The Italian construction firm Salini Impregilo said that switching to another contractor to complete the $3.2 billion installation of a new set of locks to handle bigger ships at the Panama Canal would delay the project at least three years.
Panama Canal Authority (ACP) Administrator Jorge Quijano recently said the agency could act on contingency plans to cancel the existing contract and hire another team if a dispute about reimbursement of cost overruns with Grupo Unidos por el Canal (GUPC) cannot be resolved.
Impregilo is a member of GUPC, which is led by Spanish construction firm Sacyr.
The disagreement erupted into public view at the beginning of the new year when GUPC claimed the ACP had ignored its claims for $1.6 billion in unforeseen costs, including weather delays and the ACP's rejection of the initial concrete mix for not meeting standards. GUPC argued that any problems with the concrete resulted from poor geological information provided by the ACP. Canal management said it has paid $150 million to $160 million for price escalation in approved supply categories and urged the consortium to file remaining claims through proper channels with adequate documentation, as required by the contract.
In a harshly worded statement
posted on its website Wednesday, Impregilo questioned the competence of the ACP and said all parties would lose if a solution is not found.
"The ACP’s threat to put in place the so-called Plan B — that is, to terminate the contract with the consortium and entrust the implementation of works to others — is not only illegal and against the terms of the contract, but it is also against the interests of the State of Panama and squanders the money of Panamanian citizens.
"The alternative to the completion of the works by the current consortium would result in a delay of at least three years, the expected time for the construction of a new set of gates by any new contractor, even if it were ever possible to replace the consortium without further delays to the civil works," the Italian firm said.
"The position assumed by the ACP can only be put down to the inexperience of the administrative authorities of the Panama Canal in dealing with projects of this size and complexity," the firm continued.
"The companies which form part of the GUPC consortium have, historically, managed thousands of construction contracts all over the world. As is shown in the CVs published on the ACP website, including that of President Quijano, the ACP directors do not have a single instance of experience of realizing major civil engineering works or the management of contracts for infrastructure construction."
The contract dispute threatens the projected completion of the Panama Canal expansion in mid-2015, which already represents a slip from the original completion date of October 2014. Barring further delays, Canal managers say the wider set of locks will be open for commercial traffic in late 2015. Analysts and maritime officials say the new cargo route could transform trade as ocean routes are reconfigured to take advantage of big ship economies of scale.
"The consortium of contractors is not a charity, and there is no reason why the consortium should pay the costs of the construction of the Canal. The contractors have to do their job, i.e. to build the Canal extension, and they have done their job well, tackling all the substantial technical difficulties. The client must pay the costs including contingencies and finance the construction of the work since this is required by law. It is time to stop telling fairy tales," Impregilo said.
The company urged the ACP to quickly pay $1 billion beyond the original contract terms and then consolidate and refinance $500 million in advances issued so far until an arbitrator can decide on who is responsible for the extra costs above $1 billion.
"Both of these proposals would enable the completion of work in the first half of 2015 and would provide a global solution, and in accordance with the contract situation, in addition to providing the easiest, fastest and cheapest solution."
Otherwise, the project would be delayed while it goes to international arbitration in Miami, depriving Panama of an estimated $2.5 billion in potential revenue from the new entrance to the Canal in the first year, with future revenues rising to $6.5 billion, it said.
GUPC's demands only amount to one-seventh of the revenues that would be lost by delays associated with switching to a new contractor.
"It will be necessary, then, to find someone to explain to the Panamanian citizens that, in addition to not recovering the lost revenues from the lack of a shipping channel, they will also have to pay for the damages ruled against them by the arbitration," it said.
GUPC previously proposed that the ACP advance it $400 million to enable ongoing procurement of supplies and subcontract work after the ACP offered a $100 million advance and two-months delay in repayment of an earlier $83 million advance. The ACP also wants GUPC to commit $100 million of its own to keep subcontractors on working.
"Salini Impregilo restates its goodwill and that of the GUPC consortium, which is working toward finding a solution to ensure continuation of the work on the Canal. We must all ... remain committed to this end. It would be astonishing and irresponsible if no solution was found particularly as the means necessary are staring us in the face — as are the implications and consequences of a possible shutdown of the project and the works."
Impregilo said the ACP has hundreds of millions of dollars at its disposal in its budget for contingencies and unforeseen circumstances which it has not yet used.
"Now is the time to do so," it said.
GUPC contends that is not in breach of the contract because Panamanian law calls for the compensation of contractors for unexpected cost overruns in public projects, and the contract is governed by Panamanian law.
"The non-usability of the basalt for the construction of the concrete, and its consequences, were not foreseen in the tender documents, or in the original contract," Impregilo continued.
"All expenses incurred by the consortium in this regard have been verified by documents in the client’s open book
procedure, with total transparency, and subjected to an audit by the ACP with the help of international experts. The cost of the concrete only represents around a third of the total contract value of approximately $3.5 billion, and as a result of such unexpected costs, the relative costs of the concrete alone are increased by over 100 percent," it said.
"The construction of the Panama Canal is a huge technological and engineering challenge, and with more than 10,000 people working on the project, the canal is a historic feat of engineering. ... In projects of this size and complexity, the relationship between client and contractor normally produces contrasting interpretations of the contract and the number of applications that need to be resolved in the course of implementation. It is clear that the expertise and experience of the Administration and its officials make the difference.
"The GUPC has produced approximately 100 demands to the customer for additional costs and time added, based on the sharing of risks (covered by the contract) to be borne by each party, and then charged to the client. Such a request — made up of extensive detail, documentation and supporting analysis, and also produced with the support of international advisors and the structure of more than 120 people dedicated to this task — has always been answered with a simple no, thus creating a contentious solution to these issues, rather than going along an administrative path during construction, as required by the contract and by the law of Panama," Impregilo said.
Sources from competing teams involved in the bidding process for the locks project five years ago told American Shipper
at the time that one of the problems with the terms of the proposed contract was that most of the risk for cost escalation was placed on the contractor.
Impregilo's statement went on to counter many of the ACP's statements.
"ACP maintains that GUPC must continue to work and to finance in obedient silence while awaiting whatever sums are finally recognized by arbitration as being owed to the consortium as well as its actual payment, despite having already committed billions of their own dollars to deliver infrastructure for the ownership of the client.
"It should be noted, however, that in the face of these demands, the customer, ACP, has already funded a total of more than $750 million, including advances granted and postponed repayments to the contract," it said.
Impregilo said APC was out of line to seek repayment for the advances, which are going to cover work that the consortium is already scheduled to be paid for. Forcing GUPC to bear all costs "is is totally unacceptable and even ridiculous in the current dramatic predicament.