Panama Canal expansion threatened by dispute over costs

A Spanish delegation was this weekend heading to Panama in a bid to resolve a cost dispute that threatens the planned expansion of the country's canal and has triggered a sell-off in the shares of Sacyr SA, the Madrid-based builder leading the project.

Spain's Public Works minister, Ana Pastor, and Sacyr Chairman Manuel Manrique’s visit was announced Friday by Panama's president, Ricardo Martinelli.

A Spanish-Italian consortium working on the project, which would widen the canal so that ships three times larger than at present could use it, has asked Panama to pay for $1.6 billion in cost overruns on the $3.2 billion plan to build a third set of locks for the canal.

Panama rejected that demand, though it has hinted it could be willing to negotiate with the consortium.

Spain's ambassador to Panama, Jesús Silva, told the Spanish daily El País that although the conflict is primarily a business dispute, governments should help reach a resolution.

"A first step in this dialogue is the minister's (Pastor) visit," he told El País, "because if there is a Spanish company involved in this conflict we as government representatives have to mediate to find a solution."

The massive infrastructure development aims to make it easier, for example, to move cargo between Asia and the eastern coasts of the Americas, potentially reducing the cost of transporting commodities and manufactured goods.

The dispute with the consortium could bring the project to a halt.

But a senior source from the consortium played down the dispute, saying negotiations on cost overruns were normal, albeit seldom played out in the public eye.

"To think a five-year project of the size and complexity of this one will not entail extra costs is absurd," the senior source said, on condition of anonymity.

The consortium includes Italy's Salini Impregilo, Belgium's Jan De Nul and Panama's Constructora Urbana.

Uncertainty over the outcome has wiped $358 million off the market value of Sacyr in two days, while shares in Salini Impregilo were broadly flat.

On Thursday the spat seemed to escalate with President Martinelli accusing the companies of irresponsibility. But on Friday the parties said they were seeking a resolution.

"We're going to continue talking to get this work built because the governments of Panama, Spain and Italy have an interest in seeing this project built and that the problems between the interested parties are resolved," Martinelli told reporters after a meeting with Spanish and Italian diplomats.

The building consortium had stressed that it was committed to finishing the job, Silva added.

"What it obviously can't do just now is take on economic losses they've evaluated ... that are beyond the consortium's capacities and that of any company in the world," he said.

The project is more than two-thirds complete and is scheduled to conclude in 2015.

The consortium said on Wednesday it would suspend the work unless the authorities came up with a solution within 21 days, and that overruns were due to unforeseen events during construction that it deemed normal on such large projects -- a stance supported by some investors.

"The way these contracts operate is that there is a certain amount of agreed work, and then there are always modifications that have to be agreed on by the two sides," said Cato Stonex, fund manager and joint founder of equity investment firm Taube Hodson Stonex Partners, which owns 4.94 percent of Sacyr.

"The situation is slightly clouded by upcoming elections in Panama (in 2014)," he said. "It would be better if the parties came to an agreement, but on balance the fact that the consortium is willing to invoke the clauses in the agreement is reassuring, as what you don't want is more spending without the guarantee it will be repaid."

Sacyr has blamed part of the cost overrun on materials included in the original budget being declared inadequate during the construction phase. For example, the Panama Canal Authority (PCA) rejected the concrete mix the consortium had planned to use, the company said.

Jorge Quijano, the head of the PCA, told local radio the two sides were prepared to discuss the cost issue and that Panama could pay if the consortium's demands proved to be justified.

"We will pay, but at the same time we expect the other side to play by the same rules," Quijano said.

Al Jazeera and Reuters