• JULY 16, 2014
• Infrastructure

Casco Viejo is the beating heart of a booming city. At the southwestern tip of Panama’s capital, the vibrant neighborhood overlooks the Pacific entrance to the Canal, through which hundreds of millions of tons of containerized freight pass each year. The success of the Casco and the Canal represent the same approach manifested at the local and the global scale: Operations that serve an international clientele demand logistics beyond the means of the Panamanian government. The Panama Canal Authority is a patrimony unto itself; it coordinates tariffs, cranes, locks, and docks with constitutionally protected autonomy. There are no such formal mandates in the Casco. But there is Casco Parking.

Casco Parking is a private-sector partnership to solve public-goods problems in Panama’s Old Town. The colonial-era enclave hosts architecture worthy of a World Heritage Site designation from UNESCO in 1997, plus walkability and nightlife unmatched downtown. All this attracts a surge of tourists and locals to complement residents drawn from over 30 countries, one of whom is K.C. Hardin, an American developer committed to sustainability who, with partner Ramon Ricardo Arias, has built the most notable hotels in the neighborhood. In 2013, their company, Conservatorio, organized Casco Parking as a coordinating mechanism through which the four other active developers and myriad small businesses of the Casco could solve its scourge: parking.

The dividends from the partnership’s self-funded solution have been the influx of these once-deterred customers, now happily shopping, drinking, and dining. Corporations may soon contribute, too, since Casco Parking has interpersonal contact with well-off vehicle owners. Credit-card companies, car manufacturers, liquor distributors, and entrepreneurs have all seen the benefits of sponsorship, whether to create incentives for certain credit cards through preferred valet service, to post deals on rival car models’ windshields, to promote sober-driving campaigns, or to launch new products. Hardin expects that between advertisements and the advent of a fee structure for drivers, the parking operation will soon become internally profitable, in addition to the positive externality of more customers on foot.

Buoyed by this success, Casco Parking has now called upon the MIT Sloan School of Management, where Hardin has lectured on sustainability, to help implement a far more ambitious project: the rationalization of the supply chain for local business. If sedans scouting for parking can choke Casco’s narrow avenues, then service trucks – with their wide turns and frequent stops – can asphyxiate them. The delivery of inputs from suppliers is inefficient, and the removal of outputs by the city is unreliable; privately-owned trucks grind through side streets for an hour to deliver only two cases of Coca-Cola, while trash piles up on sidewalks because a different set of public trucks never arrived.

As with parking, Hardin’s fundamental insight is to scale the operation from individual businesses to Casco as a collective entity. A multi-story distribution center, which Conservatorio will construct right outside the historic district, will be the single point of contact for all of the Casco’s logistics, assuming responsibility for the last mile of delivery and for the credit risk of the customers. Bars, coffee shops, hotels, etc. will place their orders through WhatsApp to the center, which will then purchase, receive, and process in bulk. The same golf-cart-sized electric vehicles that will deliver the perishables, liquor, laundry, and dry goods in color-coded containers to the businesses will also pick up waste and recyclables, which the city will collect from the distribution center.

Many fewer trips by much smaller vehicles can thus account for both inputs and outputs, yielding not only efficiency gains but also the centralized data that will amplify them. With on-the-ground help from Sloan second-year Andrew Morales, an experienced consultant, the supply chain will ultimately be predictive, choreographed by analytics rather than by WhatsApp messages. The integrity of the data is so vital that Conservatorio even recruited 20 volunteers from a prestigious secondary school this spring to weigh the Casco’s recyclables.

The profits from this enterprise could eventually be significant, considering that it will handle at least $500,000 worth of supplies each month with savings of 10-to-15% from the status quo. Much of the money will go back into the Casco, in accordance with Conservatorio’s principle that the neighborhood, whose population has stabilized at around 3,000 after declining from a historical high of 10,000, must invest in social and economic capital in order to ensure its economic sustainability. As the owner of substantial real estate within the Casco, Conservatorio has been able to enhance the neighborhood through its own developments as well as through the Casco Parking partnership. The distribution center, for example, will be the ground level of a complex that will dedicate two floors to community programs and the rest to affordable housing. In the basement, Conservatorio plans a garage for Casco Parking in order to further streamline that public service.

Neither the community programs nor affordable housing are new initiatives for Hardin, who has helped fund the former and build the latter since moving to Panama from New York City in 2004. He has also guided a gang reintegration program in partnership with a non-profit that has pacified parts of the Casco where, only a few years ago, hotel guests would not venture. Former gang leaders now lead tours, own restaurants, and otherwise pro-socially engage the neighborhood they once peppered with bullets.

The government has been apathetic or even, at times, antagonistic to most of Conservatorio’s work, though Hardin hopes that will change with the inauguration of a new, less corrupt national administration (the municipal government has little influence). The lack of public-sector assistance makes Casco Parking a compelling example for other, self-contained business improvement zones in cities whose governments cannot, or will not, partner with them. Two lessons stand out.

Logistical solutions are generally high- maintenance, but can be proactively devised and implemented by the private sector.

The first is to build trust between the local businesses. Free-riding or non-compliance could be prohibitively common unless the owners have confidence in the integrity and competence of the organization. The principals of Casco Parking spent five years fighting the administration of President Ricardo Martinelli over a boondoggle of a superhighway that encircles the Casco; that time in the trenches together forged relationships that enabled future cooperation. Absent of such an animating common cause, business improvement districts will likely need to substitute a combination of charismatic leadership, enforceable penalties, and participants willing to make a disproportionate initial investment. Pure public service delivery, as with the gang reintegration program, also engenders good will and enhances the commercial sector’s credibility.

The second lesson is to think logistics, not infrastructure. Hardin and his colleagues at first called for more and better parking within the Casco, before realizing that the key was not to build capacity at great expense, but rather to arbitrage the demand for parking within the neighborhood with the supply of lots on the outside. Even the multi-purpose distribution center, which is certainly a capital investment, will serve as the hub of a new supply-chain configuration whose efficiency will preclude or negate many ancillary capital costs.

Logistical solutions are generally high-maintenance, but they are usually so much cheaper than infrastructure that they can be proactively devised and implemented by the private sector while the government is still negotiating with contractors. That capacity to self-organize around acute problems has been crucial to the success of Casco Viejo.