Trading tariff packages through commodity exchanges: The Panamanian experience
(Written for the World's Commodity Exchanges, A joint publication of United Nations Conference on Trade and Development & Swiss Futures and Options Association)
By Abelardo CarlesThe National Commodities Exchange, Panama (BAISA) has utilized its commodity exchange for the somewhat unconventional purpose of distributing tariff packages negotiated as part of Panama’s WTO accession. Abelardo Carles, General Manager of BAISA, explains how this unusual mechanism works.IntroductionThe Republic of Panama finished negotiating its admission to the World Trade Organization in 1997, thus being one of the last countries of Latin America to do so.
Partly because of this delay, Panama had to accept some conditions for market opening that were perhaps more comprehensive than other countries that had been admitted before.One of those conditions is a list of eight agricultural and agro-industrial products that Panama became commited to import, despite being very “sensitive” for the country, in limited amounts and under a preferential tariff, pursuant to a program whereby these amounts would increase annually until 2007. After that year, the amounts will remain fixed.These eight products imported under a preferential tariff, in the amounts agreed upon with the WTO, are rice, dairy products, maize, chicken meat, pork meat, beans and by-products of tomatoes and potatoes.
These will be referred to in this article as “tariff packages”.A second condition accepted by Panama, upon the request of neighbouring Costa Rica, is that these tariff packages are imported thorugh an Exchange mechanism, namely a commodity exchange that, as recently as 1997, did not exist in the country.
The intention was obviously to ensure greater participation and more transparency for the interested economic agents.By means of the Panamanian Law N° 23 of 1997, the country finally formalized its adherence to the Marrakech Agreement. The acceptance of the above-mentioned conditions was made official; the operation of the commodity exchange was regulated and a state body was also created to regulate the operation of the exchanges.In 1997, the first and only Panamanian Commodity Exchange was created as a private society whose name is the National Commodities Exchange A:S: and is known in its abbreviated form as BAISA.
The members comprise approximately sixty nationally renowned agro-industrial companies and four of the larger banks, including the National Bank of Panama which is state-owned and the only public shareholder.From June 1999 to June 2006, BAISA had negotiated over US$ million in these tariff packages. The procedures used to make these negotiations are the subject of this article.
The Committee of Licenses for Tariff Packages The very same Law N° 23 of 1997 created a committee made up by three ministers or their representatives, called the Committee of Licenses for Tariff Packages. This committee is different from the regulating body, but it is the one that actually regulates all negotiations of the packages, always through the Exchange. The Committee has a technical Secretariat, and the two will be distinguished in this article as the “Committee” and “the Technical Secretariat”.
This Committee passed Resolution N° 5 of 1998, by means of which the issuing of tariff packages is regulated. The first outcome of Resolution 5 is the distinction made between the concepts of raw material and finished product.This is important because the way to negotiate each one is quite different.Whenever the Technical Secretariat convenes the negotiation of a package, it indicates what percentage of the package is raw material and what finished product is.
Some of the eight products, like maize, are raw material right from the outset of negotiations, since what the country needs is corn for the poultry and pork meat industry; and not finished products like corn creams, locally produced with Panamanian corn, which are fresher and better than the imported ones, although very expensive.Other commodities traded as finished products are beans and potatoes.
And finally, others, like rice, were initially granted an important percentage as finished products (white-polished rice, ready for human consumption), but little by little agro-industrial producers have managed to persuade the Committee that almost 100% of the rice package is defined as raw material- that is, rice for its milling industries – for reasons that will be explained later in the article.In any case, both procedures still coexist for the trading of raw materials and finished products.
We first proceed to review the procedure for raw materials, the simpler of the two.Negotiation of the tariff packages considered raw material It is the simpler negotiation because there is only one bid or auction by foreign suppliers (salesman) for the totality of the package open for bidding.The foreign supplier who offers the totality of the package opens for bidding.The foreign supplier who offers the lowest price gains the sale of the whole package.
For the Panamanian buyers or importers, instead of bids or auctions, the government allocates the right to buy a part of the package (the package is shred) according to the installed capacity each buyer has.
Only those who posses installed capacity can buy.This allocation of rights is made by the Technical Secretariat. In fact, if the group of importers does not ask for a total volume greater than the package, there is no distribution. Instead, each one is granted the right to import the amount requested. However, if the totality of the request made by all is larger than the package, then the distribution is made in proportion to the installed capacity of each.
An additional criterion that is not established in a formal fashion, but is indeed taken into account by the authorities, is the participation of agro-industries in the purchase of the national harvest.Consequently, these are simple negotiations in which the bids start between foreign sellers and in a matter of a few minutes, but depending on how long the bid takes, the sale of the package is adjudged and all the buyers know who is going to be their supplier.At the end of the process, the clearing and settlement of contracts is concluded, which is of minor importance to this article.
Negotiation of the tariff packages considered finished productsThe negotiation of the part of each package that fits the concept of finished product is more complicated. Two bids or auctions take place. The first is between sellers or suppliers, like in the case of raw materials. As in the case of raw materials, the one who offers the lowest price gains the sale of the whole package.Nevertheless, on the side of the Panamanian importers, that is to say, the buyers, there are no allocations in the case of finished products. This is simply because the finished product, by definition, does not require a processor.
Consequently, all economic agents, but mostly retailers, wholesalers and resellers, have equal rights to bid for the package. The agro-industrials can also participate, but in the same capacity as the other bidders – i.e. they have no allocation or right determined prior to the auction.Therefore, immediately after the auction for sellers, auctions or bids are conducted between buyers.
Obviously, these are auctions “towards the rise” and the bidding is no longer for the entire package, but lot by lot. For that reason, there is not one single auction but several. A “lot” is a quantity of product defined in the call, by which the total volume of the contingent is divisible. E.g., a potato package is 1,500 tons, which is then divided into 15 lots of 100 tons each. The purpose of this division of the package into lots is that, when auctioning the lots one by one, a larger number of buyers have the possibility to acquire a part of the package.However, there may seem to be an inconsistency here.
After all, the winning seller is the one that bids to supply at the lowest price, while the winning buyers are those that bid to purchase at the highest (on a lot by lot basis). So what is taken as the closing price? The answer is as follows: the sellers receive solely the price at which they won the auction, but each buyer will pay the price at which they won the right to purchase each lot.The buyers pay in two installments. One installment is the amount due to the seller and the remainder, which is sometimes quite a significant amount, will be deposited at a bank account of BAISA.
BAISA then has the formal obligation, agreed with the Panamanian State to distribute within a month every last penny among the Charitable Institutions registered and recognized as such by the Ministry of Economy and Finance. Through this mechanism, BAISA donated in 2002 the sum of US$ 1,600,000 only from the negotiation of the part of the rice package considered to be finished product (white and polished rice).
The philosophy behind this is that, even though the second auction increases the price to the consumer (as importers will transfer their higher costs to consumers), by donating the differential between the buyers’ and sellers’ prices, the most destitute segment of consumers are the ultimate beneficiaries. (Typically, these would be children and the elderly who depend for their livelihood on charitable institutions).
A second reason is to ensure a certain level of stability in consumer prices, since the buyers’ bids tend to come close to the price of the domestic product, something that would not happen if they paid only the sellers’ price which is usually far lower.
To return to a comment I made earlier, the agro-industrials have managed to reduce to a minimum the proportion of finished product in each package. As a result, the differentials generated by the double auction of finished products have also been diminished and thus a lower sum goes to the charitable institutions. Therefore, no longer is there much that BAISA can donate, but the mechanism still exists and is used.Modalities of payment, guarantees, contract formalization and liquidationThere are some additional aspects that perhaps should be mentioned.
On the day prior to the negotiations for trading finished products, parties interested in selling or buying the tariff packages must register. When trading raw material, as mentioned, the alternative method is used with requests from interested buyers and allocations made by the Technical Secretariat. The Secretariat sends these lists to the Exchange a few days before the negotiation. On the other hand, sellers and buyers must send directly to the Stock Exchange the so-called “preliminary tenders”, 48 hours before the negotiation and then they must present their actual tenders at the negotiation.
Concerning payment, the instructions or manuals of each product provide an option for buyers and sellers to use modalities of payment common to international trade – usually a bank’s letter of credit – instead of BAISA’s clearing house. The clearing and settlement of contracts is, nevertheless, quite strict.
Clearing, the delivery to the Exchange of the contracts signed by the parties, cannot exceed a period longer than five days; and settlement requires the presentation to BAISA of shipping documents and invoices from the transaction. BAISA, in turn, must send this information to the Technical Secretariat.
A last mention to procedures would be the fact that the summons or openings of each package made by the Technical Secretariat are published, by legal mandate, in two newspapers of national circulation, for three days consecutively 21 days before the date of the negotiation or the beginning of the period in which tenders can be presented and negotiations can commerce. This is made to guarantee that the stockbrokers have sufficient time to contact and to negotiate with suppliers from all over the world. In the summons, the total volume of the product is established, as well as its distribution, according to the tariff entries allotted to the product and to the number of lots assigned to each tariff entry, plus other details that the potential buyers and sellers need to know.These mechanisms, particularly the double auction and the donations, could seem a little unorthodox, but they have worked well so far.
Author note:Abelardo Carles is the General Manager of the National Commodities Exchange of Panama. He was formerly a Deputy Minister in the Panamanian Ministry of Industry and Trade as well as working in the Ministry of Foreign Relations of Panama. His other previous positions of responsibility include being Executive Director of the Union of Banana Exporters, General Manager of the Bank for Rural Development and Ambassador of Panama to the Government of Ecuador.Email: email@example.comWebsite: www.baisa.com