Consortium Resumes Work On Panama Canal Expansion -UPDATE

Parked machinery are seen at the construction site of the Panama Canal Expansion project on the outskirts of Colon City February 12, 2014. REUTERS/Carlos Jasso

By Lomi Kriel and Sonya Dowsett

PANAMA CITY/MADRID, Feb 20 (Reuters) – A Spanish-led consortium resumed expansion work on the Panama Canal on Thursday, raising hopes the two sides will finally draw a line under an acrimonious stand-off over massive cost overruns.

As workers returned to the construction site after a stoppage lasting more than two weeks, a source close to the consortium led by Spanish builder Sacyr and Italy’s Salini Impregilo said it had resolved internal disagreements over the key issue of financing.

“The restarting of the works is being done in a way that will enable it to reach full pace in the shortest time possible,” the consortium said in a statement. A source close to negotiations between the consortium and the Panama Canal Authority confirmed that work had resumed.

Work had been due to restart much earlier on Thursday.

The canal authority said late on Wednesday it had agreed with the consortium to iron out a host of remaining issues, including the delivery dates of massive lock gates being built in Europe, over the next three days.

Sources with knowledge of the negotiations said a final deal on pending issues would be signed within three days.

The parties have agreed to deal with the core of the dispute, $1.6 billion in cost overruns that the consortium wants the Panama Canal to pay for, via arbitration.The canal has said a two-week work stoppage means the project will not be completed until at least December 2015, a delay that could cost Panama millions of dollars in lost shipping tolls.

Delays are also a setback for companies worldwide that want to move larger ships through the waterway that links the U.S. Gulf Coast to Asian markets.

A key part of negotiations is the role that insurer Zurich plays and whether it will convert a $400 million surety bond, taken out by the consortium in case the project was not completed, into backing for a loan to help raise the $1.5 billion in funding the canal authority says is needed to finish the project, sources with knowledge of the matter said.

Zurich does not want to put money into the project but has asked banks to do so, another source familiar with the matter said. The banks are asking for counter-guarantees, the source said. The parties of the consortium are each liable for their own obligations, not jointly, the source said.

Shares in Sacyr rose 4.3 percent on Thursday after news of the agreement to restart work. The project represents a quarter of the company’s international revenue.

Salini Impregilo shares gained around 3.2 percent.

Zurich said it was in talks with both parties and was comfortable with its level of exposure to the project, which it said was limited due to reinsurance mechanisms and was well within its risk tolerance.

“As the discussions are still ongoing, we are not in the position to provide any further details,” it said in a statement.

SPAIN STEPS IN

The Spanish government is likely to agree to change the status of a $200 million state-backed guarantee it gave heavily indebted Sacyr in 2009 when Panama awarded it the contract, turning it into backing for finance to finish the project, sources told Reuters on Wednesday.

The guarantee was originally drawn up by Spanish state-backed insurer Cesce as a counter-guarantee to the Zurich bond. The government insurance bonds must be changed if Zurich changes its insurance into backing for a loan.

Cesce and Spain’s Economy Ministry declined to comment. Italian state-backed export credit agency Sace, also a part of the guarantee scheme with Zurich, was not immediately reachable for comment.

There has been disagreement within the Spanish government over whether to interfere with the private project, one source with knowledge of the matter said, but it is likely to tweak the conditions of the guarantee because the Sacyr-led contract is such a high-profile one for Spanish business.

Spanish builders are working on big engineering projects around the world, including a train linking the Islamic holy cities of Mecca and Medina, and a metro in Riyadh, Saudi Arabia. Overseas construction has been one of the few bright spots for companies as the domestic economy splutters.

Under Wednesday’s deal, the Canal agreed to pay the consortium $36.8 million to cover work done in December once works resume.

The project to expand the nearly 50-mile (80-km) transoceanic cargo route was originally expected to cost about $5.25 billion, but that could increase to nearly $7 billion.

When the contract was awarded to the consortium in 2009, officials and diplomats expressed concern over its ability to complete the work, since its winning bid for the work was $1 billion lower than that of the nearest competitor.

The Wood Mackenzie consultancy said on Thursday it expected the cost overrun dispute to be resolved with limited disruption, but cautioned that longer delays would affect U.S. liquefied natural gas producers and create a tighter LNG shipping market.

“If the delays last 6-12 months, it will have limited impact, as trade will carry on much as it does now,” Andrew Buckland, senior LNG shipping analyst at Wood Mackenzie, said in a research note.

“But further delays threaten the investments of a significant number of groups that are set to benefit from expanded capacity on the waterway.”