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Panama Canal refuses to pay $1 billion more for expansion work

A worker is seen at the construction site of the Panama Canal Expansion project on the outskirts of Colon City January 7, 2014.REUTERS/Carlo
A worker is seen at the construction site of the Panama Canal Expansion project on the outskirts of Colon City January 7, 2014.REUTERS/Carlo

By Lomi Kriel and Elida Moreno

PANAMA CITY (Reuters) - The Panama Canal on Wednesday rejected a proposal that it pay $1 billion to continue work on expanding the waterway, and warned the building consortium behind the project that it could bring in others to finish the job.

For the past week, the Panama Canal Authority (PCA) has been fighting with the consortium led by Spanish builder Sacyr over cost overruns in the plan to install a third set of locks for one of the world's most important cargo routes.

On Tuesday, there were signs the two sides were narrowing their differences. But on Wednesday, Italian builder Salini Impregilo weighed into the debate with a separate proposal that suggested a deal was still some distance away.

Impregilo said it had put forward two alternative solutions that involved the authority paying $1 billion to the consortium known as Grupo Unidos por el Canal (GUPC) to complete the work.

But that announcement from Italy prompted an immediate rebuff from the head of the PCA, Jorge Quijano.

The $1 billion payment "is impossible. It is outside the contract," Quijano told reporters in Panama City.

The consortium had threatened to suspend work on the massive infrastructure project by January 20 unless the PCA paid for $1.6 billion in cost overruns. The authority has rejected that demand but has said it is willing to consider detailed claims.

Quijano said the PCA had a plan ready to bring in a third party to finish the expansion if no deal is reached with the consortium to keep the project running in the weeks ahead.

Bechtel, a U.S. engineering company which lost out to Sacyr when the project was awarded in 2009, had been tipped by some analysts as a likely beneficiary of the dispute.

Quijano said the third party was not Bechtel, but did not elaborate on which other companies could step up.

"We are not going to have another contract like we have with GUPC right now. We'll have another contractor that works directly for us to administer the rest of the contractors and people," he said of the contingency plan.

The project was originally expected to cost about $5.25 billion, but the overruns could raise it to near $7 billion.

Impregilo's proposal showed signs of a split in the consortium that has been expanding the canal.

People familiar with the discussions said that Impregilo perceived Sacyr as too soft in negotiations and said the Italian company could be trying to wrest control of the project.

There was no immediate word from Sacyr on Impregilo's move.

Halting construction on the project would be a setback for companies eager to move larger ships through the century-old waterway such as liquefied natural gas (LNG) producers who want to ship exports from the U.S. Gulf coast to Asian markets.

BLAME GAME

In 2007, work began on the expansion, which will create a new lane of traffic along the canal and double its capacity. The overall project is 72 percent complete.

Last week, the consortium, which also includes Belgium's Jan De Nul and Panama's Constructora Urbana, said it had faced the added costs due to unforeseen setbacks in the $3.2 billion section of the project to build the new locks.

The group said flawed geological studies carried out by the authority were responsible for the cost overruns. The authority has not yet responded.

U.S. diplomatic cables published by Wikileaks showed the government of Panama President Ricardo Martinelli was worried about progress before six months had passed.

Sacyr won the canal contract in 2009 with an offer considerably below the main rival bids and also below the $3.48 billion reference set by the canal authority.

Sacyr, whose debts at the end of September were three times its market capitalization, made 55 percent of its revenue outside Spain in the first nine months of 2013.

Panama contributed 25 percent of the company's 1.3 billion euros ($1.78 billion) in international sales, according to its 2013 nine-month earnings statement.

Spain's ambassador to Panama has said his country's government will not provide any financing.

Sacyr's shares fell 2.65 percent on Wednesday, after rebounding sharply earlier in the week following a steep sell-off when the dispute flared in early January.

Shares in Impregilo rose 0.37 percent.

(Additional reporting by Julia Symmes Cobb in Mexico City, Danilo Masoni in Milan and Sonya Dowsett in Madrid; Writing by Simon Gardner; Editing by David Gregorio)

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