Spain's troubles and the Panama Canal

01/03/2014 1:54 PM

01/03/2014 3:23 PM

Call it the mother of all cost overruns.

A Spain-led consortium building a new set of locks for the Panama Canal said this week that it had miscalculated the cost of the job and would need an additional sum to finish the work: $1.6 billion.

This might seem like a minor business news item. In fact, its effects are rippling through Europe and in global shipping and maritime circles.

The consortium says it may halt work on Jan. 20 unless it is paid, further delaying the expansion of the canal, which handles roughly 5 percent of world trade each year. The expansion is already 72 percent complete. But delays have already pushed the ribbon cutting back till June 2015. And this may delay it further.

That means shippers worldwide taking delivery on what are called Post-Panamex vessels in 2015 have to figure out what to do with their ships until the new set of wider locks that can accommodate them open. This pushes shipping costs up.

The company at the center of the overrun storm is Sacyr Vallehermoso, one of Spain’s largest construction firms. It has operations in Brazil, Bolivia, Chile, Colombia, Peru, Qatar, Angloa Togo, India and Mozambique.

Sacyr has taken a massive beating on the Madrid exchange since its Jan. 1 announcement threatening to halt work in Panama. On Thursday, its shares fell 8.95 percent in value. Friday, they fell a further 6.85 percent.

That’s partly because investors were irate that Sacyr had misled them about earnings, according to Madrid’s El Pais newspaper. It had reported as income the cost overruns it hoped to collect from Panama. “Sacyr sold the pelt of the bear before hunting it,” is how El Pais began its article Friday.

In many ways, the cost overrun was a tale foretold. Back in 2009 when Panama awarded the bidding for the canal project, the consortium led by Sacyr bid $3.2 billion, versus the $4.3 billion bid by a group led by U.S. firm Bechtel. A third bid from another Spanish group was for $6 billion. The wide variance raised suspicions.

“A Bechtel representative noted that the concrete cannot even be poured at Sacyr's price,” noted a U.S. diplomatic cable signed by then-Ambassador Barbara Stephenson on July 8, 2009.

Panamanian President Ricardo Martinelli called in the ambassadors of Spain and Italy Friday to demand that their governments abide by the terms of the contract, hours after saying he would fly to Spain and Italy himself to press the case.

Panama Canal officials said cost overruns of 5 to 10 percent are expected in jobs as big as the canal expansion, but not the nearly 50 percent claimed by the Sacyr consortium, which also includes Italy’s Impregilo, Belgium’s Jan de Nul and a Panamanian construction firm.

Sadly for Spain’s wounded taxpayers, already reeling in a country with 26 percent unemployment, resolution of the dispute may hurt them further. The Sacyr-led consortium obtained a $400 million bond in case of a dispute over costs. The bond is backed in part by a parastatal credit agency under Spain’s Secretariat of Commerce.

The administrator of the Panama Canal, Jorge Quijano, told reporters Thursday that he’s got a Plan B for finishing the expansion project. What that is, he didn’t say.

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