Clash at the canal
Contractor plays hardball with Panama to get paid for unexpected construction costs.
The Panama Canal expansion project, which consists of adding a third traffic lane with wider locks for big cargo vessels to transit the waterway, could be delayed until 2016, or beyond, by a nasty contract dispute that erupted into public view over the holidays.
Grupo Unidos por el Canal (GUPC), the international consortium in charge of installing the massive new locks on the Atlantic and Pacific sides of the canal, in December threatened to suspend work on the project if the Panama Canal Authority (ACP) failed to reimburse the group for $1.6 billion in cost overruns by Jan. 19. It said the extra costs, caused by weather delays and the APC’s rejection of the initial concrete mix for not meeting strength standards, are normal in large infrastructure projects.
ACP Administrator Jorge Quijano said a compromise is the best solution for all involved, but that the agency had the option to hire a new team to complete the job, originally priced at $3.2 billion.
The Italian construction firm Salini Impregilo responded that switching to another contractor would delay the project at least three years.
Impregilo is a member of GUPC, which is led by Spanish construction firm Sacyr.
In a harshly worded statement posted on its Website, Impregilo questioned the competence of the ACP and urged it to quickly pay $1 billion beyond the original contract terms and then consolidate and refinance $500 million in advances issued so far until an arbitrator can decide on who is responsible for the extra costs above $1 billion.
“The ACP’s threat to put in place the so-called Plan B — that is, to terminate the contract with the consortium and entrust the implementation of works to others — is not only illegal and against the terms of the contract, but it is also against the interests of the state of Panama and squanders the money of Panamanian citizens.
“The alternative to the completion of the works by the current consortium would result in a delay of at least three years, the expected time for the construction of a new set of gates by any new contractor, even if it were ever possible to replace the consortium without further delays to the civil works,” the Italian firm said.
“The position assumed by the ACP can only be put down to the inexperience of the administrative authorities of the Panama Canal in dealing with projects of this size and complexity.
“The companies which form part of the GUPC consortium have, historically, managed thousands of construction contracts all over the world. As is shown in the CVs published on the ACP Website, including that of President Quijano, the ACP directors do not have a single instance of experience of realizing major civil engineering works or the management of contracts for infrastructure construction.”
The contract dispute jeopardizes the on-time completion of one of the world’s largest, and most anticipated, infrastructure projects, which would make it accessible to vessels three times the current size limit, increasing shipping efficiency between countries in the Pacific and the east coasts of North and South America. Analysts and maritime officials say the new cargo route could transform trade as ocean routes are reconfigured to take advantage of big ship economies of scale.
Barring further delays, canal managers say the wider set of locks will be open for commercial traffic in late 2015, more than nine months behind schedule. There was no immediate reaction regarding the lock construction developments from commercial vessel operators, many of which are transitioning their fleets to include a greater proportion of the jumbo watercraft.
By the end of 2015, 59 percent of the global liner fleet capacity will be available on vessels of 5,100 TEUs or more, according to researcher Alphaliner.
The muted response is likely because carriers have not tied their business plans and route schedules too closely to a precise completion date for the expansion, knowing that projects of its scale normally face delays.
On Jan. 7, the ACP offered a compromise proposal in hopes of forestalling a work stoppage under which it would advance GUPC an additional $100 million to help with its cash flow and keep the project moving. It also said it would extend by two months the deadline to repay $83 million in prior advances.
In exchange, the ACP said GUPC must commit $100 million of its own funds to pay subcontractors and suppliers, and ship to Panama the four lock gates constructed in Italy for which the ACP has already paid 75 percent of the cost. The $283 million total must be placed in an account to pay the subcontractors, with payments made against delivery milestones outlined in the contract. The lock gates, for example, were supposed to be delivered in November.
The ACP said GUPC must rehire laid-off workers and cancel its notice to suspend work.
GUPC counteroffered for a $400 million advance from ACP.
Prior to its offer, the ACP accused GUPC of dragging its feet because of unhappiness with the terms of its contract and the ACP’s unwillingness to cover what it claims are unforeseen, but justifiable, new expenses. The agency has rejected GUPC’s tactics, saying the letter did not include much supporting evidence for why it deserved compensation and that the consortium has not gone through proper claims procedures established in its $3.2 billion contract. GUPC subsequently made its grievances public.
The ACP said it warned GUPC on Dec. 13 about staying on task after noticing evidence of a possible work slowdown, including a reduction of personnel at the construction site, lack of progress with three dams which are part of the contract, significant delays in delivery of the lock gates, and lack of progress in rectifying construction defects.
“The consortium of contractors is not a charity, and there is no reason why the consortium should pay the costs of the construction of the canal. The contractors have to do their job, i.e. to build the canal extension, and they have done their job well, tackling all the substantial technical difficulties. The client must pay the costs including contingencies and finance the construction of the work since this is required by law. It is time to stop telling fairy tales,” Impregilo said.
The ACP said that GUPC has improperly interpreted a clause in the contract, which allows a contractor to stop working if the employer fails to pay the contractor.
In a conference call with reporters, Quijano said the ACP is rapidly processing payments for cost overruns allowed under the design-build contract, but said the construction team is trying to open the door for coverage of new cost categories and is not following proper claims procedures.
“We’re abiding by the legal framework of our contract and we expect them to do the same,” he said.
Terms allow the ACP to reimburse GUPC within 56 days of receiving an invoice, but payments are being made within 15 days.
“We have been paying them better than anyone else in the world pays a contractor,” Quijano said.
Quijano pointed out the consortium agreed to a fixed-price contract with cost-escalation clauses for only five categories: structural steel, reinforced bars for concrete, diesel fuel, cement and labor. The ACP uses a global commodity index to determine the market price of those supplies, many of which continue to climb higher, and has paid GUPC $150 million to $160 million more than stipulated in the contract, he said.
To date, the ACP has paid about $2 billion of the $3.2 billion it will owe.
Quijano said the ACP is willing to pay any legitimate cost incurred by GUPC, but said the contractor has failed to document its claims.
“All they have submitted is a two-page letter saying we haven’t paid them in the amount or frequency which we should pay them, which is totally false,” he said.
Under the contract terms, GUPC can bring reimbursement claims to the ACP. If the contract office determines the claims lack merit, the team can take its case to an independent dispute adjudication board. The ACP is required to immediately make any payments ordered by the board. Either side can appeal a board decision to an arbitrator based in Miami, who follows International Chamber of Commerce rules to apply Panamanian law.
Among the claims made by GUPC, according to Quijano, were $41 million for two days of heavy rain and $120 million for having to build a coffer dam, or temporary structure to hold back water while the locks are built. Both items were rejected by the dispute adjudication board.
GUPC has also filed a vague claim for $800 million to $900 million for disruptions caused by bad weather, strikes, poor road conditions and other alleged factors, he said.
GUPC charged canal officials with providing inaccurate geological information on which it based its initial bid and concrete formulation. But Quijano said the four consortia down-selected to bid on the project were given plenty of leeway to study geotechnical and other issues before making their bids. In fact, the ACP created a $15 million pot for the losing bidders as an incentive for the teams to invest in proper bid preparation work, which ultimately was split by Bechtel and another Spanish firm, he said.
GUPC is already on the hook for $54 million in penalties for not completing the locks by the original Oct. 21, 2014 due date. Under the contract, the ACP can dock the contractor $300,000 per day up to the $54 million cap for failing to turn over operating locks by the deadline unless an arbitration board agrees to give the group an extension.
Quijano emphasized 65 percent of the locks project is completed. Eighty percent of the concrete for the Atlantic locks has been poured and 67 percent of the electro-mechanical components have been delivered to Panama, including nearly all the valves. Four lock gates in Italy are ready to be shipped to Panama, another four have been assembled and should be ready for delivery in another month, and two more are being assembled, he said.