Panama Canal’s $5.25 Billion Expansion Project at Risk

Photographer: Rodrigo Arangua/AFP via Getty Images

Fishermen look at a cargo ship at the Panama Canal, on February 4, 2014. Close

Fishermen look at a cargo ship at the Panama Canal, on February 4, 2014.

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Photographer: Rodrigo Arangua/AFP via Getty Images

Fishermen look at a cargo ship at the Panama Canal, on February 4, 2014.

The $5.25 billion expansion of the Panama Canal was at risk of being delayed after negotiations on cost overruns between a construction group led by Spain’s Sacyr SA (SCYR) and the waterway’s authority broke down.

The Panama Canal Authority said that the construction group building new locks meant to accommodate larger ships traveling from North America to Asia suspended work on the project today. Afterward, a spokeswoman for Sacyr said work had been slowed, not stopped. The company’s shares fell as much as 8.4 percent, the biggest intraday drop since Jan. 3, and closed down 6.9 percent at 3.62 euros in Madrid.

Sacyr and Milan-based Salini Impregilo SpA (SAL) said in December they wanted compensation for $1.6 billion in cost overruns, about half the value of their original contract. They gave the canal authority, which is independent from the government, one month to reach an accord. Talks continued until yesterday, when no agreement was reached. The dispute puts as many as 10,000 jobs at “imminent risk,” the companies said.

“They put a threat on the table and today they executed it,” Jorge Quijano, head of the canal authority, told reporters in Panama City today, vowing to finish the project on time. “We demand they restart the expansion work.”

Photographer: Rodrigo Arangua/AFP via Getty Images

Panama Canal locks in Colon are seen under construction on January 17, 2014. Close

Panama Canal locks in Colon are seen under construction on January 17, 2014.

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Photographer: Rodrigo Arangua/AFP via Getty Images

Panama Canal locks in Colon are seen under construction on January 17, 2014.

Quijano said the project will be finished “with or without” the companies,. which he accused of “blackmail.”

‘Unforeseen Costs’

“Any delay is rather bad for the market,” said Nigel Prentis, the London-based head of ship broker Hartland Shipping Services, in a phone interview. “Many ships have been ordered based on the new Panama Canal so it’ll be quite a disappointment to have a delay.”

Madrid-based Sacyr and Salini continue to seek a solution to finish the project in 2015, they said in a regulatory filing today in Madrid. The European builders beat rivals including San Francisco, California-based Bechtel Group Inc. to win the contract in 2009. Their work, which is about 70 percent finished, needs the extra financing to be completed, they said. Quijano also said talks would continue, adding that he has received offers from other companies to take over the project.

‘Liquidity Problem’

“There have been unforeseen costs” that arbitration should resolve, Manuel Manrique, Sacyr’s chief executive officer, said on Cadena Ser Radio in Spain. “But after four years the claims haven’t been resolved and there’s a liquidity problem and that’s what we’re discussing.”

A breakdown “would be bad news for everyone,” Spanish Economy Minister Luis de Guindos told reporters in Madrid today, before Quijano’s news conference.

As Spain’s economy suffered in recent years and the government cut spending on public works, the country’s builders became increasingly reliant on foreign projects. About 25 percent of Sacyr’s 1.32 billion euros ($1.8 billion) of nine-month international revenue came from Panama, according to the company’s latest earnings report.

Unlikely Rescission

It’s unlikely the construction contract will be rescinded, Prentis said.

“Can you imagine? Just taking them off and putting a new construction company that knows nothing about the construction to date?,” Prentis said. “I can’t imagine that’s possible.”

Milan-based Salini’s shares fell 1.1 percent to 4.29 euros.

Panama’s ambassador to Spain, Roberto Eduardo Arango, said yesterday the country needs a fallback plan to ensure the project is completed even if talks fail. Panamanian President Ricardo Martinelli vowed on Jan. 22 that the expansion would be finished.

It’s “normal in such a complex project that there are cost overruns, that’s reasonable,” Pablo Ortiz de Juan, an analyst at Interdin in Madrid, said by phone. “So we shouldn’t be scaring ourselves.”

WikiLeaks Report

Panama Vice President Juan Carlos Varela was cited in a cable released by WikiLeaks and published by El Pais newspaper in 2010 as saying the expansion project was a “disaster” and that in two or three years “it will be obvious this is all a failure.” He made the comments on the Sacyr contract at a lunch with U.S. Ambassador Barbara Stephenson, according to WikiLeaks.

The Sacyr-led group was hired to build locks on both sides of the 80-kilometer (50-mile) waterway, shortening voyages from the U.S. to Asia and potentially reducing transport costs for commodities such as liquefied natural gas. The expansion will allow ships 1,200 feet (366 meters) long and 160 feet wide, holding as many as 12,600 containers, to transit the waterway.

“We will not let this work be detained for long,” Quijano said. “We will confront any demand because we are right in our defense of the Panama Canal.”

To contact the reporters on this story: Eric Sabo in Panama City at esabo1@bloomberg.net; Isabella Cota in San Jose, Costa Rica at icota@bloomberg.net; Nick Leiber in Madrid at nleiber@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net; Andre Soliani at asoliani@bloomberg.net

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