Dispute Over Expansion of Panama Canal
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A dispute between the Panama Canal Authority and Spanish based construction firm Sacyr over financing for the expansion of one of the world’s major trade arteries is one step closer to being resolved after the Canal Authority signed a deal last Thursday. Countries around the world now await the signature of the building consortium (led by Sacyr). Without their contribution, Panama stands to lose millions of dollars in lost shipping tolls; a steep price for a country who depends heavily on international commerce through the canal.

Panama: A country at the crossroads

Over the past decade, Panama’s GDP per capita has more than doubled, according to the International Monetary fund. Such growth has made the small Central American country a growing attraction for businesses and one of the highest rated emerging markets. But, the scars of a mercantilist past still pervade both its’ physical and economic landscapes. Panama relies on a well-developed service sector to carry its’ economy (tourism, the canal, the Colon Free Zone). While those services are currently spurring economic growth, over a quarter of the population is still at or below the poverty line and any lack of demand in those services could be financially traumatic for Panamanians.

By not signing the agreement the consortium has threatened not only the Panamanian economy but they have also stymied companies that have sought to move their shipping fraters through the canal. Relationships between Sacyr and the international community have been rocky from the get-go after officials expressed concern in 2009 when the consortium was first awarded the contract. The Spanish based firm bid $1 billion lower than their nearest competitor while also relying on a $200 million investment from the Spanish government to secure the job. Sacyr also had a debt load of $8 billion euros as a result of mismanaged projects due to Spain’s burst housing bubble.

How do you cover $1.6 billion in overruns?

The canal expansion represents the latest blunder by the construction firm as costs for the project have skyrocketed from $5.25 billion to $7 billion dollars and the completion date has been pushed back to December 2015 (given recent sentiment that may be an optimistic estimate). In order to cover the costs the consortium has turned to Zurich Insurance Group Ltd. who has issued a surety bond to the Spanish firm. The bond will cover $400 million in costs which should at least partially cut Panamanian losses from the project. Even with the surety there is still close to a billion dollars that both the Canal Authority and the consortium will need to find between now and December of next year.