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Trouble at the Panama Canal

Your money or your locks

Jan 3rd 2014, 20:40 


THE $5.25 billion expansion of the Panama Canal is one of the world’s great infrastructure projects, aimed at enabling giant mega-tankers to pass through the 100-year-old waterway between the Atlantic and the Pacific. 

So a threat by an international consortium, led by Spain’s Sacyr, to halt construction work on January 20th if the Panama Canal Authority (PCA) doesn’t pay it $1.6 billion for cost overruns, is serious. 

The amount it is claiming is fully half the $3.2 billion it bid in 2009 for its part of the project.

Jorge Quijano, administrator of the PCA, told The Economist that the authority would not pay the money because cost increases were accounted for in the contract. He says he is prepared to go through a three-stage dispute-settlement process, culminating at the International Chamber of Commerce in Miami if necessary, that could take at least six months. “It won’t be easy,” he acknowledges.

Mr Quijano says that the contract stipulates that the consortium's work on a third set of locks should continue despite disputes. As a result, he argues–perhaps optimistically–that there will be no delay in finishing the project. The completion date had already been put back from 2014 to June 2015.

The conflict has been brewing for more than a year. The consortium, which includes Sacyr, Italy's Salini Impregilo, Belgium's Jan de Nul and Panama's Constructora Urbana, initially said that the PCA’s rejection of its preferred mix of concrete had added $585m to the cost of the expansion. Mr Quijano says that in December the consortium accused the authority of further “disruption”. In his words, this “magically” added $900m or so to the cost.

On January 2nd Sacyr said the PCA was guilty of “serious breaches” in the contract. 

Since then, the president of Panama, Ricardo Martinelli, has vowed to travel to Spain and Italy, claiming their governments have a “moral responsibility” to help settle the dispute.

 The Spanish government may send its public-works minister to Panama for talks.

Mr Quijana insists that there is no danger the project could be scuppered by the row, even if the Sacyr-led consortium walks away. 

He says the authority has $1.3 billion in unused funds that could be put into finishing construction, not counting up to $600m in insurance from Zurich North America.

Some have suggested that the winning bid was too low in the first place because the European firms, battered by the euro-zone crisis in their home markets, were desperate for international contracts. (Indeed, El Pais, a Spanish newspaper, has quoted a Wikileaks cable attributed to United States diplomatic officials saying that Bechtel, a losing American bidder, thought the Sacyr-led bid wouldn’t even cover the cost of cement.) 

In that case, the PCA should have smelt a rat.

 But Mr Quijana calls this nonsense. 

He says the winning bid was lower than that of the Bechtel-led consortium because its design required fewer construction materials, and stands by the feasibility of the Sacyr-led project.

“Each one was a different project,” he says.

(Photo credit: AFP)

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