By Dan Molinski
Panama and a consortium of construction firms led by Spain's
Sacyr SA signed a final agreement Thursday that settles a
monthslong dispute over massive cost overruns on a
multibillion-dollar project to expand the Panama Canal.
The final deal, which includes $400 million that an insurance
firm could unlock to help fund the remaining construction, comes
two weeks after both sides reached a preliminary deal that allowed
for much work to resume on the $5.2 billion expansion project. With
30% of the work left to be done, the project is expected to be
finished by the end of next year, providing a wider passageway that
will allow bigger ships can fit through and Panama can sharply
increase its revenue from ship toll fees.
A spokesman for the consortium, Groups United for the Canal, or
GUPC, confirmed in an email that it and the Panama Canal Authority,
an agency linked to the government that operates the 50-mile
waterway, both signed the agreement Friday to end the acrimonious
dispute that became public at the start of this year when the
construction firms threatened to walk off the job if not paid $1.6
billion for cost overruns.
Panama refused to pay up, saying the contract stipulates that
bills for such overruns should be sent to an independent body that
decides which side should pay it. It said it was willing to hire
new contractors if the consortium decided to leave the project.
But after more than two months of wrangling, a deal was finally
reached. The final accord is little changed from the preliminary
agreement made in late February. It calls for each side to put up
$100 million to allow for work to return to its "normal rhythm" and
be completed by December 2015, the canal authority said.
Panama said another $400 million would come from Zurich
Insurance Group, which earlier in the contract issued that much in
so-called surety bonds. The bonds are normally used when a contract
is broken, allowing a party to make a claim on the bonds to recover
losses.
Zurich, in an email, confirmed it signed Friday's final accord,
though it didn't provide exact numbers or provide details on how it
would be involved in the funding.
"Zurich worked diligently with the canal authority and GUPC to
reach an agreement on the matter and fortunately the two sides have
had a successful negotiation," the insurance firm said. "We
congratulate both of them on effectively reaching a favorable
outcome. Zurich was glad to have played a role in a solution."
The work on the 100-year-old waterway, which connects the
Atlantic and Pacific oceans, began in 2007 with the overall cost
pegged at $5.2 billion. The purpose is to widen and deepen the
canal, given that many of today's vessels, including oil tankers
and many container ships, are too big to fit through the canal's
narrowest, 110-foot-wide stretches.
With the project's completion, Panama may be able to quadruple
its more-than $1 billion in annual revenue from toll fees. The
U.S., which built the canal in 1914 and is the passageway's biggest
customer, also is expected to benefit, as a wider canal could allow
it to start exporting liquefied natural gas, or LNG, to Asia from
ports in the eastern U.S.
The expansion work was mostly going according to schedule until
early January when GUPC demanded the additional $1.6 billion for
its portion of the undertaking, a $3.1 billion project to build a
third set of locks on both ends of the canal. The consortium is
48%-controlled by Sacyr, and 48%-controlled by Italy's Salini
Impregilo SpA. A Panamanian firm and a Belgian company make up the
other 4%.
The deal announced Friday also gives GUPC additional time, in
some cases until 2018, to repay $784 million in advance payments
made to the consortium by the Panama Canal Authority.
While funding for the project announced in the deal Friday
allows for construction to continue, it doesn't resolve the initial
dispute over the $1.6 billion in cost overruns. That will be
decided by independent arbitration panels over time.
In a statement, Sacyr, the lead contractor, said it "is
confident arbitration will back up the consortium, because the
demands we made our fair."
With the project's eventual completion, Panama's more than $1
billion in annual revenue from toll fees could expand to nearly $4
billion, with the very largest ships being charges close to $1
million per passage. The U.S., which built the canal in 1914 and is
the passageway's biggest customer, also is expected to benefit, as
a wider canal could allow it to start exporting liquefied natural
gas, or LNG, to Asia from ports in the eastern U.S.
Write to Dan Molinski at Dan.Molinski@wsj.com
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