Consortium Widening Panama Canal tries to Extort Additional $850 Million

On 31 December Panamanians celebrated 14 years of their national sovereignty over the Panama Canal, after the 1999 implementation of a historic 1977 agreement signed between President Jimmy Carter and Panamanian President Omar Torrijos which gave back to the country the sovereignty of the interoceanic via and its surrounding areas.

While Ronald Reagan subsequently fulminated, "When it comes to the Canal, we built it, we paid for it, it's ours, and we should tell Torrijos and company that we're going to keep it," Congress ratified the agreements. Between 1914 and 1999, successive U.S. administrations paid Panama $1.83 billion in fees; since Panama gained control, the canal has generated $8.5 billion in revenue for the country, which is almost five times what was received in 85 years of U.S. administration.

The 50-mile long Panama Canal remains the Western Hemisphere's most vital waterway, shaving nearly 8,000 miles off ships' Pacific-Atlantic transit, allowing them to avoid the storm-laden Straits of Magellan and the Drake Passage off Argentina's southern coast.

More than 14,000 ships annually, or about 40 per day, now transit the Panama Canal, connecting 160 countries and 1,700 ports, according to the Panama Canal Authority's (ACP) website. The vessels, up to 65,000 tons, are known as Panamax.

The Panama Canal locks' size constraints caused the government in 2007 to tender for the $5.25 billion Panama Canal Expansion Program, which was won by the Grupo Unidos por el Canal (GUPC) consortium, led by the Spanish group Sacyr and which also includes Italy's Impregilo, Belgium's Jan De Nul and Panamanian CUSA, to construct a third lane of locks deep draft vessels post and superpost Panamax to augment the current two sets, that will double the capacity of the channel to handle 600 million tons annually, with a completion date set for June 2015. The Panama Canal Authority borrowed $2.3 billion between 2009 and 2011 to help finance the project, while also increasing transit tolls an average of 3.5 percent a year.

Now, cost overruns and delays have led to lawsuits and recriminations between GUPC and the ACP. The Panama Canal Expansion Program is 70.7 percent complete with several components completed, such as the dredging of the Atlantic and Pacific entrances, while the construction of the new locks is 64 percent complete.

GUPC have presented a new $850 million claim against the ACP due to delays on the construction of the third set of locks. The original GUPC lawsuit for $585.9 million was due to delays caused by problems in the quality of concrete used was withdrawn in early December, but delayed the Canal's extension works for eight months due, pushing back the completion date to June 2015 instead of October 2014.

In a nasty New Year's present for Panama, on 1 January GUPC sent the Panama Canal Authority a notice of suspension of work, according to sub-clause 16.1 of the for constructing the third set of locks, according to a GUPC statement.

GUPC threatened to stop all work if within 21 days their demands are not met, noting that the consortium, said that "cannot carry on a work with projected $1.6 billion in cost overruns," equivalent to 50 percent of the project's cost, blaming poor information provided by the ACP's Directors and unforeseen events.

GUPC alleges that Panama Canal Authority administration had "failed to fulfill its obligations under the contract" and would reveal "the inaccuracy of the information provided to the consortium to implement the project. But above all, it (the ACP administration) has failed to maintain and restore the financial equilibrium with GUPC from unforeseen events that have occurred in the work, something that happens regularly in projects of this magnitude."

Not surprisingly, the consortium denies pressuring the Panama Canal Authority. The ACP believes otherwise, that the letter is for "the sole purpose of forcing the organization to negotiate outside the terms of the contract for the construction of the third set of locks. No matter what kind of pressure is made against ACP, we maintain our demand that GUPC respect the contract that they agreed and signed."

Whatever the final adjudication of the case, it seems extraordinary that GUPC would try to wheedle an additional $1.6 billion in "cost overruns" on a $5.25 billion contract, a 30 percent billing markup of a magnitude that would even cause Pentagon contractors to blush.

The Panama Canal Authority predicts that the volume of cargo transiting the canal will grow by an average of 3 percent per year, doubling the 2005 tonnage by 2025. If these growth figures are to be accomplished, then ACP and GUPC are going to have to reach an accommodation.

By. John C.K. Daly of Oilprice.com