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Panama Canal proposes joint financing to end cost row

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[January 07, 2014]  By Lomi Kriel and Elida Moreno

PANAMA CITY (Reuters)  The head of the Panama Canal on Monday proposed that it and a Spanish-led consortium expanding the major maritime cargo artery plug a financing gap between them, and said the sides had agreed to talks on Tuesday to defuse a row over huge cost overruns.

The governments of Spain and Panama distanced themselves from the dispute, saying it should be resolved by the Panama Canal Authority and the consortium led by Spanish construction company Sacyr <SCYR.MC>.

Halting work on the $5.25 billion project to widen and deepen the canal would be a setback for companies eager to increase cargo volumes passing through the century-old waterway, especially the first-ever liquefied natural gas (LNG) exports from the U.S. Gulf coast to Asian markets as well as other bulk commodity shipments.

"We are talking about some additional funding that they would have to put up and we could also provide," Jorge Quijano, the head of the Panama Canal Authority which administers the waterway, told reporters after meeting with visiting Spanish public works minister, Ana Pastor, who is mediating.

"We have set out what we can do to contribute, as long as they also contribute," he added.

There was no immediate word from building consortium Grupo Unidos por el Canal (GUPC) on the proposal.

Earlier on Monday, Spain's ambassador to Panama, Jesus Silva, said earlier his government would provide no financial help to Sacyr in sorting out the row overshadowing one of the world's most important maritime cargo routes.

Last week, Panamanian President Ricardo Martinelli accused the consortium of "great irresponsibility" when it threatened to suspend work on January 20 if the Panama Canal Authority did not pay for big cost overruns.

The GUPC also includes Italy's Salini Impregilo <SALI.MI>, Belgium's Jan De Nul and Panama's Constructora Urbana.

Arguing that the project to build a third set of locks for the canal had suffered unforeseen setbacks, the GUPC said last week it had faced $1.6 billion in added costs. It blamed the Panama Canal Authority for carrying out flawed studies of the geological terrain.

Martinelli had earlier turned on Spain and Italy, saying their governments had given him assurances that they would finish the $3.2 billion project to build the locks, prompting Pastor to fly to Panama to seek an end to the impasse.

On Monday, both he and Pastor said their governments would stay out of the spat.

"The canal authority and the consortium need to resolve all their problems between themselves," Martinelli said after meeting with Pastor. "We are sure that the meetings being held will resolve any conflict."

"What the Panamanian government and the government of Spain want most, what everyone wants, is for the Panama Canal expansion to be finished," he added.

Pastor said she viewed the spat as "a problem between a private entity and an independent entity," saying she was trying to help make relations fluid to help the parties reach a deal.

If the parties fail to reach a middle ground to split the difference over the cost overruns, the project could potentially be offered up to other companies.


On Sunday, the PCA maintained a firm stance, again rejecting the GUPC's arguments on the overruns, and referred the consortium to the arbitration panels the two sides agreed on when the contract was signed.

Quijano told Spanish newspaper El Pais that the two-page letter the GUPC had submitted last week did not justify its demands and that the consortium would need to provide more detailed information to make a viable case.

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If work on the project did stop, the authority could take steps to ensure it was completed regardless, "be it by a third party or by the PCA," Quijano told the paper.

Sacyr won the canal contract in 2009 with an offer that was considerably lower than that of at least one rival, as well as below the $3.48 billion reference set by the PCA.

Less than six months later, Martinelli, Panamanian Vice President Juan Carlos Varela and other top officials were already worried about how the project was progressing, according to U.S. diplomatic cables published by Wikileaks.

The canal expansion has been one of the top priorities for the government of Martinelli, whose term ends mid-year.

Sacyr, whose debts at the end of September were three times its market capitalization, has also staked a lot on the canal expansion.

The company made 55 percent of its revenue outside Spain in the first nine months of 2013, and Panama contributed 25 percent of its 1.3 billion euros ($1.78 billion) in international sales, according to its 2013 nine-month earnings statement.

Sacyr shares closed up 6.01 percent to 3.387 euros per share on Monday, in heavy volume of 12 million shares, but are still down from their level of 3.767 euros per share at the close of trade December 31, before the consortium announced its threat to stop work on the project.

The Panama Canal dispute has put a spotlight on another project in the works in Central America, a $40 billion canal planned in Nicaragua, which is also trying to cash in on the North American energy boom.

In June last year, Nicaragua granted a 50-year concession to the Hong Kong-based HKND Group to design, build and manage a canal aimed at giant oil and gas-bearing supertankers, many heading from the United States to Asia, that will not fit through the Panama Canal even post expansion.

HKND is currently conducting feasibility studies and construction on the project, viewed by many with skepticism, is not set to begin until at least January 2015.

Manuel Coronel Kautz, the head of the Nicaragua Canal authority, told Reuters on Monday Panama's impasse would not affect its own project timetable.

"What's going on in Panama is totally off our radar," he said. "The decisions to construct the Nicaragua canal were based on the perspective of serving the vessels that can't pass through the Panama canal."

(Additional reporting by David Adams in Miami, Fiona Ortiz in Madrid and Gabriel Stargardter and Julia Symmes Cobb in Mexico City; writing by Dave Graham and Simon Gardner; editing by Nick Zieminski and David Gregorio)

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