Work on Panama Canal expansion stops amid dispute over $1.6 billion in cost overruns

The Associated Press

Cranes and machinery lie idle at the construction site of the Panama Canal in Cocoli, Panama City, Wednesday, Feb. 5, 2014. Work on the ambitious Panama Canal expansion project was halted Wednesday after talks broke down on how to settle a dispute over cost overruns. Panama Canal Authority Administrator Jorge Quijano told a news conference the stoppage will give authorities time to analyze how to proceed on the project to widen the canal. (AP Photo/Arnulfo Franco)

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By JUAN ZAMORANO and JOSHUA GOODMAN, Associated Press

PANAMA CITY (AP) — Work on the ambitious Panama Canal expansion project was halted Wednesday after talks broke down on how to settle a dispute over $1.6 billion in cost overruns.

Panama Canal Authority Administrator Jorge Quijano told a news conference the stoppage will give authorities time to analyze how to proceed on the project to widen the canal.

"I don't even want to suggest that the next steps will be easy or risk-free," a visibly angered Quijano told reporters in Panama. "What I do want to make clear is that we will not yield to blackmail."

The Panama Canal Authority and the Spanish-led construction consortium leading the expansion blame each other for the overruns. They were negotiating how to pay for the unplanned extra costs when talks broke down.

An agreement "is now no longer possible," Quijano said, adding that the consortium had ordered its employees to stop work.

Other foreign contractors and project managers have expressed an interest in completing the 30 percent of work that remains on the third canal lock, according to canal officials, but Quijano declined to provide details about its plan B except to say that under no circumstances would a 2015 deadline to complete construction be pushed back.

"They are leaving and we are staying. The project is going to be finished. It must go ahead with or without them," Quijano said.

The consortium, which is led by Spain's Sacyr SA and includes firms from Italy and Belgium, says that 10,000 jobs are immediately at risk. In a strongly worded statement on Wednesday, it said Panama's failure to resolve the impasse threatens to overshadow a summit of 34 hemispheric leaders, including US President Barack Obama, which the Central American nation will host next year.

"Instead of celebrating Panama's vital role in global commerce, leaders will be regretting that the ACP and Panama have abandoned negotiations," the statement said, referring to the canal authority by its Spanish initials.

In Europe, the EU's Industry Commissioner Antonio Tajani said news of the work stoppage was "unexpected" after Panama's President Ricardo Martinelli had made a statement on Tuesday indicating that the parties were close to an agreement.

"I trust and hope that the parties reconsider their positions in the coming days," said Tajani, an Italian whom the European members of the consortium had asked to intervene in the dispute. "Interruption of the work would be bad news for employment, for the worldwide economy, for the expansion of the canal and for the parties themselves."

Martinelli called on Panamanians to close ranks behind the canal authority, whose autonomy is guaranteed by the constitution, accusing the consortium of acting irresponsibly.

"We're going to finish the canal whether it rains, thunders or there's lightning," the billionaire president told reporters on Wednesday.

The project, which is already running nine months late, would double the capacity of the 50-mile (80-kilometer) canal, which carries 5 to 6 percent of world commerce.

The consortium blames the extra costs largely on problems with studies that the Panamanian authority conducted before work began. It says geological obstacles encountered while excavating have prevented it from getting the basalt needed to make the vast amounts of concrete required.

Quijano said the consortium had maintained "an inflexible position."

Sacyr's share price plunged on the news of the work stoppage, falling almost 7 percent in Madrid trading.

Many experts say the roots of the dispute lie in the consortium's underestimation of project costs when it won the contract in 2009 by submitting by far the lowest bid: $3.1 billion for its portion of the job, $1 billion less than a bid by U.S. construction giant Bechtel.