Panama: Tentative agreement to proceed with Panama Canal expansion project reached
February 13, 2014
In January, a dispute broke out between the multinational consortium in charge of the project to expand the Panama Canal and the Canal authorities. When completed, the expansion will allow ships three times as wide to use the canal. The project is expected to boost the volume of cargo transiting through the waterway by around 3% per year, with the potential to increase annual profits for the Panama government from USD 800 million a year to USD 2.0 billion.
The multinational consortium, led by the Spanish and Italian construction companies Sacyr and Salini Impregilo, threatened to stop work if they were not awarded cost overruns worth USD 1.6 billion. The consortium claims that Panama is responsible for the extra costs due to their flawed pre-construction analysis. Canal officials claim that the construction companies are in breach of contract and they refuse to provide any additional funding. The massive project to expand one of the world's most important shipping routes is about 70% complete. The most important part of the project, which involves building two new sets of locks at the ocean on either side of the Canal, is stalled.
On 12 February, the head of the Panama Canal Authority, Jorge Quijano, stated that a tentative agreement with the construction firms had been reached. Quijano explained that progress has been made in talks between the Authority and the construction firms, although some details still need to be finalized, such as the role of the insurance company Zurich. One potential solution is that Zurich would convert the original USD 400 billion bond that the consortium purchased as insurance into a new loan that would fund the project directly. Zurich has not yet made an official statement on the issue.
In his statement Quijano sounded much more optimistic than he had in weeks past, although he also stressed that Panama's patience is limited and that a final decision has to be made within a week. Quijano has not abandoned the alternative plan of having the Canal Authority take over the work. The original target completion date of October 2014 has been pushed back to December 2015 and the project will likely take even longer if the original builders do not reach and agreement and resume work soon.
Author: Carl Kelly, Economist