Zurich Insurance shores up Panama Canal

The expansion project is expected to double the number of ships passing through the canal Reuters

Investors in the Panama Canal have reason to celebrate, and not just because it’s the waterway’s 100th birthday. A long-running dispute over cost overruns for the canal’s expansion has been settled thanks to help from Zurich Insurance.

This content was published on April 27, 2014 - 11:00
Andrea Ornelas,

Work had halted for 15 days in February in a row over who would pay for an estimated $1.6 billion (CHF1.4 billion) in cost overruns on the project to build a third set of locks on the 80-kilometre link between the Atlantic and Pacific Oceans.

Who was to blame for the mess? Was it a financial error or inefficient construction? But most importantly, who would pay the bill?

For months the Grupo Unido por el Canal (GUPC) consortium, led by Spain's Sacyr as well as the Italian company Salini Impregilo, Belgian firm Jan de Nul Group and Panama's Constructora Urbana S.A. were locked in battle with the state-run Panama Canal Authority (ACP) threatening 10,000 jobs. 

Geological problems

In January Paolo Moder, a member of the GUPC's board of directors, publicly blamed ACP for around half of the overrun costs.

"The main part of (the cost overruns) is due to geological flaws and is related to problems with the concrete," he told reporters.

The authority hit back, rejecting those arguments and urged the consortium to fulfil its contract. The row reached its peak in February when all work was paralysed for two weeks.

“We estimated that the project would be ready at the end of the year. The economic impact is around $300 million for the year delay,” the canal authority official Jorge Quijano told a World Economic Forum meeting in Panama City recently.

The dispute hit the credibilty of the firms involved, especially Sacyr, which saw its shares fall on the Spanish benchmark IBEX index.

But for Zurich Insurance, the row had different consequences and confirmed a new area of activity: large construction projects that hate uncertainty.

Zurich intervenes

The hold-up could not go on forever. After severe warnings from Panama’s Dispute Adjudication Board (DAB) that the project could be delayed by up to five years, an agreement was reached in March.

Although the matter is not entirely settled – the Miami International Arbitration Society is examining the case – after several weeks the two sides, and Zurich Insurance, announced they had signed a deal to complete work on widening the canal.

Under the terms of the agreement, both ACP and the consortium will each contribute $100 million to get the work back on track, while the canal authority will extend a moratorium on the refund of advance payments until 2018, freeing up funds to complete the work.

A $400 million surety bond from Zurich will also be used as backing to obtain additional funding, the consortium said. The consortium took out the bond as a required insurance policy in case it did not finish the project.

The accord sets a new December 2015 deadline to complete the project.

Zurich Insurance has refused to make any statements on its financial participation, claiming business confidentiality.

But Panamanian sources close to the negotiations confirmed to that Zurich was backing the $400 million surety bond to enable the work to move ahead.

This does not mean Zurich has to pay out such an amount, but to act as a guarantor so that GUPC can get financial backing for the project. The consortium also plans to sell machinery belonging to the consortium to secure an additional $200 million.

Selling certainty

After the global financial meltdown, gaining secure financial backing has become crucial for large-scale construction projects.

A recent report by Michael Bond, Head of Surety Zurich North America, the division of the Swiss insurer in charge of the Panama project, confirmed that the economic recession had had a positive impact on the finance market.

“With so many construction companies desperate for business, it is more important than ever that successful bidders are capable of executing the work and honoring contracts. And with companies facing so many financial pressures, having a three-party contract to ensure there are no problems during the project’s lifetime has proved vital,” he wrote.

Such guarantees give firms the necessary backing in "complex projects where there may be five or six contractors involved. You don’t get all this with a bank guarantee or letter of credit,” he added.

According to Panamanian sources, the details of the new financial arrangements will be revealed in the coming weeks. But they also confirmed that "without financial guarantees there will be no money".

Panama Canal

According to Panama’s government, around 14,000 ships transport 300 million tonnes of cargo through the canal connecting the Pacific and Atlantic Oceans every year.

The canal was built and inaugurated in August 1914 by the United States, which oversaw its management until 1999. On January 1, 2000 Washington handed over control to Panama as per an agreement signed in the 1970s.

Since 2000, the state-run Panama Canal Authority has been responsible for its management and administration. The construction of a third set of locks represents the first stage of the canal’s expansion.

Trading nations worldwide are keen to start moving a new generation of large container ships and liquefied gas tankers through the canal.

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Another strike

Work to expand the Panama Canal halted on 23 April due to a nationwide strike by construction workers demanding higher wages.

The Suntracs union, with an estimated membership of 100,000 workers, called the indefinite strike after negotiations failed with the Panamanian Chamber of Construction. The chamber offered to raise wages by 20% over four years but the union demanded 20% per year.

Across the country, 98% of the construction sites were on strike, reported Suntracs.

Grupo Unidos por el Canal (GUPC), the consortium running the expansion project, said that Suntracs workers “are heeding the call to strike,” which “is impacting the work schedule of this project.”

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