CONTRACT DISPUTE COULD POSTPONE PANAMA CANAL EXPANSION

Tricia Braid

Jan, 07, 2014  |  Today's News

Illinois Corn is keeping tabs on the Panama Canal expansion to three shipping lanes, scheduled for completing this year. The third lane would allow the world’s largest cargo ships to cut thousands of miles off their journeys, lowering the transportation costs for the corn you export. The schedule for completing the expansion of the Panama Canal could slip into 2016 if a contractual dispute with the consortium in charge of constructing a third set of wider locks to accommodate bigger vessels is not resolved soon.

Over the weekend, Grupo Unidos por el Canal issued a statement threatening to suspend work on the project if the Panama Canal Authority doesn't agree to reimburse the consortium for cost overruns within 21 days. 

GUPC is comprised of Spanish construction firm Sacyr, Italy's Impreglio, Belgian dredging company Jan de Nul Group, and Panamanian construction firm CUSA.

The group claimed that the Panama Canal Authority (ACP) has ignored its request so far to take responsibility for up to $1.6 billion in cost overruns, which it said are due to "unforeseen events" that are normal in large infrastructure projects. It said its contract allows for reimbursement if the budget is exceeded.

GUPC also charged Canal officials with providing inaccurate information on which it based its initial bid.

In a statement Thursday morning, the ACP said GUPC has not followed proper claims procedures and conflict resolution mechanisms established in the contract. It reaffirmed its commitment to successfully complete the expansion project.

"ACP categorically rejects the pressures by contractor GUPC in recent statements, the sole purpose of which are to force the ACP to negotiate outside the terms established in the contract for the new locks alleging cost overruns and demanding to be provided additional funds from those agreed in the contract," the agency said. GUPC should follow the contract it signed and allow an adjudication board to decide how to resolve its claims, the ACP added.

GUPC said it "has always been willing to work within the contract and the laws of Panama to find a negotiated solution to finish the work in less time and cost" and regretted having to take its case to the media.

The dispute over who is responsible for excess costs may have been inevitable, according to sources on engineering teams that lost the bid for the locks project in 2009. Officials involved in the process told American Shipper at the time that the ACP's terms were quite onerous, and consortia were pressured to submit bids without much negotiation on the terms. The proposed contracts didn't allow much room in its cost escalation clauses and forced the contractors to take most of the risk even though the full design for the project had not been completed.

Another concern was the requirement that contractors buy large bid bonds designed to guarantee their ability to finish a job as spelled out in the contract. The bid bond provides assurance to the project owner that a contractor is financially stable or has the resources to take on a project. If the project fails, the owner can collect compensation from the surety bond.

Some teams pursuing the project decided not to place final bids because of the contractual terms.

GUPC came in as the low-cost bidder. Some industry insiders questioned the ability of Sacyr to do the job because of the company's financials troubles, which were tied to the crash of the Spanish housing market.

In addition to the new locks on the Atlantic and Pacific side of the Canal, the $5.2 billion project includes excavating the Pacific locks access channel, dredging the Canal entrances to the sea, dredging interior sections of the Canal and raising Gatun Lake. The Panama Canal Authority earlier this week said that the project is 70 percent complete, with the locks portion 64 percent of the way towards completion.

GUPC's bid for the lock portion of the project was $3.2 billion.

On Monday, before news of the contract dispute was widely known, it forecast the locks on the Atlantic side would be completed in March 2015 and for the Pacific side by June 2015, with commercial traffic being able to utilize the new locks in the second half of 2015. But engineers have to put the locks through a series of quality control tests that can take about three months, meaning the locks would be open at the earliest in the fourth quarter of 2015. Previously, Canal officials had said testing would be conducted in early 2015 and that the new locks would be open for business by the middle of the year.

The opening was originally scheduled to take place in October 2014.

Source: AmericanShipper.com by Eric Kulisch