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The Panama Canal expansion has been delayed by cost overruns by a consortium led by Spain-based Sacyr. (Photo: ACP)
Wednesday, March 5, 2014
Special Reports

Panama Canal Faces Delays, Arbitration


Despite agreement between Panama Canal Authority and Sacyr consortium.


BY LATINVEX STAFF 


Despite a preliminary agreement between the Panama Canal Authority (ACP) and a consortium led by Spain-based construction firm Sacyr, experts warn that the waterway may face further legal disputes and delays in completing the expansion. 


“The ground is certainly set for many legal battles that will go on for years,” says Richard Wainio, a former planning director of the Panama Canal Commission who recently served as Port of Tampa CEO and follows canal development closely. 


IHS Global Insight agrees. “After the recent acrimonious and public dispute, there is a significant risk that further problems could lead to more delays and growing threats of arbitration,” it said in a commentary yesterday.

White & Case and Panama-based law firm Alemán, Cordero, Galindo & Lee are providing legal advice for the consortium, Grupo Unidos por el Canal (GUPC). In addition to Sacyr it includes Italy-based Impregilo, Netherlands-based Jan de Nul and Panama-based CUSA.

The Panama Canal has been undergoing a historic expansion to allow larger ships to pass through the waterway linking the Atlantic and Pacific Oceans.  Groundbreaking on the expansion was held in September 2007 and originally the work was to have been completed this year, which coincides with the canal’s 100th anniversary.  

REPEATED DELAYS

However, the work has been plagued by several delays, which in turn pushed back the official date for the expansion finish to early 2015, then mid-2015, then last quarter 2015 and now to December 2015. 

On December 30, the GUPC presented the Panamanian government with an ultimatum , warning that if it did not obtain payment of a $1.6 billion cost overrun by January 20, 2014, it would stop work completely. Between February 5 and 20, it stopped work on the expansion.

“This issue has been ongoing, it just reached a breaking point last month when GUPC shut down work completely,” Wainio says.

After weeks of public wrangling between Sacyr and the ACP, Panamanian President Ricardo Martinelli in January asked the governments of Spain and Italy to pressure GUPC to reach a solution.  “Sacyr’s behavior damages Brand Spain,” Martinelli told Spanish newspaper El Mundo.

On February 27, the ACP and GUPC agreed that each will inject $100 million for immediate cash flow which will enable works to regain a normal pace in March. Another $400 million will be sourced from insurance company Zurich, which wrote performance cover for the project, converting this into a loan, according to IHS Global Insight. 

The deal would also extend repayment of advanced payments made by the Panama Canal Authority to the consortium that are worth $784 million until 2018 at the latest, according to Reuters. 

"We have reached a conceptual agreement that protects the interests of the Panama Canal, within the terms of the contract and respecting our position," Panama Canal Administrator Jorge L. Quijano said in a statement.


Under the new agreement, the expansion is scheduled to be finished by December next year, which would enable traffic to start crossing the new locks in January 2016.


“I still believe their new target date of January 2016 will be difficult to achieve given all that has happened,” Wainio says. “There are many issues still to be worked out on the financial side and I have heard there are other problems as well.”

Additionally there are other contractors and subcontractors who are part of the difficulty, he points out.

“ACP may be setting an ambitious new date to hold GUPC's feet to the fire and it may also play into the negotiations/mediation still to come and the efforts to obtain new financing,” Wainio says. “It's complicated and only ACP knows their own strategy.”
  


PRICE TAG 


With the cost overruns, the price tag has now gone from $5.2 billion to $6.7 billion, although it may actually end up higher. “I believe the actual project cost could exceed $ 7 billion when all is said and done,” Wainio says. 


GUPC is not the only company seeking more money, he points out. Quijano has said he won’t pay more than the contract, so the cost overruns may have to be incurred by other parties.  


The GUPC cost overrun did not come as a surprise to experts like Wainio. “It was a problem recognized almost from the beginning of their work,’ he says. “Their bid was way too low and many observers thought so.” 


The US government attempted to warn the ACP about the potential problems of awarding the canal expansion work to Sacyr, according to leaked cables through Wikileaks quoted by Spanish newspaper El Pais in December 2010. 


“U.S. diplomats said on numerous occasions that Sacyr was technically bankrupt, it would not be able to run the project and won the competition only thanks to support from the Spanish Government,” the newspaper wrote. 


A consortium led by US-based Bechtel had offered $4.2 billion for the expansion work, or $1.2 billion more than the GUPC. According to Wikileaks, it viewed the winning offer as uncredible and suspected Sacyr would attempt to renegotiate the contract up during implementation, which is in fact what ended up happening. 


“I assumed from the beginning that there would be significant change orders and that GUPC would be seeking additional funding,” Wainio says. “In fact, soon after they began work, early issues caused problems. GUPC claimed that certain geotechnical information provided by the ACP upon which they based part of their bid was not accurate. Also … soon after work began there were problems with the cement mix that caused many months of delay.” 


Stiff penalties that were incurred for those delays pushed the costs to GUPC higher. 


“GUPC made claims over a year ago for more money which ACP rejected and so the fight began,” Wainio says. 


GUPC began curtailing work on the project last November and had not been paying some subcontractors on a timely basis.  


“I was told they were working for several months at only about 25 percent [and] then last month they shut down completely,” he says.  “I knew that they owed some of [the subcontractors] lots of money.” 


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