Canal Expansion Deadlock Risks Growth

The Panama canal's US$5.3bn expansion looks set to be delayed further as Spanish builder Sacyr , leader of the Grupo Unidos por el Canal (United Group) consortium, stated on December 30 that work on the vital third set of locks element of the project will be halted unless cost overruns are met by the Panama Canal Authority (PCA). Sacyr's statement gave a 21 day period for an agreement to be reached before it would halt work; however, the PCA has subsequently rejected the suggestion that it is obliged to meet the US$1.6bn of cost overruns, nearly half of the initial contract's worth of US3.1bn.

Won in 2009 by the consortium consisting of Sacyr, Italian Salini Impregilo, Belgian Jan de Nul and Panama's Constructora Urbana, the locks are the key element in the plan to double the waterway's annual capacity from 300mn tonnes per annum to 600mn. Crucially, the expansion of the Panama Canal may permit 88% of the global liquefied natural gas (LNG) vessel fleet to pass through when completed, which will have a dramatic impact on international LNG market. The Panama Canal route would save significant amount of time and costs for LNG buyers and producers, particularly relevant for US and Japan. Presently, the canal can accommodate only 8.6% of the world's existing LNG fleet.

The cost overruns in the construction of the third set of locks stem from United Group reportedly being forced to use more expensive, higher-quality concrete in the works, flawed geological studies and labour disputes - factors which the consortium believe were unforeseen and should be addressed by the PCA honouring existing agreements. However, the canal authority state that these issues fall outside of the contract signed with United Group and as such they are not responsible for meeting the incurred costs. This is contrary to United Group's belief that under Panamanian law, the canal authority is responsible for absorbing those cost overruns.

Delays Threaten Impressive Growth
Construction Industry Value, US$bn (LHS) and Real Growth (% Change Y-o-Y)

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This article is tagged to:
Sector: Infrastructure, Shipping
Geography: Panama

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