In-depth: Panama Canal and Sacyr discuss new financing proposal

Just when the working year started, on January 2nd Sacyr announced it left the Panama Canal expansion because they have become short of money. Overtime costs to build a third set of locks had  increased so much. The works have not stopped at the moment, just slowed down, but all parties implied have started a harsh argument to determine who is to blame for this situation.  Spanish Sacyr-led United Group for the Canal (GUPC for its Spanish initials), informed the Panama Canal Authority (PCA in its English acronym) that it would cancel work if its demands weren’t met in 21 days. The consortium pointed that they “can’t continue a construction in which are projected more than €1,2 billion in overruns,” which is equivalent to 50% of the overall cost of the project. Needless to say GUPC blamed the Panamanian body to not have given enough information about eventual risks and future budgetary deviations, and the PCA accused the consortium of presenting a dangerous low bid.

Not suprising conflict

Few analysts question the fact that Sacyr, which holds a 48% stake  of the consortium as well as the Italian company Impreligo with the same stake percentage, and the  other two companies in the project, were aware that those possible setbacks could happen. “It is almost impossible that public works this size and technical complexity can meet initial budgetary conditions. Therefore, it would be very naive saying current situation is a surprise. Having said this, the resolution process regarding companies’ demands undoubtedly should speed up a lot because it would help avoid this kind of conflicts”, Pablo Ortiz, specialist in construction and infrastructures at Interdin says.

Sacyr, the PCA, Impreligo, the respective national governments which, as expected, have supported their companies and interests; the EU which has accepted to mediate in the conflict through European Comission Vice-president and Industry’s area responsible Antonio Tajani; the company Zürich America International which insured the project with € 443,2 million, according to Panamanian data, and of course the Dispute Adjudication Board (DAB, in its English initials), the arbitration body created when signing the deal…too much actors in scene to find an easy resolution in just a 21-days period. At the end, they also have to decide about €1,2 billion in overtime costs, a big amount of money that anyway “absolutely makes sense dealing with Sacyr-led consortium’s conditions and consequently are reasonable”, Ortiz remarks. “The final amount could be that or any different, it will depend on each part’s negotiating capacity”, he adds.

Twenty days to reach an agreement

The 21-days Sacyr’s deadline finished on Tuesday. In all this time, the Spanish construction company has only considered the option to reach an agreement and terminate the works, by the estimated mid of 2015, as some Sacyr’s sources confirmed to The Corner. The company’s chairman Manuel Manrique, has always maintained that Sacyr’s bid was not excessively low and its solvency is solid. The United Group for the Canal has proposed the PCA an overtime costs cofinancing in order to continue Panama Canal expansion, according to a Relevant Fact sent by Sacyr to the Spanish markets authority, CNMV.

“GUPC has always taken jointly decisions and it is not demanding for extra profits but only cofinancing while international arbitration institutions’s resolution comes”, Sacyr’s note reported. They also pointed that “almost 70% of Panama Canal’s third set of locks is finished and their cost reaching more than €74 million monthly should be financed until the arbitration body resolves”. Spanish analyst Juan Moreno at Ahorro Corporacion thinks that “Sacyr’s proposal will not be welcomed by the PCA, given they have not smoothed the path for a deal in last weeks of conflict”. This resulted right. In a three-way negotiation meeting with the project’s insurance company at Zurich on Tuesday, the PCA answered Sacyr’s new proposal with another proposal: to obtain external funds to finance Panama Canal expansion by using the project’s insurance as a guarantee.  It also would mean to free the consortium from paying back PCA the amount of €573 million they advanced while arbitation resolution come.

Furthermore, DAB’s chairman would have written a letter to the PCA advising they should approve a massive liquidity injection to continue the Canal project, according to the consortium’s requirements. The PCA would also rejected  the EU’s mediation offer.

EU’s mediation

After being invited by the Panama Canal European consortium, Antonio Tajani, responsable for the EU’s industrial area accepted to participate in the arbitration process. “I know very well the overtime costs in big public Works, because unfortunetely, it is also a usual event in Europe”.  The Italian Foreign Affair minister Emma Bonino and her Spanish counterpart José Manuel García-Margallo also met on  Monday to approach “possible common measures to solve Panama Canal conflict.

However incredible it might seem, that the strife will be over is clear for the majority of analysts. In Pablo Ortiz’s opinion, “it would be the best option to all implied parties, particularly to Panama”.

Another big doubt on Sacyr’s affair is if they will be able to not reduce revenues for the Canal contract. At this time Sacyr has calculated a negative account impact around € 60 million while forecasts suggest an increase even to €100 million in the entire year 2013. Every € 100 million Sacyr is losing is equivalent to 6% of its current capitalisation.