Panama Canal: Hits and Misses

Jaume Ribera finds lessons on project management from Panama

14/08/2014

Panama Canal Gatun Locks

The Gatun Locks, looking north towards the Atlantic Ocean.

August 15th marks the 100th anniversary of the opening of the Panama Canal, considered the riskiest and most technologically complex project of its time. The current effort to expand this corridor, like the original plan to build an Atlantic/Pacific shortcut, provides salient lessons on managing grand-scale projects, writes Jaume Ribera, professor of Operations Management at IESE and holder of the CEIBS Port of Barcelona Chair of Logistics, in the latest issue of IESE Insight magazine.

It is important to note that in the late 1800s, the scientific management of projects was something new. The Frenchman Ferdinand de Lesseps, riding high on pulling off the Suez Canal, aimed to repeat this feat in Panama. In the end, it bankrupted him, and the United States had to step in and finish what he’d started.

In 1879, a decade after Suez, an International Congress was organized in Paris to entertain proposals for the Study of an Interoceanic Canal in Panama. De Lesseps’ plan to construct another Suez-style, sea-level canal without locks won majority backing among the 136 delegates present – only 19 of whom were engineers.

In 1880, de Lesseps estimated the project would cost 658 million francs and take eight years to complete – this was before any surveys had been done or any excavation work began. Within a few years, he had to admit defeat. With insufficient capital, the company was declared bankrupt in 1889. Apart from the technical difficulties – not to mention charges of financial corruption later leveled against de Lesseps – one of the biggest obstacles proved to be the wet tropical work conditions, causing tens of thousands of laborers to die from malaria and yellow fever.

De Lesseps’ failure underscores the importance of careful planning and risk analysis prior to the start of any project. A gung-ho committee is no substitute for a proper study, with the technical aspects determined by experts.

In U.S. hands, the Panama project had three chief engineers: John Findley Wallace, John Stevens and George Washington Goethals. Stevens was the foremost civil engineer of his day, having accomplished the Great Northern Railway across the Pacific Northwest of the United States. He immediately applied his expertise to building a railway to cart away the excavated materials. Crucially, it was Stevens who finally calculated that a sea-level canal without locks was impossible, and he shifted to an elevated series of locks and dams, which ultimately saved the project.

Stevens was also the first to take the working conditions seriously, understanding that humanitarian concerns were as vital as scientific management to the project’s success. He enlisted specialized physicians to treat the malaria and yellow fever, while also introducing an entertainment and food space for the workers, which boosted their flagging morale.

There are two takeaways here: first, the need to create safe work environments; second, the importance of breaking down complex projects into activities that can be delegated and understood by those in charge of executing them.

A century later, these lessons appear not to have been learned, as evidenced by problems with the canal expansion planned to be completed for the centennial. A group of companies, led by Spain’s Sacyr, won the bid to construct new locks based on high technical credentials and a budget lower than expected. However, time has revealed the shortcomings of awarding projects to the lowest bidder, with cost overruns leading to a bitter dispute and a stoppage of work until Panama coughed up more funds.

This highlights another key point: When risks are shared between the project tenderer and deliverer,their interests are better aligned and greater efforts are made on implementation and, when problems arise, joint resolution. There are fewer legal battles and less finger-pointing over who should pay for things that were either poorly defined or not properly costed out by one side or the other.

In the case of the latest dispute, a temporary deal was struck, but the completion date has been put back to at least late 2015. When that day comes, the canal should be able to accommodate much larger and wider container vessels, doubling the traffic passing through the channel and with it world trade.

Project management is not so much a miracle – as the naysayers once said it would take to complete the Panama Canal under de Lesseps – but rather a science for which executives need to make sure they are fully prepared.

This article was originally published in IESE Insight. Members of the Alumni Association and subscribers can read more articles like this and other premium content using their credentials. Those who are neither Alumni, nor subscribers, can access the premium content either by subscribing to the magazine, or by buying the articles through the IESE Publishing website.