The row over the Panama Canal
Keeping things afloat
Jan 8th 2014, 15:31by F.B. | MADRID
WHEN Sacyr, a Spanish construction firm, won a 2009 tender to undertake the bulk of the $5.25 billion expansion of the Panama Canal, its then-chairman crowed “Asi, asi, asi gana Sacyr” (“That is how Sacyr wins”), a play on a catchy rhyme long used by Real Madrid football fans. Those celebrations have soured.
The consortium that Sacyr leads is haggling with the Panama Canal Authority over a projected $1.6 billion cost overrun and an urgent need for cash. The contractors have threatened to walk out on the project, which will allow huge tankers to pass through the 100-year-old waterway between the Atlantic and the Pacific, if no agreement is reached by January 20th. The good news is that both sides have a strong incentive to reach a compromise.
The main problem, says Pedro Alonso, a spokesman for Sacyr, is that the project faces a cash crunch. The contractors, which include Italy’s Salini Impregilo, Belgium’s Jan de Nul and Panama’s Constructora Urbana, blame ballooning costs on the canal authority for providing flawed geological studies of the terrain.
The canal, they say, failed to detect the presence of fault lines despite a seven-year study, which in turn affected the quality of the basalt earmarked for mixing the cement. New basalt had to be sourced elsewhere and it took the authority months to approve the new mix. The contractors say they have already put $280m of additional cash into the construction of the new locks. (The canal rejects the cost-overrun claims, arguing that the cost increases were accounted for in the contract. It, too, has had to pump in extra cash due to fluctuations in the prices of some raw materials.)
A deal is already in the offing. A visit to Panama from Spain’s public-works minister on January 6th helped calm the waters and kickstart the haggling. The canal has offered to stump up a $100m advance provided the contractors contribute the same amount and withdraw their threat to halt work. The contractors, meanwhile, have agreed to making the $100m contribution but are demanding an additional $400m advance from the canal authority in order to guarantee the completion of the project. The consortium also wants a moratorium on returning an existing $784m cash advance until arbitration on its claim for the $1.6 billion overrun is resolved.
Neither side wants to see the project halted at this stage. The expansion is 72% finished; the new locks being built by the consortium are two-thirds complete. The canal could theoretically bring in a new contractor. Jorge Quijano, the canal administrator, says the authority has $1.3 billion in unused funds that could be put into finishing construction, plus insurance. But a project that is two-thirds completed with very specific design requirements may not be very attractive to a third party. It would also lead to further delays: the completion date has already been put back from 2014 to June 2015.
Sacyr and its partners have both reputations and money on the line. The consortium’s winning $3.2 billion bid was 7% less than the canal’s own estimate and about a billion less than that of Bechtel, an American rival, fuelling suspicions at the time that it would try to renegotiate the contract later. Sacyr and the canal authority still defend the original bid, saying it was cheaper than rivals because their design required fewer construction materials. With Spanish construction companies heading up big infrastructure projects all over the world, including the $10 billion Mecca-Medina high speed railway in Saudi Arabia, Spain itself is also keen to preserve its reputation for engineering prowess. But the country says it won’t help fund the project.
Financially, the project contributed 14% of Sacyr’s sales in the first nine months of 2013. The firm’s shares have lost 8% of their value since the conflict erupted on December 30th, even after recovering some ground in recent days. Mr Alonso insists that the company doesn’t have any financial problems and that the row in Panama in no way affects its other projects. Maybe so, but the initial euphoria at winning one of the world’s biggest engineering projects looks misplaced.