Panama Canal officials on Tuesday broke off talks with the international consortium responsible for constructing a third set of larger locks to expand the waterway's vessel capacity, potentially jeopardizing the late 2015 opening for a project that is already nine months behind schedule.
Grupo Unidos por el Canal issued a statement
saying the failure of Panama Canal negotiations during the past month to resolve $1.6 billion in disputed cost overruns means work on the project, which has slowed to a quarter of its normal pace since December, will stop and 10,000 laborers will lose their jobs.
There is no word yet from the Panama Canal Authority (ACP) about its next step, but the apparent decision to stick to yesterday's self-imposed deadline for resolving the situation indicates officials are prepared to ditch GUPC and move ahead with an alternate contractor. Officials have stated that such a move would only result in a couple of months delay as the ACP takes over project management and a new contractor rehires GUPC's subcontractors. But GUPC and the ACP's own independent dispute resolution board have said switching contractors midstream could set the project back three years or more.
In the negotiations, which were aided by a mediator from the European Commission as well as diplomatic involvement from Spain and Italy, GUPC sought reimbursement for the unforeseen costs or an agreement to co-finance ongoing operational costs while arbitration continues so it could pay subcontractors and suppliers on time.
GUPC is led by Sacyr, a Spanish construction firm. One of its partners is Salini-Impregilo of Italy.
The $5.2 billion Panama Canal expansion is more than 70-percent complete, with the lock phase more than 65-percent complete, according to the ACP. The delays and extra expenses are likely to drive the final price tag well above the original budget.
GUPC, which has been beset by liquidity problems that forced the recent layoff of many workers also said that the ACP is late paying a $50 million invoice it needs to cover this week's payroll. Canal officials have previously said they promptly pay invoices within 15 days, 35 days faster than required under the contract.
The parties are likely to spend years in court and international tribunals fighting over who will ultimately pay for the cost overrun, a large portion of which is due to the ACP's rejection of a large concrete mix that it said didn't meet strength specifications and had to be redone. GUPC has said its original concrete formulation was based on inaccurate geological data provided by the ACP. It has also claimed losses because of poor weather and other circumstances.
In its Wednesday morning statement, GUPC questioned how easily the ACP would be able to transition to another contractor, noting that it achieved the highest technical scores during the bid process and that other proposals had different, more expensive designs.
The consortium had to expend "extensive additional resources" to maintain the project's quality and environmental standards, for which it should be compensated, it said.
"The project is already more than 70-percent complete, and the specialized lock gates will all be delivered in 2014. It requires additional funding of $1.6 billion to reach completion. This is a burden of such a magnitude that no contractor or private company can bear it alone," the statement said.
The funding is separate from the resolution of the ongoing disputes by the Dispute Adjudication Board and international arbitrators, GUPC said. "The circumstances require a balanced solution, reached in good faith, to pre-finance the $1.6 billion in costs necessary to complete the project, and separately provide time for international arbitration proceedings to allocate the ultimate liability for those costs under the contract and applicable law," it said.
GUPC said its latest offer involved a 50-50 sharing of costs to complete the project, despite its claim that the project owner is supposed to arrange all funding and financing. GUPC said it was willing to put up $100 million in new funding on top of $300 million it has already provided beyond any contract obligations, and $400 million in new financing.
The ACP would put in $100 million and extend a repayment deadline for $785 million in advance payments already made under the contract so GUPC has the cash to pay for ongoing construction.
GUPC offered various debt and interest payments terms for the ACP's financing of the future costs. The scenario offers the best prospect for completing the project and allowing Panama to begin collecting revenue from vessels as soon as possible, GUPC said.
"The GUPC investors are construction companies, not banks. It is unjust and impossible for the ACP and Panama to expect that private companies will finance $1.6 billion in costs on a project that was to be fully funded by the ACP. Applicable Panamanian law requires an equilibrium and reasonable balance to the contract. Without ACP joining GUPC to reach a resolution, those funds will not be available to pay Panamanian workers, subcontractors and suppliers. Even worse, the broad economic benefits of the Panama Canal expansion will not be realized by the Panamanian people for years to come with far greater expense."
GUPC said it has shown a willingness to compromise by postponing its deadline for suspending construction, expressing willingness to adhere to international mediation, and agreeing to continue negotiations to prevent a termination of the contract.
The GUPC said a large delay in completing the project would disrupt investment plans by regional ports, many of which are upgrading their infrastructure to handle the next generation of vessels that will be able to transit the wider canal, and carriers that are ordering larger, more efficient vessels and plan to deploy them through the canal.
But there has been little, if any, public reaction from vessel operators because they do not plan to make adjustments to their networks until the time is closer for the expanded set of locks to be available. And U.S. East Coast and Gulf ports, lagging with upgrades such as harbor deepening, appear to welcome the extra time to prepare their facilities for the new vessels that will become more commonplace once the throughway between the Atlantic and Pacific oceans is expanded.
In a seeming attempt to embarrass Panamanian officials to change their mind, the statement added: "The failure of a strategic project for the economy of Panama and the world would leave a permanent shadow over the Panama Canal expansion project in the books of history. Leaders from across the Americas and around the world have visited the expansion project, and countries and companies have invested billions in port expansion and domestic infrastructure in anticipation of new trade opportunities that depend on this project. Next year, when leaders from throughout the Western Hemisphere gather in Panama for the historic Summit of the Americas, instead of celebrating Panama's vital role in global commerce, they will be left lamenting that the ACP and Panama abandoned talks rather than agreeing on a
solution that could cement Panama’s historic place in the world."
Curtis Foltz, executive director of the Georgia Ports Authority, expressed his unwavering support of the ACP during the Georgia Foreign Trade Conference Tuesday and urged conference attendees to think about the bigger picture instead of getting bogged down in the particulars of the contract dispute.
"There’s a lot of noise right now about the contract dispute that they have, and I’ve got to tell you folks, this is the first time they’ve expanded in 100 years," he told attendees. "Arguably for all of us that are involved in global transportation, this will be the single largest transportation project that occurs during our lifetime.
"They’ll get through this," he continued. "I’m confident of it. It’s hugely important … to global trade. Let’s give them all the support and encouragement they need to get it done."
Jon Ross contributed to this story.