PANAMA CITY / MADRID (Reuters) — A bitter
dispute between the Panama Canal and a Spanish-led consortium of
construction companies over the spiraling cost of expanding one of the
world's busiest waterways was years in the making.
The two sides are at odds over who should pay for $1.6 billion in
cost overruns to build a third set of locks for the canal, the main
part of the expansion of the 50-mile cargo route that connects the
Atlantic and Pacific oceans.
The impasse over the 100-year-old waterway could delay construction,
which aims to double the canal's shipping capacity and bring in
billions of dollars in new revenue for Panama.
Reuters interviews with people involved in the 2009 bidding for the
contract, local officials and leaked diplomatic cables reveal their
concerns that the Grupo Unidos por El Canal (GUPC) consortium would
not be able to finish the job with a bid that was $1 billion lower
than its nearest rival.
The GUPC, led by Spanish company Sacyr, said the overruns were
caused by problems including flawed geological studies carried out
by the Panama Canal Authority (PCA), a semi-independent government
entity that has managed the waterway since the United States
transferred ownership to Panama in 1999.
But the PCA has rejected the GUPC's assertions.
A top Panamanian official close to the bidding process, who spoke on
condition of anonymity due to the sensitive nature of the matter,
said within months of the project being awarded, Sacyr executives
were saying the work would not stay on budget.
"The PCA knew some years ago that Sacyr authorities were saying that
openly, but felt they were protected by the contract," the official
told Reuters.
A second Panamanian official, also speaking on condition of
anonymity, said even before the deal was signed, discussions with
consortium officials showed they believed they would be able to
negotiate a higher cost at a later stage.
"But they found in Quijano a brick wall," the official said,
referring to the head of the PCA, Jorge Quijano.
Large infrastructure projects often run over budget, and GUPC
officials have said overruns are an occupational hazard.
But Sacyr denies it ever planned to ask for more money and says
flawed data from the geological studies of the canal pushed up
costs, because it meant that local basalt excavated for the work was
not right for the concrete mix it planned to use.
"It was not a deliberately underbid offer," the company's chairman
Manuel Manrique told reporters this month. "Sacyr has successfully
carried out a great number of projects ... and we are still winning
and carrying out projects."
The PCA has dismissed that basalt claim, and points out that its
contract offered no assurances over the rock.
"The employer in no way guarantees that such (material) is adequate,
or meets the requirements for the contractor's proposed design, or
is suitable for the works," says the contract, which is publicly
available on the PCA's site.
COSTLY DISPUTE
The dispute could prove costly for both sides.
Expansion was originally due to be finished in 2014 to coincide with
the canal's centenary celebrations, but that deadline was pushed
back to the middle of next year.
If work is delayed, Panama could lose out on millions of dollars in
projected revenue from toll charges.
For Sacyr, which has 48 percent of the consortium, the work brings
in a quarter of its international revenue. Like most Spanish
builders, the company relies heavily on foreign orders to offset a
sharp economic downturn at home.
Winning the bid gave the company a major lift.
At the end of 2008, Sacyr was grappling with falling core earnings,
punished by weak construction and property markets as Spain's
economy swung from boom to bust. The company was swamped with 14.5
billion euros ($19.7 billion) of debt, around seven times its market
value. Sacyr's shares had lost nearly 90 percent of their value from
the 2006 all-time peak.
In July 2009, GUPC clinched the contract for the locks with an offer
worth $3.12 billion — significantly below the $3.48 billion target
reference issued by the PCA for the process.
That was $1 billion below the second-lowest offer tendered by a
group fronted by U.S. engineering company Bechtel.
Both Bechtel and another consortium led by Spanish company ACS,
whose bid was worth $6 billion, quickly sent letters to the PCA
complaining the GUPC proposal did not meet the bid requirements and
had inherent structural risks.
But neither losing bidder formally challenged the process, and Canal
Administrator Quijano told Reuters those structural concerns had
since been resolved.
Jorge Sanchiz, a Panamanian engineer with experience in canal work,
said both the PCA and the consortium were to blame: one for
underestimating the costs, the other for allowing it.
"They only way (the consortium) was going to be able to cover this
was asking the Canal Authority to meet the overruns," said Sanchiz,
who forecast before the PCA made its choice in 2009 that the winner
would run substantially over budget.
The overall expansion of the canal was initially forecast to cost
$5.25 billion in total. But the overruns now being claimed by the
consortium are pushing it close to $7 billion.
A senior figure within the GUPC said the PCA was being unrealistic
if it thought the project would not cost more than originally
projected by the consortium.
"To think that a five-year project with the complexity and size of
this one won't have overruns is absurd," the official said, asking
not to be identified. "In a lot of projects the deviations were much
bigger than in this one."
One of the biggest academic studies on the issue in recent years was
a 2003 investigation at Aalborg University in Denmark which looked
at 258 transport infrastructure works worldwide and found they had
an 86 percent chance of incurring cost overruns.
On average, the costs were 28 percent higher than forecast, the
study said — but below the 50 percent jump on the GUPC bid.
Sacyr's main partner is Italy's Salini Impregilo, which has a
similar share in the project. The GUPC also includes Jan De Nul from
Belgium and Panama's Constructora Urbana (CUSA).
A day after the PCA published its evaluation of the bids, the U.S.
embassy, which had backed the Bechtel-led consortium, described the
GUPC proposal as a "bargain basement bid," according to cables
published by WikiLeaks.
"It is widely expected that during construction, Sacyr will attempt
to renegotiate the price," the cable said.
Less than six months later, the U.S. embassy cabled Washington that
Panamanian vice president Juan Carlos Varela had expressed grave
misgivings about the winning offer.
"When one of the bidders makes a bid that is a billion dollars below
the next competitor, then something is seriously wrong," the cable
quoted him as saying at the end of 2009.
Alberto Aleman, who headed the PCA from 1999 to 2012, said all the
competitors had faced the same rules and that the Sacyr-led group
had offered both the best design and the best price.
"Bechtel's offer had a different design in which the gates were 50
percent bigger, using much more concrete," he said.
But costs were always likely to be an issue, he admitted.
"We knew before we put this together that any project of this
complexity would have claims. No matter who would win."
The dispute has not surprised industry experts in Spain.
The practice of making low offers for a contract, then negotiating
costs later has been a popular strategy for Spanish construction
firms for years, industry officials told Reuters.
Companies put in low bids in the hope of booking extra pay-outs on
modifications and extensions as revenue, they said.
"We've all done that at some time or another, making low bids was a
typical Spanish tactic," said one official, speaking on condition of
anonymity.
The Spanish government passed a law in 2011 aimed at preventing the
practice of underbidding, and said at the time that 98 percent of
public contracts signed in the previous 15 years had ended up with
cost overruns.
The PCA said this month it could take over the project from early
February if GUPC made good on its threat to suspend work unless the
authority footed the bill for the cost overruns.
The dispute over costs looks likely to be settled by arbitration
panels agreed in the contract, but a question remains over whether
the GUPC will finish the project.
The first Panamanian official said he expected the expansion to be
taken out of the GUPC's hands. The consortium's suspension was due
to take effect Monday, but GUPC said work would continue for now
while it remains in talks with the canal authority.
However the row plays out, the expansion looks unlikely to suffer
the fate of the 19th century scheme to build a canal through Panama
led by Frenchman Ferdinand de Lesseps.
Starting work in 1880, it collapsed after the loss of thousands of
lives and millions of dollars, allowing the United States to step in
and take control of the canal project in 1903.
Panama's President Ricardo Martinelli said the expansion of the
waterway could not be stopped.
"The Canal will be finished regardless of what's said, come rain,
wind or hail," he said. ($1 = 0.7352 euros)
(With additional reporting by Elida Moreno in Panama, Jose Elias
Rodriguez in Madrid, David Adams in Miami, Danilo Masoni in Milan
and Julia Symmes Cobb in Mexico City; writing by Dave Graham;
editing by Nick Zieminski)
The two sides are at odds over who should pay for $1.6 billion in
cost overruns to build a third set of locks for the canal, the main
part of the expansion of the 50-mile cargo route that connects the
Atlantic and Pacific oceans.
