By Lomi Kriel and Sonya Dowsett
PANAMA CITY/MADRID Jan 20 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 (80 km)
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.
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.
"COST OVERRUNS COMMON"
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
"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.