Dispute erupts as Panama Canal expansion faces six-month delay

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Shipping lines, forwarders and ports in the Caribbean and the US east coast could have another six months – at least – to prepare for the arrival of post-panamax boxships moving through a widened Panama Canal.

A $573m dispute between the Panama Canal Authority (ACP) and Grupo Unidos por el Canal (GUPC), the consortium responsible for the construction of a new set of locks capable of handling 12,600teu container vessels, has thrown the centrepiece of the $5.25bn project six months off course.

Details of the claim, lodged in Panama in July, emerged earlier this month with the consortium led by Spanish construction group Sacry Vallehermoso and Italian engineering group Impreglio SpA complaining of costly delays caused by the ACP dragging its feet in approving the formula for the concrete to be used in the construction of the new giant locks.

GUPC project manager in Panama, Bernando González, has used the Panamanian media to voice his discontent. “The complaint is about the characteristics of the stones for the concrete with respect to that established in the tender. The formula was not approved in time and the quality of the basalt was not that specified in the technical specifications,” he told Panamanian television.

Concrete pouring started on 1 July but both sides admit that the most important element of the mammoth engineering project has been hit by delays of up to six months.

GUPC refused to comment on the fallout of the dispute when contacted by The Loadstar, claiming that it had now entered into negotiations with the ACP.

ACP administrator Alberto Aleman and his team have insisted on the highest specifications set out in its detailed tender document in 2007. “We will continue demanding quality,” he told Panamanian TV.

The administrator of the waterway will fall back on the procedures laid out in the contract to ensure that the contractor complies with its requirements, says Aleman.

Panama Canal Authority Engineering and Programs Management vice president, Ilya Marotta told The Loadstar that the project “has experienced some slip on the schedule due to the contractor’s delay in achieving a concrete mix design that would comply with the requirements of the contract” but it insists that the rest of the project is advancing smoothly.

GUPC’s Gonzalez is lowering expectations regarding the chances of an early delivery and claims there are concessions that permit the project to be delayed by as much as a year. The ACP is insisting that the contractor has the obligation to make up for lost time. It is refusing to budge from a delivery date of 21 October 2014 written into its $3.1bn contract.

Construction of the locks makes up more than half of the total cost of the project. While dredging of the new widened canal is nearly complete and overall the project is 43% complete, the construction of the locks has progressed only 29%, according to the latest update from the ACP.

“With regard to the claim made public by Grupo Unidos por el Canal, S.A., the ACP is currently analysing the contents of the claim to make a determination whether to accept it or not,” says Marotta.

The ACP has placed its faith in independent international experts appointed to oversee such conflicts, common in complicated engineering works. Three international arbitrators will determine the merit of GUPC’s US$573m complaint. Both parties have the right to take the complaint to the International Arbitration Tribunal under regulations laid out in the contract.

Like all major engineering projects there are costly penalties in place for delays, as well as a $50m bonus for early completion. The locks design and construction contract has daily damages for late completion of the works in the order of US$300,000, says the ACP.

González told journalists on a tour of the works with Panamanian president Ricardo Martinelli that the project would be finished “in April 2015”.

For US logistics and port operators the commercial dispute represents something of a temporary reprieve, with port development on the US east coast well behind the delayed progress being made in Panama.

Aleman has warned major ports on the eastern seaboard that they risk missing out on the immediate advantages of a widened waterway if they are not ready in time.

Costly but vital projects to enable key ports to receive the biggest ships capable of transiting the new locks – allowing shipping lines to extend their post-panamax supply chains from China to New York via Panama – are well behind schedule.

Plans to raise the Bayonne Bridge in New York-New Jersey at a cost of $1bn have still to be finalised and important dredging programs along the east coast are yet to get underway.

Shipowners and shippers will be less pleased by the dispute. Already feeling the pinch of a doubling of tolls in the last seven years, recent toll increases are set to add another 15% to the cost of transiting the canal for liquid bulk, general cargo, ro-ro, vehicle carriers and tankers in the next two years, with no major productivity increase scheduled until the second half of 2015.