Business, Finance & Economics

After six years and billions of dollars, the Panama Canal expansion may grind to a halt

Panama Canal.jpg

Credit: REUTERS/ Carlos Jasso
Workers are seen at the construction site of the Panama Canal Expansion project on the outskirts of Colon City January 7, 2014.

Seven years ago, the Panamanian people voted overwhelmingly to widen the Panama Canal to allow more traffic, and money, to pass through their country. But now, there's a snag that may halt the project.

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The expansion is nearly three-quarters complete, but it’s costing too much. And the builders are threatening to stop their work.

A European consortium — Grupo Unidos por el Canal (GUPC) led by the Spanish construction company Sacyr — won the bid to build a third set of locks at both ends of the canal for $3.2 billion. Now, they are claiming more than $1.5 billion in cost overruns, and want to be paid for them. They argue that the Panama Canal Authority provided poor geological studies, which has driven the final price tag for the work higher than the estimates.

The overall cost for the entire canal expansion program could exceed $7 billion. Panama had initially estimated that the entire project would cost $5.2 billion, with new wider locks and deeper channels providing passage for larger ships through the 50-mile waterway built more than a century ago. At the time, the building of the canal was considered one of the greatest engineering feats in history.

The canal is the country’s major moneymaker and central to the nation’s identity. The government argued that the passage needed an upgrade to stay competitive in world trade. Roughly half the ships that come through the canal travel between the east coast of the United States and Asia. But as freighters have gotten bigger than the canal, the canal has lost business.

The European consortium’s bid was considerably lower than rival bids, even lower than the initial cost estimate prepared by the Panama Canal Authority. Some analysts suggest the consortium bid aggressively to get the contract and is now making up for overly-tight estimates.

The Panama Canal Authority is refusing to pay for all the cost overruns. The two sides are now bargaining on how to share the cost overruns.

If the two sides can’t resolve their dispute, they can go to arbitration. If an agreement still can’t be reached, work could be halted by January 20th. The Panama Canal Authority could then look for bids from another contractor to finish the project — an undesirable option for Panama as it would slow down the project and almost certainly raise the final cost.

Halting construction on the project would also be a setback for companies eager to move the largest ships, such as containers with liquefied natural gas, from the US Gulf coast through the canal to Asian markets.

The expansion both widens and deepens channels along the canal route and creates new sets of locks on both the Pacific and Atlantic ends of the canal. For most of the passage, ships travel along the expansive Lake Gatun, which a century ago was the world’s largest man-made lake.

The current locks — which raise and lower ships 85 feet — are just 110 feet wide and capable of accommodating ships up to 106 feet wide. There are currently two lanes of locks on both ends of the canal.

So-called Panamax ships, behemoths of the 20th century, pass through the locks guided by small locomotives on each side, tethered to the ship by cables. The largest ships have just 24 inches of clearance on each side, so it's a tight squeeze.

The post-Panamax ships are too large to pass through the current locks. Many of those ships go around Cape Horn, at the bottom of South America. Others have to unload their cargo at US west coast ports like Long Beach, CA, where it is put onto trucks or rail to get to its final destination in the eastern US.

An extra set of locks would handle the wider ships and accommodate increased traffic through the canal. Currently, the canal can handle 43 ships a day. It takes 8 to 10 hours to pass from Pacific to Atlantic, or vice-versa.

At times, more than 115 ships have been waiting to enter the canal, with lines exacerbated when repairs to the locks are being made. If the wait is too long, a ship captain can decide that it’s faster, and cheaper, to travel around South America, rather than lingering in the waters outside of Panama waiting for passage.

This costs Panama a lot of money. The average toll to pass through the canal is roughly $50,000. Depending on the size and cargo of the ship, tolls have been as high as $375,000.

These tolls have built the Panamanian economy. Local historians say the country’s unique geography and isthmus did for Panama what oil did for Saudi Arabia or copper for Chile.

Stanley Heckadon, a professor at the Smithsonian Tropical Research Institute in Panama City, and the resident historian on all things concerning the canal, says, if you want to know what Panama would be without its canal, look no further than Nicaragua, a far poorer country. Developers considered building the canal in Nicaragua in the late 19th century.

“It is very difficult to explain perhaps to someone who is not from the isthmus what the canal means,” says Heckadon.

“But what comes best to my mind, when you travel in Central America and you look at the coat of Arms of the Central American countries, they have volcanoes in their coat of arms and their currencies. In Panama, it’s not that way. In Panama, the national coat of arms has the canal as a centerpiece because it does reflect its geographic destiny.”

If a resolution can be reached between the European consortium and the Panama Canal Authority, the expanded canal could open for business by the summer of 2015 — nine months behind schedule. If an agreement isn’t reached, it could add many more months, or years, to the project.  

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