Knocking heads

Panama Canal heading towards silly global failure

One of the world's biggest construction projects, the $5.2 billion expansion of the Panama Canal, is turning out to be a monumental nightmare. The 70 per cent-completed project is an estimated $1.6 billion over budget. Talks about how to finance cost overruns while arbitration decides who should pay what have all but broken down. Tempers are frayed at both the Panama Canal Authority, the government-backed agency that is paying, and the Spanish-led construction consortium. Work is grinding to a halt.

The builders, led by Spain's Sacyr, say they are doing all they can. They have sunk $280 million of their own money into the project and are willing to take out loans to pump in another $500 million. Under their proposal, the canal authority would contribute another $100 million and extend the deadline for repayment of a $784 million cash advance until as late as 2018. The Authority is reportedly balking at the last request. If the contract is broken, the conflict might spill over into the courts. The Authority says the project will be finished next year - even without the consortium - but that is improbable. It will not be easy to find alternative competent contractors.

It's ludicrous that the future of a major world trade artery hinges on what is pocket change in the global economy. The economic costs from delaying the expansion of a canal that currently accounts for five per cent of world trade would be far larger than the disputed amount.

Ports along the US East and Gulf coasts have been racing to upgrade infrastructure to deal with the larger ships that will be able to pass through the wider canal. 

Zurich, the project's insurer, has tried to help, and Panama rejected mediation from the EU. But a strong mediator might be able to knock heads together and come up with a workable solution. If the civil engineering challenges of doubling the capacity of one of the world's major trade arteries can be managed, surely someone can arrange a little bit of financial engineering.