4. O&M Case Study: The Panama Canal Authority
The Panama Canal, about 80 km (50 miles) in length, connects the Atlantic and Pacific Oceans at one of the narrowest points of the American continent. After more than 100 years, it still stands out as a masterpiece of engineering. Since its opening in 1914, more than a million vessels from around the world have transited the waterway, on any one of 144 maritime routes linking more than 80 countries. Every day, about 38 ships on average pass along the canal.
The canal contributes considerably to Panama’s economy. While the direct contribution to the government budget is about US$ 1.2 billion a year (8% of the budget), considering all indirect effects, such as the maritime and logistics industry it supports, the canal influences about 25% of Panama’s GDP. The canal is also key to global trade, and plays a prominent role in many of the leading economies in the world. About 5% of total global cargo is transported through the canal, including 10% of US exports and imports.
The canal is managed, operated and maintained by the autonomous government agency Autoridad del Canal de Panamá (ACP), or the Panama Canal Authority. The management principles currently applied at the ACP exemplify the various best practice areas in the O&M framework – maximizing asset utilization, enhancing quality for users, reducing operating costs, mitigating externalities, extending asset life and reinvesting with a life cycle view. In all of these areas, the ACP strategists have taken targeted actions.211 This conscientious approach comes as no surprise: after the handover from the US in 1999, the ACP developed as a disciplined commercial canal operator, leaving behind the previous administrative model. The change was fostered by the Government of Panama, which put the right enabling factors in place, helping to ensure funding, build capabilities and reform governance, and thereby facilitating sustainable O&M. (See Figure 37 for an overview of the ACP’s O&M strategies.)
Figure 37: Case Study on the Panama Canal
Note: KPI = Key Performance Indicator; ACP = Panama Canal Authority; LNG = Liquefied Natural Gas; Ro-Ro = Roll-on Roll-off
Maximizing asset utilization
The ACP optimizes throughput. It has reduced the average vessel transit time from 27 to 24 hours by fine-tuning transit processes and thus enabling more transits per day. Transit times are not only shorter now, but also more predictable, so the canal is attracting more container liners that have to keep to strict schedules. In 1995, 200,000 containers were transported through the waterway; the number now exceeds 12 million Twenty-foot Equivalent Units (TEUs).
The ACP maximizes availability. It provides a 365-day, 24-hour service, and has increased the reliability and continuity of service by minimizing downtimes. That has been partly due to a policy of incorporating redundancy into the key system components, such as the lock gates. For example, each lock chamber has two valves, so a valve can be replaced without suspending normal operations (the water-filling process is slowed down somewhat, but service is not interrupted).
The ACP uses a mixed demand management system – partly price-based and partly rules-based. Its booking system allows pre-booking of slots, and reserves a certain number of slots for each vessel size category and for specified pre-booking periods, so there will always be some slots available for late-bookers. While slots for the first three booking periods are awarded on a first come, first served basis (rules-based), a short-notice slot (i.e. one day prior to the transit) is awarded through an auction (price-based).
Enhancing quality for users
In running its infrastructure business, the ACP applies various marketing strategies and tools. It has introduced customer segmentation by vessel type, commodity and geography. (The segments include: container, dry bulk, liquid bulk, passenger, car, refrigerated goods and general cargo.) It has created dedicated teams to conduct market research on each segment, and to serve each of them appropriately.
The ACP has also introduced technology for forecasting user traffic, and adopted scenario planning to assess the different customer markets and the changes to the underlying drivers. For example, it studies the competitiveness of coal production in different regions, and the evolving fortunes of shale gas and consequent potential for exports of liquified natural gas (LNG) from the US. In addition, the ACP is continuously engaged in analysing its own competitive position. Given the competition from the Suez Canal and the land bridge across the US, it monitors those competitors constantly, assessing their competitive advantages and disadvantages.
The ACP is customer-oriented, and intent on improving the customer experience. Its online booking system allows vessels to conveniently register many months in advance for an assured transit time – a service that is much appreciated by cruise lines and container shippers. In fact, a special allocation is reserved for cruise ships, which can access the allocation more than a year in advance, prior to all other types of vessel.
To reduce the user’s costs, and thus enhance its own competitive appeal, the ACP has recently initiated a new just-in-time service that allows vessels to pass more efficiently. The vessels receive notification of their required arrival time and provisional transit time 96 hours prior to their scheduled transit, and can thereby accurately pace the final leg of their voyage to the canal entrance; in that way, they can use fuel more efficiently and reduce anchorage time.
These various measures have proved their worth by yielding high levels of customer satisfaction. In 2012, the customer satisfaction index, based on a survey of Ship Masters after transit, registered 97.8%.
Reducing O&M costs
The ACP conducts central corporate planning, and sets financial targets and goal-oriented budgets to drive efficiency in the organization. The planning metrics, however, are concerned with more than mere financial performance: the aggregate performance index is composed of 40% financial metrics (e.g. the operating margin), 25% human resource metrics (e.g. occupational safety, staff well-being, productivity) and 35% client and operations metrics (e.g. vessel transit time, energy and water efficiency).
Great importance is accorded to analysis and planning. Any proposed construction or maintenance projects first have to undergo a whole life-cycle return-on-investment analysis before they get the go-ahead for implementation. And, overhauls are planned in detail a full year in advance. The ACP aims to pre-assemble components and pre-order materials and equipment to avoid waiting times during the actual maintenance works. Its maintenance planning makes use of Gantt charts, where the activities are itemized by the minute, and generates the optimal sequence of steps for repair work. The value of such detailed planning and preparation is evident from the results. To fix a major gate outage now takes 4.5 days on average, compared with 14 days in the past. A further boost for maintenance efficiency has come from the new “all-in-one-go” maintenance model, which has replaced the old policy of carrying out maintenance work in multiple sequential packages.
The ACP’s procurement system promotes competition and transparency, with open specifications and whole life-cycle evaluation of major parts. Responses to tendering are evaluated twice over – from a technical and a financial perspective. And where appropriate, the ACP uses performance-based procurement; for example, the specifications for new locks stipulated a target time for filling and emptying the lock chambers rather than the type of technology to be used.
The ACP’s corporate culture has also changed with the times. The traditional, tight process control culture (“instructions for everything”) has given way to a culture of continuous improvement that values entrepreneurial decision-making. In addition, a formal, continuous improvement process is now in place, whereby staff can propose innovations through an intranet platform, and a dedicated team of professionals has been established for analysing and improving processes.
All of these measures, in the cause of operational excellence, contribute to an operating profit margin of around 45% and returns on equity of about 20%. (Being wholly owned by the state, the ACP is not charged for the use of water and land, which would definitely alter these results.)
The ACP runs comprehensive programmes of environmental mitigation, with the aim of becoming carbon-neutral. For example, a reforestation programme along the canal has involved the planting of 600,000 seedlings so far. The agency also operates a filtration plant to provide water to about 500,000 people in Panama; and, it operates various hydraulic and thermal power plants for the canal’s own operations, selling the excess energy to the external market.
Operating the canal involves a vast consumption of water, thus water management is a priority concern for the ACP. Under its Integrated Water Resource Management scheme, the agency monitors and modifies the level of the canal’s lake, taking into account the hydrological and meteorological forecasts, and allocates water for the various needs, including lock operations, utility consumption and electricity generation. The agency also works actively to reduce water consumption. The new locks currently under construction, despite being 60% wider and 40% longer than the existing locks, will actually consume 7% less water, as 60% of the water required for each transit will be salvaged in the new reservation basins and then reused.
The ACP has deliberately integrated environmental stewardship into its regular business processes. It established an energy efficiency committee, and has instituted environmental impact assessments at various project stages. It also undergoes an external environmental audit every six months. Its environmental division is well resourced, with 45 staff, about 20 of whom are working exclusively on environmental issues related to the expansion project. In addition, the ACP’s integrated management dashboard includes environmental KPIs.
Finally, the ACP engages proactively with external stakeholders and the surrounding communities. It operates a community outreach programme, which includes providing training for teachers, and its water governance approach is based on six regional advisory councils and 30 local committees. It also publicly discloses key environmental performance metrics (e.g. a water quality index).
Extending asset life
The ACP maintains an elaborate maintenance schedule, with the required interventions for each asset being carefully planned well in advance. The approach is a mix of preventive maintenance used for critical assets, and corrective “run-to-failure” maintenance used for non-critical components. The preventive maintenance is implemented in any of three ways – time-based, usage-based or condition-based – depending on the asset’s criticality and the availability of information on the asset’s condition.
Substantial resources are dedicated to maintenance; the agency has spent nearly US$ 2 billion on upgrades and improvements to the canal since 2000. The main areas of maintenance include dredging operations in the navigation channel, controlling erosion and landslides, improving locks and their components, and maintaining dams, landfills and power plants.
Reinvesting with a life cycle view
The ACP looks to the future, and makes plans constantly. The current expansion should secure its place in the global supply chain, and safeguard it, to some extent, against new competition from the projected rival canal in Nicaragua and the increasingly de-iced Arctic route. But the canal’s expansion programme was actually prompted by the increased demands of world trade, and the consequent surge in both the number and the size of cargo ships. The latest container vessels can carry about 18,000 TEUs, while the canal’s old locks could only accommodate ships with a maximum of about 5,000 TEUs. While the old canal was too limited in the number of vessels it could transit each year, that number is about to double. All the new measures are aimed at maintaining the canal as the route of choice for international trade.
The expansion programme involves an investment of US$ 5.2 billion. It consists of various major works, including the construction of new larger locks, the dredging of navigational channels and a new Pacific access channel. The programme was approved by a national referendum in 2006, in which Panamanians voted heavily in favour of expansion. The ACP believes that the expansion, once completed in 2015, will boost Panama’s annual GDP growth rate by 1.2%, which would lift 100,000 Panamanians out of poverty.
The expansion plans have taken into account the canal’s O&M needs and costs over the whole life cycle. The ACP’s maintenance department was an early participant in the planning of the construction and the purchase of new equipment, notably the new locks. The planners conducted a full total-cost-of-ownership analysis, and gathered external benchmarks to validate the results. Maintenance concerns are also incorporated into the construction contracts; specifically, the contractor for the locks is obliged to maintain them for three years, and also has to perform failure mode analysis and reliability analysis to support future preventive maintenance works.
Looking ahead, the Government of Panama has created the right enabling conditions for optimizing the O&M of the canal for the long term. They are:
During the US era until 1999, tolls were set on the basis of covering costs, but the canal took a more advanced approach to increase its revenues and optimize its yield. It segmented the market, and adapted tolls to different cargoes, using a sophisticated pricing model that included the estimated total landed cost of transporting the goods from origin to destination (not only the canal costs) as well as the price sensitivity of the relevant user segment.
There is no political interference in the use of the canal’s proceeds. By law, after covering the costs of O&M, modernization and expansion, the agency disburses the surplus funds to the National Treasury. (In the last financial year, the country gained more than US$ 1 billion in this way.)
In addition to the toll revenues, ancillary businesses currently contribute more than 20% of the ACP’s revenues: notably, through the sale of electricity, water and transit-related services. The ACP is studying additional ancillary business opportunities, including an LNG terminal, a roll-on/roll-off terminal, a ship repair yard, a bunkering terminal, logistics parks, a container terminal and container-on-barge services.
Panama has no university-level programme focusing on maintenance, nor a professional maintenance association. Given this, the ACP itself provides most of its staff training, and runs its own apprentice school. More than 8,000 employees attended its training courses in 2012. The agency also uses state-of-the-art software to optimize its maintenance planning and works.
The ACP has nurtured a maintenance culture among its staff. A team of dedicated maintenance professionals has even set up a maintenance circle, with about 70 members, who get together after work hours to discuss issues and best practices. The team recently organized a conference attended by professionals from across the region.
The ACP was not privatized, but corporatized with a professional structure. Although a government agency, it has financial autonomy and functions quite independently: politics are kept well clear of the canal, so the agency enjoys long planning horizons while the government benefits from receiving the full profits. This independence is also reflected in its leadership personnel. The CEO is selected on the basis of experience and competence, and is not a political nominee.