oversight

Panama Canal Commission: Revenue Forecasting and Marketing Efforts

Published by the Government Accountability Office on 1990-09-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                   PANAMA CANAL
                                                   COMMISSION
                                                   Revenue Forecasting
                                                   and Marketing Efforts




                                                                                                                                   9


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                                                                                                                          142431




                                                                                                RELEASED
                                                    RESTRICTED--Not       to be released outside the
                                                    General Accounting OBlce unless specifically
                                                    approved by the Offlce of Congressional
                                                    Belationt3.

.I   ----.--.-   “.-_               I--   -.---




(;AO/NSIAI)-!)O-~7~l~I~
             United States
CiAO         General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-240763

             September 14,199O

             The Honorable Roy Dyson
             Chairman, Subcommittee on Panama
               Canal and Outer Continental Shelf
             Committee on Merchant Marine and Fisheries
             House of Representatives

             Dear Mr. Chairman:

             On March 15, 1990, you requested that we review the Panama Canal
             Commission’s recently developed revenue forecasting methodology and
             the Commission’s marketing efforts to promote the Canal. Also, at your
             request, we evaluated the Commission’s procedures for collecting and
             maintaining data on Canal traffic to determine whether the amount of
             cargo originating from, or destined to, a specific port could be identified.

             On June 28, 1990, we briefed your staff on the results of our review.
             This report summarizes and updates the information provided in that
             briefing.


             The Panama Canal Commission, established by the Panama Canal Act of
Background   1979 (Public Law 96-70), is an agency of the executive branch of the
             United States government. The Commission manages, operates, and
             maintains the Canal on a self-financing basis and is expected to collect
             tolls and other revenues to cover all operating and maintenance costs, as
             well as obtain capital for plant replacement, expansion, and improve-
             ments. To comply with the Panama Canal Act’s requirement to recover
             such costs, the Commission prepares forecasts of Canal traffic and toll
             revenue. Over the years, these forecasts have been prepared by Com-
             mission staff and, on occasion, by consulting firms under contract with
             the Commission.

             The Commission’s methodology for forecasting short-range revenue and
             cargo flows produced reasonably accurate figures during fiscal years
             1980 through 1988. These figures fell within 5 percent of actual
             amounts. For each of those years, consistent with the Panama Canal
             Act, we reviewed and certified that the underlying assumptions used to




             Page 1                              GAO/NSIAD-90-278BB Panama Canal Chmmhion
                   B-240762




                   estimate cargo flows provided a reasonable basis for estimating reve-
                   nues for the forthcoming fiscal year.*

                   In 1988 the Commission contracted with Temple, Barker, & Sloane, Inc.
                   (TBS) who, in association with Data Resources, Incorporated (DRI), was to
                   develop an improved short- and long-range forecasting model. Inputs
                   into the model are still being refined, and Commission officials stated
                   that they are planning to consult with their contractors about other
                   adjustments to the model.


                   We believe that the methodology developed by TBS and DRI and now
Results in Brief   being used by the Commission to forecast revenues is sound and compre-
                   hensive. It provides sufficient flexibility for the Commission to adjust its
                   revenue forecasting as conditions dictate. However, this model has been
                   in use for less than 2 years, and only time will tell if it is a more accurate
                   predictor of future revenue than the previous methodology, which
                   proved quite accurate.

                   We found that the Commission’s primary marketing emphasis is on
                   keeping existing clients rather than on expanding its client base. Com-
                   mission officials acknowledge that developing new business is extremely
                   difficult because (1) other transportation modes are becoming increas-
                   ingly competitive and (2) new trade routes that would be served by the
                   Canal are only slowly developing.

                   The Commission does not maintain data on the specific ports of origin or
                   destination of cargo passing through the Canal. Instead, information on
                   where cargo comes from and goes to is maintained by the Commission
                   on a more aggregated basis. For example, data would be available on
                   areas served, such as the East Coast of the United States, the West Coast
                   of South America, or Asia. Therefore, we were unable to identify the
                   amount of cargo passing through the Canal destined for, or originating
                   from, a specific port.




                   ‘On December 22,1987, the Congress amended the Panama Canal Act, changing the Panama Canal
                   Commission Fund from an appropriated fund to a revolving fund. This amendment eliminated the
                   requirement that we annually certify the Commission’s estimated revenues.



                   Page 2                                       GAO/NSLW4O-278BR Panama Canal Commission
                     In 1988, the Commission contracted with TBS to develop a new long-
Panama Canal         range Canal forecast. As part of the forecast contract, TBS was also
Commission Revenue   requested to develop an econometric forecasting model that could be
Forecasting          used on the Commission’s microcomputer system. This software mod-
                     eling package was designed to provide Commission economists greater
Methodology          capability to revise forecasts and to test the impact of possible varia-
                     tions in certain key elements of Canal traffic. In April 1989, the first
                     forecast using the new model produced cargo traffic and revenue esti-
                     mates through fiscal year 2010. A second and, according to the Commis-
                     sion, more accurate forecast was produced in March 1990. The model
                     ultimately contained two components-one to forecast cargo flows and
                     another to forecast toll revenues.

                     To prepare commodity forecasts, TBS subcontracted with DRI, and
                     together they adapted their jointly owned World Sea Trade Service to
                     the trade routes and commodities serviced by the Canal. The Service is
                     an econometric system of ocean trade forecasting and combines a histor-
                     ical trade database, commodity-specific forecasts, forecasts of interna-
                     tional economic activity, and trade industry analyses to produce a
                     commodity-specific trade forecast. The base forecast provided by the
                     Service is updated every 3 months, and the data can be used to provide
                     a Canal-specific forecast upon request by the Commission. This enables
                     the Commission to monitor the amount of each commodity expected to
                     go through the Canal during the forecast period and to revise the esti-
                     mates quickly if there are indications that actual trade patterns are
                     varying significantly from forecast targets.

                     The commodity forecast is reviewed by the Canal Commission; adjusted,
                     if necessary, to account for recent Canal traffic data and developments
                     affecting Canal trade; and then used as input into the revenue-fore-
                     casting model. A program then converts each commodity-specific fore-
                     cast into the numbers, sizes, and types of ships expected to transit the
                     Canal. Toll revenue is then calculated based on the projected Canal
                     vessel traffic, with a goal of having the Canal meet all costs on a self-
                     financing basis.

                     Our evaluation indicates that the forecasting methodology currently in
                     use by the Canal Commission is sound and thorough. It overcame the
                     Commission’s problems with the previous methodology, allowing data to
                     be manipulated quickly and easily, and thereby permitting the Commis-
                     sion to react to emerging economic conditions. Data are available by
                     region, commodity, and trade route. The forecasting methodology (1)
                     considers the market for and the shipping technology associated with


                     Page 3                             GAO/NSIAIMO-278BR Panama Canal Commission
                    B240763




                    each commodity, (2) predicts changes in the level of economic activity
                    and trade in the regions most used by the Canal, and (3) considers
                    changes in the shipping industry, such as the use of larger vessels. The
                    methodology is flexible enough to allow quick adjustments to forecasts
                    for each commodity. If, over time, forecasts prove to be unreliable, the
                    Commission can easily readjust.

                    Inputs used in the model are still being refined. The initial April 1989
                    forecast was optimistic and overstated projected Canal traffic. The
                    second forecast, developed in March 1990, took into account lower cargo
                    flow expectations. Estimates of future ship sizes were overstated and
                    the anticipated number of transits were understated in the initial fore-
                    cast and will also need refinement. These two factors balanced each
                    other out and had no effect on revenue projections, but the Commission
                    desires greater accuracy in these factors. Commission officials told us
                    that they are planning to contract with TBSto address these and other
                    issues.

                    Because the revenue-forecasting model currently used by the Commis-
                    sion is less than 2 years old, we do not know whether it will consistently
                    produce more accurate forecasts than the prior methodology. Commis-
                    sion officials stated that the Commission’s revenue-forecasting track
                    record was very good and that improvements would be hard to attain,
                    Nevertheless, our evaluation of the current forecasting methodology
                    indicates that it is more comprehensive and flexible than the Commis-
                    sion’s earlier model (see app. I and II for cargo flow and traffic and toll
                    revenue forecasts).


                    The Director of the Office of Executive Planning is the focal point
Panama Canal        within the Commission for market relations and trade development pro-
Commission’s        grams. A Marketing Policy Steering Committee composed of five senior
Marketing Program   level Commission executives makes policy for the overall marketing pro-
                    gram, coordinates marketing plans and efforts, and ensures responsive-
                    ness to the needs of Canal customers.

                    In 1983, an Economic Research and Market Development Division was
                    established in the Office of Executive Planning to strengthen ties with
                    existing Canal customers, to explore and develop new market sources,
                    and to help gain recognition for the Canal as an efficient and economi-
                    cally advantageous transportation alternative for world trade. The mar-
                    keting section within the division is staffed by two marketing
                    specialists, with one additional position currently vacant. However,


                    Page 4                              GAO/NSL4D-9O-278B& Panama canal canmissioll
    other Commission officials, including both the Director and Deputy
    Director of the Office of Executive Planning, also perform marketing
    functions during the normal course of their work.

    The marketing group’s primary mission is to maintain existing clients.
    Some examples of the Commission’s past marketing activities include

l publishing articles concerning the Canal in trade journals, periodicals,
  and shipping industry magazines; sending current information about the
  Canal to maritime organizations; contacting port authorities and
  attending board meetings at key U.S. ports; and briefing visiting dignita-
  ries and Canal customers,
. sending messages to Canal customers immediately following “Operation
  Just Cause”2 to assure them that they would encounter no problems
  when transiting the Canal, and
l conducting face-to-face market surveys and maintaining communication
  with shippers and exporters in the Far East, Europe, Latin America, and
  the United States to tell Canal customers about the Canal’s capabilities,
  toll rates, and costs and to discuss with users any problems they have
  encountered with Canal service.

    The Commission’s marketing plan for fiscal years 1989 through 1991
    consists of the following four steps: (1) to enhance the database by
    greater use of automated resources for collecting and analyzing transit-
    related data, customer profiles, and other information; (2) to expand the
    lines of communication with customers through increased participation
    in conferences, symposiums, personal visits, and larger direct mailings;
    (3) to promote the Canal through trade journals and other periodicals as
    a preferred route for world shipping; and (4) to strengthen internal coor-
    dination efforts to promote the usefulness of the Canal.

    Commission officials told us it is extremely difficult to attract new busi-
    ness to the Canal because of competition from other transportation
    sources, changes in world trade patterns, and slow development of new
    trade routes that could use the Canal. We were told by Commission
    sources that using differential toll rates for various commodities or
    types of shipping could possibly improve the Canal’s competitive posi-
    tion in certain areas, but that the Commission is prohibited by law from
    having a multiple rate schedule.



    ‘“Operation Just Cause” was the name of the American action in Panama on December 20,198Q.



    Page 6                                      GAO/NSIAD9O-278Blt Panama Canal Canmidon
                       The Commission’s current procedures for collecting and maintaining
Data on Vessels        data on Canal traffic do not readily identify the amount and type of
Transiting the Canal   cargo originating from or destined for a specific port. We found that the
                       Commission maintains these types of data only on a country-to-country
                       basis or, in the case of the United and Canada, by coastal region. We
                       attempted to disaggregate these data to show the port of origin, the des-
                       tination, and the cargo carried; however, we found that developing data
                       beyond those maintained in the Commission’s automated database could
                       only be done by intensively reviewing individual ship documents for a
                       given period.

                       The Commission collects 240 pieces of information on each of the esti-
                       mated 1,100 ships that transit the Canal monthly. Some of this informa-
                       tion is coded and entered into the Commission’s Ship Data Bank system;
                       however, specific ports of origin and destination are not entered. For
                       example, a ship traveling from Baltimore to Tokyo would be recorded by
                       its trade route-East Coast United States to Far East-rather than by
                       specific ports. Furthermore, the system does not maintain information
                       on commodities coming from or being delivered to specific ports.

                       Data on all vessels calling at any U.S. port may be purchased from the
                       Port Import/Export Reporting Service (PIERS).PIERS'information identi-
                       fies the vessel name, shipping line, date of arrival and departure, and
                       port of origin. It also provides a description of the cargo. However, PIERS
                       does not provide information on the ship’s deployment route. For
                       example, PIERSwould show that a vessel had traveled from Tokyo to
                       Baltimore but would not indicate whether the ship had transited the
                       Panama Canal or had arrived by another route.


                       We interviewed and obtained records from Commission officials in the
Scopeand               offices of Executive Planning, Finance, and Marine Bureau in Balboa,
Methodology            Republic of Panama, to obtain information on revenue forecasts, mar-
                       keting efforts, and data availability for the amount and type of cargo
                       transiting the Canal originating from or destined for specific ports. We
                       did not verify Commission-provided data.

                       We reviewed the economic forecasts prepared by Temple, Barker, &
                       Sloane, Inc., as well as those prepared by the Panama Canal Commis-
                       sion Our review included assessments of the underlying assumptions of
                       the model and the reasonableness of the data and analytical techniques
                       used in developing the forecasts. We also interviewed a vice president of



                       Page 0                             GAO/NSIAD~278BB   Panama Canal Commieeion
8,”

      B.240763




      PIERSin New York to obtain information on the data available through
      its reporting service.

      We performed our review from May through August 1990 in accordance
      with generally accepted government auditing standards.

      We discussed the contents of this report with the Acting Director of
      Executive Planning, the Acting Administrator, and the Deputy Adminis-
      tratAJr of the Panama Canal Commission. Their comments have been
      incorporated where appropriate. However, as agreed with your office,
      we did not obtain written agency comments on this report.

      As arranged with your office, unless you publicly announce its contents
      earlier, we plan no further distribution of this report until 30 days from
      the date of this letter. At that time, we will send copies to the Adminis-
      trator, Panama Canal Commission. We will also make copies available to
      others upon request.

      GAOstaff members who made major contributions to this report are
      listed in appendix III. A list of related GAOreports is provided on the last
      page of this report. If you or your staff have any questions concerning
      this report, please contact me on (202) 275-5790.

      Sincerely yours,




      Harold J. Johnson
      Director, Foreign Economic
        Assistance Issues




      Page 7                              GAO/NSIAD-!KL278BR Panama Canal Commission
Contenb


Letter
Appendix I
Panama Canal
Commission Cargo
Forecasts by
Commodity Group
Appendix II
Panama Canal Traffic
and Toll Revenue
Forecasts
Appendix III
Major Contributors to
This Report
Related GAO Products                                                                            16




                        Abbreviations

                        GAO       General Accounting Office
                        DRI       Data Resources, Incorporated
                        PIERS     Port Import/Export Reporting Service
                        TESS      Temple, Barker, & Sloane, Inc.


                        Page 0                           GAO/NSIADB&278BB   Panama CanaI Commidon
Y




    Page 9   GAO/NSI.ADBO-278BR Panama Canal C4mmbsion
                                                                                                                                               h”,
                                                                                                                                                     t
Appendix I                                                                                                                                               K
Panama Canal CommissionCargo Forecastsby
Commodity Group


Longtonsinthousands
                                                                                                 Fiscal year
                                                          1989
Commodity group                         _____-         (actual)         1990        1991         1992            1995      2000         2005         2010
Automobiles -.'                                            1.990        1.718       1.629        1.638       1.670         1.773       1.946        2.021
Alumina/bauxite                                            2,385        31077       33329        31508       4,367         4,537       5,351        6,048
Bananas         .                       ~-                 1,375        1,641       1,854        2,057       2,442         2,823       3,081        3,363
                                                                                                                                      .___
Chemrcals -- .1                .--.. -.~-            ----  5,508        4,537       4,709        4,963       5,396         6,647       7,574        8,643
                                                                                                                                                   ___---
Coal& coke                                                 8,934-.-     8,757       8,329        8,001       7,272         7,445       7,528        7,687
Fertilizers                                                5,601        4,890       5,099        5,176       5,871         6,598       7,175 -.-- 7,862
Food & agr&       ~-                                       3,041        3,135       3,187        3,250       3,524         3,764 -     3,953        4,157
Grains, other - -                                         13,647       17,378      18,287       18,968      20,376       23,651       25,958       28,523
                                                                                                                                           ---.   -..___
Iron & steel                                               7,850        7,632       7,534        7,656
                                                                                                     ____.- 7,891
                                                                                                                ~-         9,070       9,957       10,373
Lumber products                                            6,361        6,375       6,811        7,194       7,973         F 756       9,535       10,294
Metals, other                                              1.658        1.786       1.800        1.813       1.832        -is857        1,897
                                                                                                                                        -~---       1.938
Minerals, misc.                                            4,389        6,084       6,044        6,027       6,043         6,191       6,384        6,670
Ores, other                                                4,448        5,147       5,194        5,220       5,367         5,466       5,638        5,836
Paper                                                      1,419
                                                             --         1,407       1,460        1,541       1,767         2,283       2,661        3,111
                                                                                                                                                       -
Petroleum, them.                                           2,117        1,493       1,468        1,472       1,487         1,396        1,353       1,325
Petroleum, coke                                -----       3,184        3,375       3,455        3,528       3,847         4,176       4,407        4,653
Petroleum,crude                                            7.873        7.517       7.982        7.978       7.910         7.430       7.249        7,137
                                                               --
Petroleum, prod.                                           7,003        7,491       7,238        71169       7,277         7,556       7,702
                        _~._..,.-__-.--                                                                                                    _____-- 7,856
Petroleum, resid.                                          4,174        5,003       5,072        5,234       5,633         6,011       6,390        6,795
Phosphates.                                                8,603        8,514       8,358        8,347       8,452         9,997      11,176       12,518
Pulpwood                                                   3,084        3,154       3,213        3,300       3,482         4,213       4,772        5,464
Refrigerated~arqo,other                                    3,377        3,648       3,929        4,196       4,757         5,416       5,878        6,388
Scrap metal                                                2,019
                                                        --_-~.--        1,517       1,579        1,628       1,527         1,622    -  1,689        1,760
Sovbeans                                                   5,243        6.021       5.999        6.187       6.787         7,889       9.137
                                                                                                                                       L-L.-       10.603
Sugar                                                      3,364        2,785       21640        21533       21371         2,504       2,674 -...___-
                                                                                                                                                    2,901
Wheat                                                     11,027-       6,295       6,439        6,602       6,908         7,842 __________-...
                                                                                                                                       8,487        9,191
All other                                                  2,049        1,830       1,895        1,958       2,239         2,565       2,817
                                                                                                                              -___________          3,097
Containerized                                             19,913       19,901      20,422       21,021      22,052       24,035
                                                                                                                             -____    25,460       27,553
Total                                                  151,636        152,108    154,955      158,165      166,520      183,615    197,829      214,367
                                                          Source: Data provided by the Panama Canal Commission




                                                          Page 10                                       GAO/NSIAD-90-278BR Panama Canal Commimion
    ,
Appendix II

Panama Canal Traffic and Toll
RevenueForecasts


                                              Oceanmoinm tnnrltrr                      Toll revenue              Net tonnage               Small vessel
Fiscal year -.-.         _-._-.-----   TOM               Dally average         (Dollars in millions)        (Tons In milllons)e                 transits
1989(actuai~                           , 2,075                     33.1                        $329.8                       187.0                   1,314
1990_.   .   -- .._---~- --.._ -       11,950                      32.7                         357.0                       184.8                   1,300
1991         -.-.---^--                12,osO                      33.0                         364.0                       188.4                   1,300
199i .         - ..._                  12,150                      33.2                         374.0                       193.6                   1,300
i~5                  -.--_             12.295                      33.7                         394.0                       203.9                   1,300
2000         ------                    121665                         34.7                      436.5                       225.9                   1,300
2005_.       .-_..-.-._.-.__-__        13,140                         36.0                      472.5                       244.6                   1,300
2010                                   13,580                         37.2                      510.0                       264.0                   1,300
                                                   BNet tonnage is calculated by converting cargo tons by commodity into Panama Canal net tons based
                                                   on a conversion matrix by vessel type and selected trade route. The resulting Panama Canal net ton-
                                                   nage for each commodity varies depending on the type of vessel carrying the commodity and on load
                                                   factors, For example, the Panama Canal net ton/cargo ton ratio for automobile shipments is higher than
                                                   other commodities because of the configuration of the ships used to transport automobiles.
                                                   Source: Data provided by the Panama Canal Commission.




                                                   Page 11                                          GAO/NSIAJM@=278BR        Panama Canal C4mmbsion
                                                                                                     c
                                                                                                         *
Appendix III                                                                                                 J

Major Contributors to This Report


National Security and        Thomas Melito, Senior Economist
International Affairs
Division,
Washington, DC.
                             Oliver G. Harter, Evaluator-in-Charge
Dal1as    Re@ona1   Office   Penney M. Harwell Site Senior
                             Rita F. Oliver, Evaluator




                             Page 12                             GAO/NSlAIMO-278BR   Panama Canal Commieeion
Page 13   GAO/NSIAD4@27SBit   Panama Canal Ckmminsion
                                               .*




Page 14   GAO/NSIAD-90.278BR   Panama Cd   Cmnmission
Y




    Page 15   GAO/NSIAIWO-278BR   Panama Canal Co&ion
Related GAO Products


              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1980 (ID-SO-~, Oct. 26, 1979).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1981 (ID-80-19, Mar. 6, 1980).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1982 (ID-81-34, Feb. 24, 1981).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1983 (ID-82-26, Mar. 19, 1982).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1984 (GAO/ID-83-29, Mar. 21, 1983).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1985 (GAO/NSIAD-84-96, June 19, 1984).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1986 (GAOIAFMD-86-42, Feb. 25, 1985).

              Certification of Panama Canal Commission Estimated Revenues for
              Fiscal Year 1987 (GAO/AFMD-~~-~~, Apr. 15, 1986).

              Revenue Estimate: Panama Canal Commission Estimated Revenue for
              Fiscal Year 1988 (GA~/AFMD-~~-~~, May 1, 1987).




(472221)      Page 10                         GAO/NSLALMO-278BR   Panama Canal Commission
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