' Economic Commission on Latin America and the Caribbean (ECLAC).

Manzanillo, jointly operated by U.S.-based Stevedoring Services International and the local Motta and Heilbronn families, has enjoyed five-fold growth since it was built in 1995 for more than $300 million. Carlos Urriola, president for marketing at Manzanillo International Terminal says there are three reasons for this remarkable growth: "Location, location and location."

"That is why you had the [transcontinental] railroad here in 1855 and the canal later. Before ships passed through here, the only need was to have reliable, efficient and cost-effective ports," says Urriola, who claims that the Manzanillo has the fastest ship turnaround time in the Americas, including U.S. ports. "Once Panama was able to do that the cargo naturally flowed here."

Manzanillo is now investing $30 million more to expand storage space after taking over an old school for space to stack containers.

Taiwanese transport giant Evergreen, which was rumored to be looking for a buyer last year for its Colon Container Terminal, apparently isn't looking any more. It has announced a $80 million expansion that will boost capacity from 400,000 TEUs towards the million mark. It has also started handling non-Evergreen ships.

Panama Ports Company, a subsidiary of Hong Kong shipping firm Hutchison-Whampoa, now has 25-year leases (with 25-year renewal options) on ports at both ends of the canal. Cristobal is located in the rapidly expanding Colon area, while Balboa, on the Pacific, is already planning expansion after opening in November 2000. Some $120 million will be invested to bring capacity towards an eventual 1.5 million TEUs.

Pacific promise. "There is enormous potential for cargo movement to and from the west and east coasts of the U.S.A., the Caribbean and South America," said John Meredith, managing director of Hutchison Port Holdings, at the inauguration of the Balboa terminal.

Indeed, bullish predictions abound about Balboa becoming the Pacific coast port for South and Central America. Maersk shipping line uses its dump-and-run strategy to bring containers to the port and send ships back to the west coast of South America. Port officials plan to dredge the harbor so big ships can pull alongside docks. And Stevedoring Services is mulling over its option to build a terminal at Balboa.

Jan Hoffman, a maritime specialist at ECLAC, points out that a carrier on the west coast of South America will probably prefer to send cargo on one of the daily services to Balboa and then pick up a ship to the United States or Europe rather than wait for the weekly direct service.

"All these advances, combined with the great advantage of having the canal, suggest the role of Panama's ports as transshipment centers will keep gaining in importance," says Hoffman. "There is a growing tendency toward transshipment."

Others question whether the ambitious predictions will prove true. Panama is capable of moving 2.2 million TEUs annually, but handled only 1.35 million last year. Neil McColl, project director of Maritime Transport, a shipping and port company, says that existing cargo routes may limit the number of boxes moved through Panama. "The canal is an expensive place to move cargo through," he adds, noting that the amount of bulk cargo going through the canal is declining as costs rise.

"The canal will play a key role in the development of Panama as a transshipment hub," says Alberto Aleman Zubieta, canal administrator. "The canal is on 144 global routes. The strategy is to make Panama the most important transshipment hub in Latin America and I think it will work."

A $1 billion expansion and modernization program is underway, but the canal will reach capacity in around 10 years. The signs are that the canal authority, an independent government body, will build a third set of locks at a cost of $3.9 billion to accommodate the huge ships now rolling off shipyards.

Small things matter. "We have to be ready," says Aleman. "The shipping industry has taken the decision to go bigger. We can look at the order books and see New York-New Jersey and New Orleans deepening the draft they can handle."

But Manzanillo port's Urriola does not focus as much on the canal as other changes needed if Panama is to take full advantage of its location. "We have been successful so far because of our ports' low costs," he says, indicating the need to review "small things" that make Panama uncompetitive, such as quarantine procedures, customs and bureaucracy. "Shipping lines look at overall cost and these are costs," he says.

One concern of many transport companies is to privatize piloting--the practice of changing to a local skipper who knows the area well--at Balboa and Cristobal. As it stands now, the ports have to use expensive canal pilots.

But attempts at achieving efficiency have found the going slow. For example, a measure to introduce X-ray screening of all containers entering Panama by the Maritime Authority, the state body in charge of the ports, was stymied by vociferous protests. Dissenters said that the contract was awarded without a competitive bidding process, that it amounted to privatization of customs services. Companies complained that the proposed screening would add to costs.

"We believe customs procedures should be done at the port of origin and destination," says Charles Langman, a shipping agent and also vice president of the country's private sector chamber of shipping. "As long as the container arrives in Panama sealed and leaves sealed that is good enough."

Whether these setbacks remain minor or reflect a trend toward an inability to keep Panama competitive with other logistics centers will become increasingly cleat. As Manzanillo's Urriola says, "Panama is entering the major leagues of container ports and to stay there we have to maintain the same average or better."

WILL IT FLY?

The Interoceanic Regional Authority (ARI), a government body that took charge of the old U.S.-administered canal zone is now seeking to develop the following three major transport areas with air connections:

* The Howard Air Force Base, just across the canal from Panama City, has a 2.5 kilometer runway that can take the biggest jumbos and cargo carriers, four hangars, a passenger terminal, refueling facilities, warehouses, a fire station and hundreds of homes on 1,200 hectares of land. DHL, Taiwan's Evergreen Aviation, Federal Express, Ross Perot's Hillwood Strategic Services, United Parcel Service and France's Vinci are said to be interested. The sale is expected later this year.

* Farfan, a naval base that was to be leased to a single investor with nearby Howard, will now be offered separately as a second Pacific port to rival Balboa.

* Another multimodal transport center at the Colon Free Zone is to link the container port of Manzanillo, the U.S.-built airport of France Field and the transisthmian railway to give shippers more options.