Panama Canal Expansion Still Set for Completion in 2015, Official Says

January 21, 2014 – The deputy administrator of the Panama Canal Authority today said the $5.25 billion expansion of the Panama Canal will meet the target date of mid-2015, even if the Spanish-led consortium fails to complete its construction work.

“We have completion funds and a letter of credit that would allow us to continue with the project should the contractor fail its obligations,” said Manuel E. Benítez, deputy administrator at the canal authority, at the SMC3 JumpStart 2014 conference in Atlanta. “Financially, the project is assured.”

The contracting consortium, Grupo Unidos por el Canal, had threatened to stop working on the locks if it didn’t receive payment for what it says are $1.6 billion in cost overruns. The canal authority has rejected those claims and the consortium’s proposal that the authority help co-finance the cost overruns. However, Sacyr, the lead contractor from the consortium, has since pledged that it will complete the contract, despite the cost overruns, according to a statement issued on Jan. 19 by the consortium.

The canal authority could fire its contractor as early as Jan. 27 if the consortium continues to slow down work or stops work altogether, Benítez said. The canal authority then would appoint a management firm to oversee subcontractors working on construction, he said.

“Unless the contractor starts picking up this work pretty soon we have the right to issue a termination letter on the 27th,” he said. That date is 20 days after a warning notice was sent by the authority to the contractor on Jan. 6.

If the contractor is fired, “We’re probably looking at a one- to two-month delay that would still put us (completing the expansion) in the fourth quarter of 2015,” Benítez said.

Benítez said work on the locks is 65 percent compete and that intricate conduits for filling the chambers and recirculating water is largely finished.

“From here on it’s really much easier,” Benítez said. “I anticipate no further delays even if the contractor fails to complete the project.”

The pace of the expansion project has fallen 70 percent since November, according to The Washington Post, with hundreds of workers let go because work has dragged, The Associated Press reports. The expansion will more than double the size of container vessels able to transit the canal today, allowing container lines to boost their economies of scale per unit. The expansion, which is set to be complete about 100 years after the canal opening, has spurred U.S. East and Gulf Coast ports to deepen their channels so they can handle fully loaded post-Panamax vessels.

The canal authority will not negotiate a settlement outside the contract, he said, stressing that the contract offers the contractor three levels of dispute resolution. He also noted the contractor had lost previous claims submitted to a dispute resolution board. The contractor sent the canal authority a “notice of non-payment” on Dec. 30 that the authority dismissed as groundless in the Jan. 6 reply.

“We have been paying on average every 15 days,” Benítez said. “We have paid every invoice.”

The contractor has slowed down but not suspended work, he said. “If they do not continue to work, we are going to terminate their right to complete the project.” The slowdown is a breach of contract, the deputy administrator said.

“We have a Plan B. Basically the construction site is worked by subcontractors, and we will hire a management firm to manage them.”

The Spanish-led consortium hasn’t paid those subcontractors, he said, and the authority has no contractual obligation or means to do so.

As for the contractor’s claims, “this is not a cost overrun,” he said. “The problem is the contractor has overspent and they want the Panama Canal Authority to pay outside the contract. We’re saying no way.”

The consortium blames the cost overruns largely on what it claims were flawed geological studies by Panama that have prevented it from obtaining the basalt needed to produce concrete for the huge new locks. The consortium won the contract for the locks, the most expensive and complex part of the expansion project, in 2009 by submitting by a $3.1 million bid that was by far the lowest bid and was $1 billion less than a bid led by the U.S. construction giant Bechtel.

The canal authority has rejected a proposal by the European Union to mediate the $1.6 billion overrun. The consortium said it welcomed the EU offer.

Representatives of the consortium and canal authority were set to meet with insurers Zurich North America today to discuss the status of the work.

Benítez, who is confident a resolution will be found, said failure to reach an agreement would “be a big fiasco for the Europeans” and could make it harder for those in the consortium to get future projects. He noted the contractor has joint liability with the canal authority should the project fail to be completed.

“If they abandon the project, that would be considered a deliberate default, and their liability would be unlimited,” Benítez said.

Benitez estimated that $1.1 billion in work remains to be done, not counting anything the consortium may owe subcontractors. The entire project originally was forecast to cost about $5.25 billion.

He said the build-design contract was structured on a “cash flow positive” arrangement, with the canal authority providing periodic advances against which the contractor provides reimbursement.

Benitez said the contractor owes $548 million on a $600 million advance secured by an on-demand letter of credit. He said the authority also has $441 million in undisbursed cash and $600 million in security bonds. Excluding the design differences, the GUPC price is only about $300 million below the other bidders, he said.

Benitez said the contract also had clauses allowing for change in prices for structural and reinforcing steel, cement, diesel, and labor. He said the canal authority had agreed to an additional $160 million in payments because of rising prices for these items.

“They signed the contract, and they need to comply with it,” Benitez said.

Source: Journal of Commerce