Panama Canal talks break down

Firms slow expansion, say 10,000 jobs at risk in pay fight

A cargo ship exits a lock on the Panama Canal in Panama City on Tuesday. A construction group working on the expansion of the canal said it slowed work Wednesday in response to concerns about not being paid for cost overruns.
A cargo ship exits a lock on the Panama Canal in Panama City on Tuesday. A construction group working on the expansion of the canal said it slowed work Wednesday in response to concerns about not being paid for cost overruns.

The $5.25 billion expansion of the Panama Canal is at risk of being delayed after negotiations on cost overruns between a construction group led by Spain’s Sacyr SA 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 Wednesday. Afterward, a spokesman 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 in Madrid.

Sacyr and Milan-based Salini Impregilo SpA said in December that they wanted compensation for $1.6 billion in cost overruns, about half the value of their original contract. They gave the authority, which is independent from the government, one month to reach an accord. Talks continued until Tuesday, 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 authority, told reporters in Panama City, vowing to finish the project on time. “We demand they restart the expansion work.”

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

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

In the United States, ports have invested billions of dollars in dredging, raising bridges and renovating docking infrastructure to accommodate the new generation of larger ships, including liquefied-natural-gas tankers, that could pass through an expanded Panama Canal.

Madrid-based Sacyr and Salini continue to seek a solution to finish the project in 2015, they said in a regulatory filing Wednesday in Madrid. The European builders beat rivals including San Francisco-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.

“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, 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 $1.8 billion of nine-month international revenue came from Panama, according to the company’s latest earnings report.

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.”

Panama’s ambassador to Spain, Roberto Eduardo Arango, said Tuesday that 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.”

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 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 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.” Information for this article was contributed by Angeline Benoit and Emma Ross-Thomas of Bloomberg News and The Associated Press.

Business, Pages 25 on 02/06/2014

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