Panama Briefs – January 2014: Panama Canal Expansion Costs Dispute

As the Panama Canal Authority, or ACP is facing the prospect of a work stoppage it confirmed last Thursday that it has held talks with other potential contractors as it prepares for the possible suspension of work on an expansion project this week, although it said it still hopes to resolve a financial dispute with the consortium building a third set of locks for the new section of the Canal.

The expansion project, now 72 percent complete, would double the capacity of the 50-mile (80-kilometer) canal, which carries between 5 and 6 percent of world commerce.

Photo by Juliette Passer

A stop-and-restart of the canal expansion, one of the largest construction efforts in the world, could mean a delay of months or even years, setting back the arrival of bigger ships, and higher fees, to ports along the entire U.S. East Coast, some of which have been carrying out their own improvements. The ships known as post-Panamax have more than twice the carrying capacity of those able to pass through the canal today.

Canal administrator Jorge Quijano told reporters after a meeting with Panama’s APEDE - business executives’ association in Panama - that he would not reveal the names of the companies he had spoken with “until we’re ready to act.”

“We’re prepared for that eventuality, (but) we’re still holding out hope that the United Panama Canal Group consortium (GUPC) reconsiders,” Quijano said, referring to the consortium led by Spain’s Sacyr that was awarded the contract for the locks project in 2009.

Quijano met later Thursday with Sacyr Chairman Manuel Manrique and representatives of two of the other three members of the consortium: Belgium’s Jan de Nul and Panama’s CUSA.

An agreement was reached during the meeting to “keep communication channels open over the next several days” to resolve the dispute, according to an official statement.

The GUPC - also made up of Italy’s Impregilo, which like Sacyr has a 48 percent stake in the consortium - said earlier this month that it would suspend work on the locks project on Jan. 20 if the ACP did not agree to pay an extra $1.6 billion to cover cost overruns.

Quijano told reporters Thursday morning that the contractors had not yet presented a “positive” proposal for resolving the conflict, reiterating that the offer the canal authority presented on Jan. 7 to resolve the impasse still stood.

The ACP said then it would advance the GUPC $100 million and give the consortium a grace period of two months to repay a previous advance of $83 million, provided the contractors also put up $100 million and withdraw their threat to suspend work.

The proposal was presented after a meeting between the ACP and GUPC was held at the urging of Spanish Development Minister Ana Pastor, who traveled to Panama as part of Madrid’s efforts to mediate the dispute.

The GUPC countered by calling on the ACP to fork out an advance of between $400 million and $1 billion, a proposal Quijano rejected as outside the terms of the contract.

The contract for the locks, which is the centerpiece of a $5.25 billion canal expansion, calls for the ACP to pay the consortium a total of $3.12 billion.

So far, the ACP has paid GUPC $2.83 billion, including repayable advances, plus an additional $180 million for cost overruns.

The contract provides for independent arbitration of disputes that GUCP and the canal authority cannot resolve through negotiations.

The Panama Canal, which was designed in 1904 for ships with a 267-meter (875-foot) length and 28-meter (92-foot) beam, is too small to handle modern ships that are three times as big, making a third set of locks essential.

As of today, GUPC is keeping the works to enlarge the Panama Canal moving at a snail’s pace, despite today having been the deadline for a suspension. Works continue slowly, without a resolution in sight with 7,000 workers suspended from 9,000 employed.

The APC said that the workflow has decreased to 25 percent or less, and that the negotiation would be within the confines of the contract, already violated by the construction group.

Canal Administrator Jorge Quijano has planned a Tuesday meeting with the authority’s insurance company, Zurich America, to plan possible next steps if a deal fails to materialize. He said the canal authority is prepared to take over the job in February and spend as much as $1.5 billion more to complete the bigger canal.



Photo by Juliette Passer

“We want United for the Canal to finish the job,” Quijano said. “Our intention is to find a way to get that done. That’s what’s best for the contractor and for us, but we also have to be ready in case they give up.”

An economist from the Association of Entrepreneurs of Panama, Aristides Hernandez, said that the APC cannot depend on the threats of suspension and continue without a resolution, since this would greatly affect the national economy. It is calculated that after it is finished, the Panama Canal will bring in $100 million USD in the first year, $279 million in the second, and nearly a billion dollars in the third.

“If the canal authority has to take over the job and look for companies it will have to oversee until the work is done, obviously there will be delays that are inconvenient for Panama, the canal and the entire world, which already has post-Panamax ships getting ready to be delivered,” said Roberto Eisenmann, founder of the influential newspaper La Prensa and an expert on the canal expansion.