A general view of the site where the new Panama canal locks are being constructed. Photo: AFP/Getty Images
The biggest international business spat of the year is the Panama Canal expansion, a tug-of-war over extra funding between the Panamanian authorities and the transnational consortium in charge of carrying out the project. The dispute just saw its latest episode, the most significant one yet: the Spanish-led consortium confirmed Friday that work on the project has been suspended.
The enlargement of one of the world’s most important shipping routes – five percent of world maritime trade goes through the Panama Canal – has entered a dangerous alley with both sides deeply entrenched in their opposite positions and unable to find a solution for how to finance the $1.6 billion in overruns to finish the project in time. Negotiations have gone back and forth in the last month but no progress has been made: the consortium seeks extra funds for the project, while the Panama Canal Authority (PCA) is unremitting in their refusal to forward more money than the initially agreed upon $3.2 billion.
The issue at stake now is if the project will, in fact, be completed by the end of 2015. The consortium recently suggested that finishing the expansion – to widen the canal by building extra locks on the 50-mile waterway that links the Atlantic and Pacific Oceans – may take up to another five years.
But local authorities have another idea in mind, which is to stick to the initial schedule. The Panama Canal Authority’s head, Jorge Quijano, recently stated that the expansion will be done in 2015 “with or without the consortium.” But what will they do in order to achieve that goal?
Here is a handful of possibilities:
- The Panama Canal Authority drops the contract with the consortium (led by Spain’s Sacyr along with Impregilo of Italy, the Belgian firm Jan De Nul and the Panamanian Company Constructora Urbana) and selects another international company to proceed with the expansion (probably one that was outbid in the original auction). Many believe this will be the outcome in this spat though it could lead to new difficulties: if a new company takes the wheel, the execution cost could double or triple along with technical design and operation challenges.
- The country assumes responsibility to end the expansion. Panama’s president, Ricardo Martinelli, has said in recent weeks that his country has the resources to complete the expansion even if talks end. The canal authority could tell insurer Zurich North America that it wants to end the contract, which would then have 14 days to evaluate the request and decide if it will pay a $400 million bond for the completion of the project, go with other subcontractors, or otherwise help the two groups arrive at an agreement.
- The PCA and the consortium reach a co-financing deal, which would see resume work on the expansion and that sets out a new timetable for the completion of the Panama Canalproject. This is likely the consortium companies’ (unspoken) hope since the economic consequences for each of them if they were booted out would be very significant. Especially in the case of Sacyr, which has 48% of the consortium, since the work brings in a quarter of its international revenue at a time of a slump at home.
- One of the two sides initiates a dispute-settlement process stipulated in the signed contract. Such a move entails three steps: an authority review, an evaluation by a dispute adjudication board and a ruling by the International Chamber of Commerce.
- The wildcard: the United States decides to take action since the Panama Canal plays such a big role in the U.S.’s economy (and will play an even larger one once the expansion is completed). The U.S. Embassy said in an emailed statement in Panama “that timely completion of the Canal expansion is important to these ports and to U.S. trade.”
