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Panama Canal Expansion Threatened by Cost Overruns of $1.6B

Image: Panama Canal Expansion Threatened by Cost Overruns of $1.6B

By Michael Mullins   |   Friday, 03 Jan 2014 02:04 PM

A Panama Canal expansion is being threatened by cost overruns of $1.6 billion, which the European consortium responsible for completing the project is demanding from the Panama government before moving forward with it.

On Thursday, Sacyr, the Spanish builder leading the Grupo Unidos por el Canal consortium, informed the Spanish stock market regulator that due to "unforeseen circumstances," about one half of the original $3.2 billion contract would have to be paid before the project could be completed. Sacyr did not offer any further details, The New York Times reported.

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If the additional $1.6 billion was not agreed to by the Panama Canal Authority within 21 days, the consortium said it reserved the right to suspend construction on the canal "in line with the contractual terms."

In response to the ultimatum, the Panama Canal Authority rejected the added "pressure" and warned that it would invoke "mechanisms from the contract that would allow the work to be completed" so as to compel the builders to cover the additional costs themselves.

Panamanian President Ricardo Martinelli recently weighed in on the dispute, saying that he will personally travel to Italy and Spain, the nations from which the primary builders are from, to resolve the matter, NPR reported.

"It's not possible for a company to just announce an enormous amount of cost overruns, when they had already fixed a price," Martinelli said. "And now they're coming forward saying that the price has risen."

Martinelli added that both Italy and Spain "have a moral responsibility" to help resolve the dispute, NPR noted.

The contract was awarded to the Grupo Unidos por el Canal consortium in 2009, after which work began almost immediately on the 48-mile long waterway that connects the Pacific Ocean with the Atlantic Ocean via the Caribbean.

The expansion primarily involved the construction of a third set of locks that would enable significantly larger vessels carrying upwards of 12,000 containers to navigate through the nearly century-old canal, the BBC reported.

Presently, the largest ships that can navigate the Panama Canal carry 5,000 containers.

As a result of the filing, Sacyr saw its shares plunge almost 9 percent on Thursday as investors worried how the dispute would impact the Spanish company, The New York Times noted.

If the project were to move forward without any significant delays, the builders estimate it would be completed by June 2015.

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