PANAMA/MADRID The Panama Canal on Wednesday set a target of no more than a week to reach a deal to jump-start a stalled multibillion-dollar expansion of the waterway amid a cost row, but its administrator said an agreement was falling into place.
Panama Canal Authority (PCA) head Jorge Quijano warned that failure to reach an agreement would leave no alternative but to complete the project without a consortium led by Spain's Sacyr (SCYR.MC).
"I think we have no more than a week, and that is the target we have set," Quijano said. "If we go beyond that, then we will have no alternative."
The builders stopped work early last week on doubling the canal's capacity while a dispute rages over $1.6 billion in cost overruns and extra financing for the work, which is 70 percent done and due to be finished next year.
Quijano said that the dispute has delayed completion of the canal to December 2015.
Delays could cost Panama millions of dollars in lost shipping tolls and are a setback for companies worldwide eager to move larger ships through the Panama Canal, including liquefied natural gas (LNG) producers that want to ship from the U.S. Gulf Coast to Asian markets.
Quijano said he had reached an agreement in principle with the consortium, which also includes Italy's Salini Impregilo (SALI.MI) as well as a Belgian and a Panamanian company.
Financing for resuming the expansion project also needs to be ironed out, including getting the green light from insurer Zurich North America ZURN.VX.
The consortium took out a $400 million bond with Zurich as a required insurance policy in case it did not finish the project. The bond is payable if the project is not completed by the consortium for any reason.
"There is a deal in essence, in principle, between the two parties, but we still need the third," Quijano said, referring to Zurich. "The best option is still to try to finish the project with those who are there."
One option was for Zurich to convert the bond into backing for another loan for the consortium, sources close to the matter said.
Zurich said it was "following progress of the project through ongoing dialogue with both parties" but did not say what it would do with the bond or comment on financing.
The overall expansion project, of which the consortium is building the lion's share, was originally expected to cost about $5.25 billion, but the overruns could increase that to near $7 billion.
Quijano has previously warned the canal could push ahead with a third party if there was no deal soon. He said the project could now be finished by December 2015 given construction work has ground to a halt.
However, the canal authority has not abandoned the alternative of handing over the contract to a third party and Quijano did not give details about what any agreement would involve.
A spokesman for Sacyr declined to comment.
A source familiar with the situation said no agreement had been signed but a deal could be sealed soon.
An agreement was likely to center on both sides bearing some of the additional costs and involve more bank loans, a second source with knowledge of talks said.
Shares in Sacyr closed 4.7 percent higher while Salini Impregilo, which has a 48 percent stake in the consortium (GUPC), traded up 1.8 percent.
The project to widen the 100-year-old waterway that connects the Atlantic and Pacific oceans brings in a quarter of Sacyr's international revenue.
Aside from the cost dispute, the two sides are negotiating over a deadline for the consortium returning $785 million in advance payments made by the canal authority and the delivery dates for 12 of 16 lock-gates, a major part of the project.
Agreement on a date for delivering the lock gates was near, a third source with knowledge of the matter said, but issues around financing were yet to be resolved. A moratorium on the repayment of advances made to the consortium, which has been a major sticking point, is also being straightened out.
The Italian company was on board with the PCA, the source said without specifying on which aspects of the dispute.
The PCA and the GUPC were also in agreement regarding the date of tests of the new structures and a payment plan for suppliers and subcontractors, this source said.
The consortium has said it is willing to let third-party arbitrators decide who pays for the overruns but has also said it needs more cash to finish the work.
Talks over how to find the additional cash to finish the project have been extended twice.
(Additional reporting by Danilo Masoni in Milan and Jose Elias Rodriguez in Madrid; Editing by Simon Gardner, Kieran Murray and W Simon)