Parallels
11:49 am
Wed January 8, 2014

As Costs Soar, Who Will Pay For The Panama Canal's Expansion?

Originally published on Wed January 8, 2014 6:29 pm

For five years, a multibillion-dollar expansion has been underway on the Panama Canal so that ships three times the current size can pass through the vital waterway. The new, wider canal will alter global trade routes and dramatically increase revenue for Panama's government, primarily from toll charges.

The expansion is more than two-thirds done, but now a funding dispute between the builders and the canal operators threatens to bring construction to a halt.

A mostly European building consortium called GUPC issued an ultimatum saying it would suspend work on the project unless Panama's government ponied up an extra $1.6 billion to help cover cost overruns.

Pedro Alonso, a spokesman for Sacyr, the Spanish company heading the project, says there were many unforeseen problems that forced up the cost.

"For example, the exact quality of the stone, and certain geotechnical things that weren't documented ... the depth of different layers of earth," said Alonso. Those are things beyond the consortium's responsibility and "should be covered by the client," he added.

Questions About The Original Contract

But there have long been questions about whether the GUPC underbid the contract.

Hackett Associates, which provides research and analysis to the international maritime industry, did an analysis of the cost estimate for the expansion plan when it was being bid in 2008. CEO Ben Hackett says that usually when companies bid for massive, expensive projects of this nature, they tend to be optimistic.

"Typically when you have large infrastructure projects, there is usually a delay in most cases ... and where there are delays, there will ultimately be cost overruns," he said.

The Panama Canal Authority, which operates the waterway, says the builders should have taken that into account.

Jorge Quijano, the head of the Panama Canal Authority, says the GUPC has made many claims since the start of the project and that the authority has already paid close to $180 million above the contract price for things like the rising cost of fuel, steel, cement and employee payrolls. Quijano said the canal authority is seeking a solution.

"The problem is most of the time we've not been able to come to terms with them because their numbers have been blown out of proportion," he said.

Still, the authority doesn't want a drawn-out impasse. Earlier this week, Ana Pastor, Spain's public works minister, traveled to Panama to meet with President Ricardo Martinelli about the dispute.

New Funding Proposal

On Tuesday, both sides offered their own joint funding proposals to allow work to continue for several months until a permanent solution can be found. The canal authority proposed a $283 million funding package of which it would pay $183 million and the GUPC would kick in the rest.

However, the building consortium also proposed that it pay $100 million, if the canal authority ponied up $400 million. The negotiations remain stalled.

Cato Stonex, with THS Partners, which has a 5 percent stake in the project, says the dispute must be resolved.

"It's an extraordinary passage, and obviously widening it allows that capacity to expand dramatically," he said. "It's a particularly unique and important project, which I'm sure all parties to the project want to be concluded satisfactorily."

Quijano agrees construction must continue.

"It will not stop," he said. "Let me tell you, this expansion will be completed with GUPC or without them."

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

AUDIE CORNISH, HOST:

A funding dispute is threatening to derail a major expansion of the Panama Canal. A European consortium is doing the work and it says it's run out of money because of unforeseen costs. The consortium wants operators of the Panama Canal to pay more than a billion dollars of extra funding. The canal authority has put forward a counter-offer. Now the two sides are meeting in Panama to come up with a solution.

As NPR's Jackie Northam reports, negotiators have so far failed to break the impasse.

JACKIE NORTHAM, BYLINE: The multi-billion dollar expansion of the Panama Canal began about five years ago and was more than two-thirds completed when a funding dispute between the builders and the canal operators came to a head. A mostly European building consortium called GUPC issued an ultimatum, saying it would suspend work unless Panama's government ponied up an extra $1.6 billion to help cover cost overruns. Pedro Alonso is a spokesman for Sacyr, the Spanish company heading the project. He says there were many unforeseen problems that forced up the cost.

PEDRO ALONSO: (Through Translator) For example, the exact quality of the stone and certain geotechnical things that weren't documented, the depth of different layers of earth. So these are the things that the consortium believes are beyond our responsibility and should be covered by the client.

BEN HACKETT: Usually when companies bid for projects of this nature with such a long term and such a high cost, they'll tend to be optimistic about the timing of completion as well as costs.

NORTHAM: Ben Hackett is the CEO of Hackett Associates, which provides research for the international maritime industry. His company did an analysis of the cost estimate for the Panama Canal expansion plan when it was being bid in 2008. He says, like many companies, GUPC didn't fully take into account cost and time overruns.

HACKETT: Typically, when you have large infrastructure projects, there is usually a delay in most cases. And where there are delays, there ultimately will be cost overruns.

CORNISH: The Panama Canal Authority, which operates the vital waterway, says the builders should have taken that into account. Jorge Quijano, the head of the Canal Authority, says it's already paid close to $180 million above that price for things like the rising cost of fuel, steel, cement and employee payrolls. Quijano says the canal authority is seeking a solution.

JORGE QUIJANO: All we've been saying is that whatever claim they have, they have to go through the process, and we will abide by the decisions. Now, the problem is, most of the time, we've not been able to come to terms with them because their numbers have been blown out of proportion.

NORTHAM: Still, Quijano says the authority doesn't want a drawn out impasse. Yesterday, both sides offered joint funding proposals to allow work to continue for several months until a permanent solution can be found, but they remain at odds. Cato Stonex, with THS Partners, which has a 5 percent stake in the project, says the dispute must be resolved.

CATO STONEX: It's an extraordinary passage and, obviously, widening it allows that capacity to expand dramatically. It's a particularly sort of unique and important project, which I'm sure all parties to the project want to be concluded satisfactorily.

NORTHAM: The wider, deeper waterway will allow container ships three times the current size to pass, which in turn will alter global trade routes. Quijano, the head of the canal authority, says for that reason, construction must continue.

QUIJANO: It will not stop. Let me tell you, this expansion will be completed with GUPC or without them.

NORTHAM: Jackie Northam, NPR News, Washington. Transcript provided by NPR, Copyright NPR.