Halt in Panama Canal Expansion Could Cause Serious Delays

By MarEx 2014-01-23 11:11:00

If work on the expansion of the Panama Canal is suspended, it could take up to five more years to finish, according to arbitrators helping to oversee the project that has been hit by a dispute over costs.

Since the start of 2014, the Panama Canal Authority (PCA) has been embroiled in a public row with the consortium known as Grupo Unidos Por el Canal (GUPC) over $1.6 billion in additional costs the GUPC says have arisen during work on the project.

Though the spat only recently went public, discussions over added costs have been going on since 2010, and advisers on the project's Dispute Adjudication Board (DAB) said in a letter written in December that any hold-ups would be serious.

"If GUPC was to stop work now, the canal would be finished, but not in 2015 - more likely in 2018, 2019, or 2020," the panel of independent international advisers said in the document, a copy of which was seen by Reuters on Wednesday.

"The enormous losses to (the PCA) - which have not only a severe financial impact but also would seriously damage its credibility and reputation - can only be imagined," the DAB added in the letter that was sent to both sides of the dispute.

The planned completion date for the expansion of the 50-mile (80-km) canal has already been delayed from 2014 to mid-2015.

If the canal authorities do not help pay for cost overruns, the consortium of construction companies - fronted by Spanish firm Sacyr - has threatened to suspend work on the project that aims to double the waterway's shipping capacity and bring in billions of dollars in new revenue for Panama.

The PCA has refused, warning the GUPC it could be dismissed and that other contractors could finish the project to build a third set of locks for the canal, the heart of the expansion.

The PCA, a semi-government entity, did not immediately respond to requests for comment on the letter's contents. However, earlier on Wednesday, Panama's President Ricardo Martinelli vowed the work would be completed.

"Panama has the resources, and will finish work by 2015 regardless of what happens, rain, thunder or lightning," he said at the World Economic Forum in Davos, Switzerland.

The DAB letter described the GUPC's shortfall as "genuine" but added the $3.12 billion bid which the consortium made to clinch the deal for the locks in 2009 was likely too low.

That bid was $1 billion below the second-lowest offer tendered by a group fronted by U.S. engineering company Bechtel. Top Panamanian officials and others close to the deal have raised concerns that the bid was too low.

"But horsewhipping or pointing the finger of blame will not save this project," the DAB wrote.

The DAB must help arbitrate the dispute over costs, which has been ongoing since 2010. But the letter stated its views on the potential delays did not have any bearing on the claims.

The PCA held talks with GUPC earlier this week and canal administrator Jorge Quijano said a potential financing deal involving insurer Zurich North America had been proposed that could offer a long-term solution to the project.

Nevertheless, the two sides have yet to agree on how much each party could provide to bridge the funding gap.

The DAB letter said the GUPC appeared to need a cash injection of $250 million to $500 million to keep work going.

As talks began on Tuesday, the consortium, which includes Italy's Salini Impregilo, Belgium's Jan De Nul and Panama's Constructora Urbana, pushed back its possible suspension of the work until the end of January. 

By Lomi Kriel (C) Reuters 2014.