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Deadline looms for Panama Canal expansion dispute

Saturday, January 18, 2014    

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PANAMA CITY, Panama (AP) — On a hot September morning, a powerful explosion demolished a rocky slope on the banks of the Panama Canal, announcing to the world a massive expansion that the canal's managers promised would transform global trade when it was completed in 2014, on time and under budget.

US ports invested billions in dredging, raising bridges and renovating docking infrastructure to accommodate the new generation of larger ships that could pass through the expanded canal.

Now, more than four years after construction began, these ports and the Panama Canal Authority are facing the prospect of a work stoppage on the US$5.25 billion expansion over a financial dispute -- an unexpected blow to a project long seen by many as the epitome of competent management in a region where many major infrastructure initiatives are marred by cost overruns, delays and shoddy workmanship.

The Spanish-led consortium hired to handle the biggest part of the canal expansion says it will halt work by Monday if the canal authority doesn't come up with the funds to cover US$1.6 billion in cost overruns, while the authority insists the consortium live up to the terms of the original contract.

The expansion project, now 72 per cent complete, would double the capacity of the 50-mile (80-kilometre) canal, which carries between five and six per cent of world commerce.

"Monday will be a crucial day in the history of the Panama Canal and for us as a country that wants to carry out projects of great size," Jose L Ford, the president of the Panamanian Chamber of Commerce, Industry and Agriculture, said after meeting with canal authority directors this week.

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 US 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.

"I am hopeful that the dispute can be resolved expeditiously," said PortMiami Director Bill Johnson. "Dredging is now well underway and we are scheduled for a mid-2015 completion date. Let's hope the canal can also stay on schedule."

The canal-building consortium, United for the Canal, blames the cost overruns largely on problems with the studies carried out by the Panamanian authority before work began. It says that geological obstacles it has encountered while excavating have prevented it from getting the basalt it needs to make the massive amounts of cement required for the expansion.

Many experts say the root of the conflict lies in the consortium's underestimation of the project's costs when it won the canal expansion contract in 2009 by submitting by far the lowest bid: US$3.1 billion for its portion of the job, US$1 billion less than a bid led by the US construction giant Bechtel.

Some, particularly in Panama, suspect the low bidding was carried out in bad faith by a company hoping to dramatically increase its billing in the event of cost overruns, just as is occurring now.

The consortium denies any reckless underbidding.

Both sides say they are working hard to reach a deal as the deadline nears. In Spain, there is a sense of confidence in an amicable resolution, reflected in the recovery of the value of Spain's Sacyr Vallehermoso, the company that heads the consortium and saw its stock plunge after the dispute become public this month.

Sacyr's president, Manuel Manrique, promised Monday that work on the expansion would be completed in 2015 and assured the public and investors that negotiations were on the right path.

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