Panama Canal Administrator Jorge L. Quijano on Thursday strongly disputed charges by the contractor building the locks for a new waterway entrance that his agency has not promptly paid claims for unforeseen construction costs and said the project is on track to open for business in the fourth quarter of 2015 if there is no work stoppage.
Rumors of a contract dispute last month broke into full public view over the weekend when Grupo Unidos por el Canal (GUPC), the consortium in charge of installing the massive new locks on the Atlantic and Pacific sides of the canal, issued a statement threatening to suspend work on the project if the Panama Canal Authority (ACP) failed to reimburse the group for cost overruns within 21 days.
The two sides have until Jan. 19 to work out their differences.
In a conference call with reporters, Quijano said the ACP is rapidly processing payments for cost overruns allowed under the $3.2 billion design-build contract, but said the construction team is trying to open the door for coverage of new cost categories and is not following proper claims procedures.
“We’re abiding by the legal framework of our contract and we expect them to do the same,” he said.
Terms allow the ACP to reimburse GUPC within 56 days of receiving an invoice, but payments are being made within 15 days.
“We have been paying them better than anyone else in the world pays a contractor,” Quijano said.
GUPC – comprised of Spanish construction firm Sacyr, Italian civil engineering and construction firm Impreglio, Belgian dredging company Jan de Nul Group and Panamanian construction firm CUSA – is complaining the ACP has ignored its request so far to take responsibility for up to $1.6 billion in cost overruns, which could not be predicted and are normal in large infrastructure projects.
But Quijano pointed out the consortium agreed to a fixed-price contract with cost-escalation clauses for only five categories: structural steel, reinforced bars for concrete, diesel fuel, cement and labor. The ACP uses a global commodity index to determine the market price of those supplies, many of which continue to climb higher, and has paid GUPC $150 million to $160 million more than stipulated in the contract, he said.
To date, the APC has paid about $2 billion of the $3.2 billion it will owe.
Quijano said the ACP is willing to pay any legitimate cost incurred by GUPC, but said the contractor has failed to document its claims.
“All they have submitted is a two-page letter saying we haven’t paid them in the amount or frequency which we should pay them, which is totally false.”
Under the contract terms, GUPC can bring reimbursement claims to the ACP. If the contract office determines the claims lack merit, the team can take its case to an independent dispute adjudication board. The ACP is required to immediately make any payments ordered by the board. Either side can appeal a board decision to an arbitrator based in Miami, who follows International Chamber of Commerce rules to apply Panamanian law.
“It’s not that we are saying we won’t pay anything, but we cannot simply say, ‘O.K., you come up with some numbers and we just go ahead and pay.’ We have to justify every penny that we spend on a claim and they have to provide us with the information so that we can analyze it,” Quijano said.
“What we have been telling these guys is, ‘We don’t have any problem with you putting in claims that you think you can substantiate. If we don’t agree, there are two more steps to make it good for yourselves,’ ” but the ACP won’t negotiate outside the normal process, he said.
“We are bound by a very strict legal framework in the contract” and can’t opt to “split the baby” when it comes to cost overruns, the ACP chief added.
Among the claims made by GUPC, according to Quijano, were $41 million for two days of heavy rain and $120 million for having to build a coffer dam, or temporary structure to hold back water while the locks are built. Both items were rejected by the dispute adjudication board.
GUPC has also filed a vague claim for $800 million to $900 million for disruptions caused by bad weather, strikes, poor road conditions and other alleged factors, he said.
Quijano said it’s in everyone’s best interest to complete the work and iron out any remaining expense differences at the end, but said the ACP has contingency plans to switch to another contractor, if necessary.
“We’re never stuck with Plan A. We always have a Plan B. But we’d rather finish the job with this consortium,” he said, adding there is no truth to speculation that prominent U.S. engineering firm Bechtel has been tentatively hired to finish the job.
GUPC is already on the hook for $54 million in penalties for not completing the locks by the Oct. 21, 2014 due date. Under the contract, the ACP can dock the contractor $300,000 per day up to the $54 million cap for failing to turn over operating locks by the deadline unless an arbitration board agrees to give the group an extension.
The consortium a long time ago said it would not be able to complete the project until the spring of 2015, pushing the commercial opening until the middle of the year. Earlier this week the ACP released its latest timetable for finishing the $5.2 billion canal expansion, which includes excavating the Pacific locks access channel, dredging the canal entrances to the sea, and dredging interior sections of the canal. It said the overall project is more than 70 percent complete. It forecast the locks on the Atlantic side will be completed in March 2015 and the Pacific-side locks will be done by June. Once handed over, the ACP must conduct channel navigation testing and other quality control checks.
Quijano emphasized 65 percent of the locks project is completed. Eighty percent of the concrete for the Atlantic locks has been poured and 67 percent of the electro-mechanical components have been delivered to Panama, including nearly all the valves. Four lock gates in Italy are ready to be shipped to Panama, another four have been assembled and should be ready for delivery in another month, and two more are being assembled, he said.
All of the dredging by contractors has been completed and ACP personnel will complete dredging in the channel areas of Lake Gatun within the next three months, Quijano added.
Shippers and carriers are keenly interested on when the wider canal will be available so they can plan routes with larger, more efficient vessels.
“I would say the last quarter of 2015 would be a good number,” the administrator said.
The Panama Canal’s transits dipped slightly in fiscal year 2013, Quijano said, because of continuing economic weakness in the United States and Europe. In fiscal year 2012, transits ticked down 1 percent to 14,554, but tonnage as measured by the special ACP system reached a record 333.7 million tons, according to the ACP’s annual report.
He acknowledged that the Suez Canal has siphoned some container traffic as carriers such as Maersk Line have opted to wait until the opening of the new locks to see if the extra capacity available on larger ships justifies the tolls, but said the biggest business hit was last year’s drought in the United States, which resulted in fewer U.S. grain exports to Asia.
In fiscal year 2012, grain tonnage transiting the Panama Canal fell 8.1 percent from the previous year, according to ACP figures. But the situation has recently reversed. Last month, the ACP said it registered record grain cargoes during the first two months of the 2014 fiscal year. In October, a total of 5.2 million long tons of grains were transported through the waterway, the highest level since October 2011. In November, tonnage was expected to near the November 2011 record of 6.3 million long tons. Transits of Panamax-sized dry bulkers increased 22 percent during the two-month period. The ACP forecasts strong grain volumes until the grain harvest in South America begins and competes with U.S. supplies.
“I believe once we have the expansion completed, our rates and the opportunities of the economies of scale we will offer our customers will encourage them to come back to the Panama Canal,” Quijano said.
Liquefied natural gas tankers, which officials originally didn’t expect to be big users of the expanded canal, are now projected to arrive in greater numbers and, along with bulk vessels carrying U.S. crops, are expected to compensate for any potential loss of container business, he explained.
The ACP board of directors is expected to vote on staff recommendations for the new toll structure by the end of month and an announcement could be made in February. That will give the maritime industry and its customers plenty of time to build the costs into their budgets, he said.