Panama Canal Expansion Threatened By Cost Dispute

January 2, 2014Panamaby EW News Desk Team

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A planned expansion of the Panama Canal, which handles 5 percent of world trade, may be suspended indefinitely according to reports on Thursday, due to a dispute between the contractors and the Panama government over cost overruns.

Construction on the 80-km waterway was due to be completed in June 2015, nine months behind schedule, but the building consortium, led by Spanish firm Sacyr, threatened to halt work within the next three weeks, unless the Panama government coughed up an additional $1.6 billion for the project.

Sacyr said that the consortium – which also includes Italy's Salini Impregilo, Belgium's Jan De Nul and Panama's Constructora Urbana – had notified Panama’s authorities of its demand on Wednesday.

Problems arose last year when Panama’s technicians objected to the quality of the concrete used, forcing the consortium to use a more expensive, higher-quality product. That, along with labour strikes, bad weather and other factors, contributed to the project’s delay and additional cost.

About 70 percent of the project has been completed. The Panama Canal Authority on Wednesday said that the consortium should respect the existing contract, warning that it may invoke mechanisms from the contract to force the builders to cover the costs and finish the project.

Panama’s President Ricardo Martinelli also said that he would fly to Spain and Italy to speak to their respective governments in order to pressure the companies into fulfilling their responsibilities.

"I'm going to go to Spain and Italy to demand this from them, because a company should not be able to put such a high amount of overrun costs on a project that belongs to humanity," Martinelli told reporters in Panama City, as cited by Reuters.

The stakes for Panama are high. Government revenue from the canal is currently about $1 billion a year, according to the Wall Street Journal, but with the expansion the government expects the figure to jump to $4 billion a year.

The majority of the construction work had been to build a third set of locks for the canal, which would allow ships carrying over 12,000 containers in capacity to pass the waterway. At the moment the biggest ships that can navigate the canal only carries 5,000 containers.

Analysts Reuters spoke to said that the dispute was not good for either Sacyr’s or Spain’s image. Spanish officials had visited the Panama project as recently as September last year, heaping praise on Sacyr, for securing the contract even after the country’s property bubble burst in 2008.

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Sacyr won the bid on the canal contract in 2009 with a $3.12 billion offer, which was considerably lower than that of rivals, as well as below the $3.84 billion reference set by Panama. Wikileaks cables from the U.S. Embassy, taking confidential analysis by the American firm Bechtel, which lost the bid for the canal project, had claimed that Sacyr's winning tender was unrealistic and would barely pay for the concrete.

If the dispute is not resolved, the case may go up to international arbitration. Shares in Sacyr plunged by more than 15 percent in Madrid on Thursday morning, before stock price recovered by mid-afternoon, albeit still down by 8 percent for the day.

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