Deadline Looms in Panama Canal Expansion Dispute

A view of the construction site of the Panama Canal Expansion project on the Atlantic side on the outskirts of Colon City January 15, 2014. REUTERS/Carlos Jasso

By Lomi Kriel and Sonya Dowsett

PANAMA CITY/MADRID, Feb 18 (Reuters) – The Panama Canal and a Spanish-led construction consortium expanding the major global waterway discussed options on Tuesday to keep the multibillion-dollar project afloat amid a dispute over costs, but any deal seemed unlikely ahead of a looming deadline.

The disagreement between the two parties over $1.6 billion in cost overruns and how to maintain financing has already halted work on the project for two weeks and has delayed its projected completion until at least December 2015.

Delays could cost Panama millions of dollars in lost shipping tolls and are a setback for companies worldwide that are eager to move larger ships through the canal, including liquefied natural gas (LNG) producers that want to ship from the U.S. Gulf Coast to Asian markets.

“The Panama Canal Authority reports that despite efforts to agree with (consortium) Grupos Unidos por el Canal to resume work on the new locks project, positions between the parties remain apart,” the canal authority said in a statement.

“Although last week the parties seem to have come to an agreement on certain components during the talks, there were serious disagreements at the time of putting it in writing,” it added, saying the parties agreed to resume talks on Wednesday morning.

Canal administrator Jorge Quijano last Wednesday set a target of no more than a week to reach a deal to jump-start the project, a deadline that will lapse in the coming hours.

Quijano had previously warned that the canal could terminate the contract with the consortium and push ahead with a third party if a deal proves elusive.

A major sticking point in the negotiations on Tuesday was converting a $400 million bond from insurer Zurich North America into backing for a loan so the consortium can secure a short-term cash injection needed to continue its work, sources familiar with the talks said.

The consortium took out the bond as a required insurance policy in case it did not finish the project. The bond is payable if the project is not completed by the consortium for any reason.

The insurer was ready to provide the loan if shareholders of the consortium, which is led by Spain’s Sacyr and Italy’s Salini Impregilo and includes a Belgian and a Panamanian company, shoulder the risk and are liable for repaying the loan, one source said.

But the consortium’s chief executive officers want the insurer to be the primary risk-holder, which Zurich considers unacceptable, one source said.

A key issue centered on the share of the risk the Italian and Spanish governments would take, one source said.

Spain’s majority state-owned insurer Cesce, set up to financially aid international expansion of Spanish companies, provided a guarantee for the Sacyr bid in 2009.

Although Cesce has declined to comment on how much was guaranteed, a source with knowledge of the operation said it was for $200 million and helped underwrite the $400 million Zurich bond.

Officials at Zurich were not immediately available for comment. A spokesman for Sacyr declined to comment.

The parties also continued to debate a weekend proposal by the canal authority that would allow work to restart immediately, with it and the consortium each contributing $100 million.

But a source familiar with the negotiations said the consortium had not yet accepted the deal and wanted to wait on an answer from Zurich.

The overall expansion project, of which the consortium is building the lion’s share, was originally expected to cost about $5.25 billion, but the overruns could increase that to nearly $7 billion.