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Expanding The Panama Canal: The Problem Is Money, Not Mosquitoes

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When the United States built the Panama Canal a century ago, it faced harrowing obstacles, from mudslides to malaria that killed thousands. But history doesn't appear to show a financial dispute with contractors. At least not one that halted labor on the maritime marvel.

Fast forward a century, to a $5.3 billion expansion on both the Pacific and Atlantic ends of the isthmus waterway. It looks like a digitally created Hollywood epic, an army of trucks and cranes erecting concrete walls more than two miles long and more than 100 feet high.

The wider, deeper channels and locks are aimed at serving more massive vessels known as Post-Panamax ships. Over the next decade they should almost double the cargo the canal moves in and out of our hemisphere.

As a result, says Jorge Quijano, who heads the Panama Canal Authority, or ACP, "Panama is essentially going to be the largest port in Latin America."

Yet earlier this year the expansion work stopped for two weeks. The reason: a disagreement between the Panama Canal Authority and a consortium of European construction firms, the GUPC, over who should pay for a $1.6 billion cost overrun.

They've since agreed on some stopgap financing to keep the project running – the entire canal expansion is about 75 percent complete, and is slated to be finished by the end of next year – and they've agreed to international arbitration, some of which is now playing out in Miami.

A Cloud Of Uncertainty

But until the two sides get this settled, a cloud of uncertainty hangs over the project's final stretch. And over many U.S. ports which have laid big bets on the Panama venture by investing billions in their own expansions in order to profit from the increased Post-Panamax traffic.

Miami's expanded port, for example, just opened a new, billion-dollar tunnel – the jewel of a $2 billion makeover that includes a major dredging project and skyscraper-size loading cranes for sending a lot more auto parts to Brazil and getting a lot more handbags from China.

Says Carlos Urriola, executive vice president of the Manzanillo International Terminal, a major port at the Panama Canal's Caribbean entrance: "We're all too aware that ports like Miami are definitely waiting to see when we're going to be ready with our canal."

Odds are that arbitration will cut through the dysfunction and that the canal expansion will be ready on time. No project of this magnitude is ever immune to snags; but given the hemispheric if not global importance involved in this one, the alleged $1.6 billion spillover is alarming. It represents a full half of the GUPC's original $3.2 billion contract.

So was the GUPC's bid simply too low? And if so, why was it accepted by the Panama Canal Authority, which since taking control of the canal from the U.S. in 2000 has run it in otherwise stellar fashion?

I spoke in Panama with both Quijano and Jan Kop, the GUPC's deputy project director.

Kop insists the consortium has run into "surprises that we could not have foreseen."

He argues it has had to dramatically adjust its costs for circumstances like rare soil conditions and higher-than-expected earthquake potential along the canal. Things, Kop adds, that the Panama Canal Authority "should have known about since 1914."

Quijano, a U.S.-educated engineer, calls the claims either false or exaggerated.

"Even if [the GUPC's claims were] fact," Quijano says, "the [cost] amounts they are claiming are outrageous. They're not even within the ballpark." He adds: "[Their] behavior is definitely disappointing."

Hong Kong Of The Americas?

Kop says the Panama Canal Authority is sticking "too rigidly, given the project's scale," to the contract. But shipping analysts tell me there's a broader reason for Quijano's hard line.

Namely, the Panama Canal Authority's earnest desire to prove itself a reliable institution in contrast to Panama's notoriously corrupt political and judicial systems. Which means making a point of holding to business agreements too often cavalierly dismissed outside the canal's walls.

Arbitration will decide if the Panama Canal Authority is being too inflexible in this case. But making Panama more transparent is in fact key if the tiny Central American country, with just 3.5 million people, wants to realize its outsize ambitions. One is to compete with Miami to be the commercial "gateway to the Americas."

The other, larger goal is to become the Hong Kong of the Americas – a global maritime and financial hub.

"We're selling Panama now more than the Panama Canal," says Quijano.

"We do want to take away a little bit of the business from Miami," he adds. "With an expanded canal and all the [business] diversification it envisions ... our thrust is to make Panama a [hemispheric] logistics center."

As a result, says Urriola of the MIT, the canal "is the religion that unites all Panamanians."

Which is why those Panamanians are praying for light at the end of the canal expansion's tunnel.

Tim Padgett is based in Miami with WLRN. You can read more of his coverage here.

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