Grupo Unidos por el Canal (GUPC), the consortium hired to build a third set of wider locks for big ships at the Panama Canal, on Monday qualified its ultimatum to suspend work Jan. 20 if its demands to be reimbursed for $1.6 billion in cost overruns are not met, saying its deadline is not automatic.
The contractor claims the Panama Canal Authority (ACP) refuses to compensate it for cost overruns due to unforeseen weather conditions and other circumstances, as well as the ACP's decision more than a year ago to reject the initial concrete mix for the locks because it allegedly didn't meet requirements for durability. GUPC says the concrete mix was based on faulty geological data provided by the Panama Canal Authority (ACP).
"GUPC will not have to make tomorrow any change in the status of the work because the letter sent on Dec. 30th entitles the consortium to suspend work at any time from the 21th, although this scenario is not contemplated. However the Board of GUPC can evaluate the situation and take the appropriate decision at any time," the consortium said in statement.
The ACP said talks continued over the weekend with the head of Spanish construction firm Sacyr, which is leading the international consortium.
On Sunday, Antonio Tajani, European Commission vice president for industry and entrepreneurship, said he will attempt to mediate the dispute between the parties.
Tajani, a Spaniard, said he understands the positions of both sides, but said the most urgent step is to get an agreement on a cooling-off period of several weeks so he can familiarize himself with the issues and solve the problem.
An impasse that shuts down construction is in no one's best interest, including European construction firms that depend on business in Latin America and elsewhere around the world, he said.
The ACP reiterated in a statement Sunday that to justify its threat, GUPC is wrongfully applying a clause in the contract that allows contractors to suspend work when the employer has failed to issue payments for regular invoices. The ACP says it has 56 days under the contract to pay the invoice, but has been doing so within 15 days of receipt.
The ACP confirmed that since the dispute became public three weeks ago, construction work on the locks has slowed to a crawl. It previously said that it noticed a drop off in production and fewer workers on the job site as early as mid-December. It's not immediately clear if the slow down is designed to signal GUPC's displeasure with the situation or because of a lack of cash flow to pay subcontractors.
The slow down is expected to further delay completion of the Canal expansion, now scheduled for June 2015. The concrete mix redo pushed back the original completion date from October 2014. The ACP said vessels will be able to start using the new locks in the fourth quarter of 2015, but many in the maritime community suspect it won't be ready until 2016.
Delays could be more extensive if the GUPC officially suspends work later today.
The ACP has proposed advancing $100 million, and postponing collection of a previous advance, to help the consortium cover expenses and keep the project moving. GUPC officially countered that offer by asking for a $400 million advance from the ACP, but one of its members said the Authority should immediately pay $1 billion for the extra expenses the group has incurred.
Canal officials say they have already reimbursed GUPC $150 million to $160 million above the $3.2 billion contract price to cover price escalation in pre-approved categories of materials. GUPC needs to go through proper claims channels and provide adequate documentation, as stipulated in the contract, if it wants more expenses to be considered, they said.
The overall price tag for the Canal expansion is $5.2 billion.
Meanwhile, Fitch Ratings last week said a significant delay in construction could postpone anticipated increases in vessel traffic and related revenues for U.S. East Coast and Gulf ports.
Ports such as Hampton Roads, Va., that already have the channel depth and landside infrastructure to handle super post-Panamax vessels are likely to experience little impact by a Canal delay because they are already handling big ships through the Suez Canal.
"Other ports with ongoing projects to dredge their channels, increase berth capacity, and become 'big ship ready' in anticipation of larger ships coming through the Panama Canal may see pressured returns on their capital investment if they develop significant delays," Fitch said.
Ports are jockeying for government funding to increase their capacity to handle big ships, but until the Canal expansion is completed, it's not clear how vessel routes will change. And most experts do not believe the Canal expansion itself will lead to cargo growth or a shift in market share, simply a reconfiguration of the existing cargo volume into fewer, bigger vessels.
The Panama Canal's construction delays are not unusual for mega projects. The first phase of the $5.6 billion project to extend a Washington, D.C., subway line out to Dulles Airport is already five months behind schedule.