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Published: Friday February 7, 2014 MYT 10:15:02 AM
Updated: Friday February 7, 2014 MYT 10:16:02 AM

Panama Canal ready to nix contract if no consortium deal soon

Panama Canal administrator Jorge Quijano speaks during a news conference at the Panama Canal administration building in Panama City February 5, 2014. REUTERS/Carlos Jasso

Panama Canal administrator Jorge Quijano speaks during a news conference at the Panama Canal administration building in Panama City February 5, 2014. REUTERS/Carlos Jasso

PANAMA CITY (Reuters) - The Panama Canal is ready to pull the plug on a Spanish-led consortium's contract to expand the major world shipping route unless the two sides reach a deal quickly amid a spat over massive cost overruns, its administrator said on Thursday.

Jorge Quijano, head of the Panama Canal Authority, told Reuters the canal could itself obtain financing for the $1.5 billion needed to complete the project to build a new set of locks if necessary.

A canal official familiar with the process said if no agreement was reached in a "matter of days," the authority could ask insurer Zurich North America to terminate the contract with Grupo Unidos Por El Canal, the consortium led by Spain's Sacyr and Italy's Salini Impregilo.

"We have made significant movements in our position to allow them to continue with the work, and if they don't agree, we cannot continue to just wait around," Quijano said in a telephone interview.

He says the project will be completed in 2015 "with or without" the consortium.

Quijano has held general talks with other companies about work still pending on the expansion, but declined to name them.

The multibillion dollar expansion project was plunged into doubt on Wednesday after talks between the canal administrator and a Spanish-led building consortium fell apart and work ground to a halt.

Live web cams of the construction site show trucks sitting idle amid stretches of mud alongside the canal.

The consortium is at odds with the canal over who will pay for $1.6 billion in unforeseen costs it says it has incurred in part because of what it says were flawed geological studies done by the canal authority. The canal denies those claims.

While both parties have agreed to resolve claims through international arbitration, the consortium still needs immediate cash to continue its work.

The canal authority has said it is still open to reaching a deal with the consortium, and two sources said on Thursday that the consortium was still in contact with the canal in a bid to restart talks.

The work brings in a quarter of Sacyr's international revenue, helping it offset a sharp economic downturn at home.

Quijano said the canal would be able to raise the necessary funds whether or not insurer Zurich pays out all of a $400 million bond taken out as insurance against the consortium not completing the project.

Including that bond, the canal authority said it has existing bonds and guarantees of about $1.2 billion.

"Whatever we don't have we will get," Quijano said. "We're having an accident here and we expect (Zurich) to come to the plate."

Any delay in the project would be a setback for companies worldwide eager to move larger ships through the Panama Canal, including liquefied natural gas (LNG) producers that want to ship from the U.S. Gulf Coast to Asian markets.

The project has been mired in disputes since the consortium, which also includes a Belgian and a Panamanian firm, won a bid to double the capacity of the near 50-mile (80-km) transoceanic cargo route.

The overall expansion project was originally expected to cost about $5.25 billion, but the overruns could increase that to nearly $7 billion.

The canal authority said it has already paid the consortium $2.8 billion of the $3.12 billion it bid for the most important portion of the project, which is to build a new set of locks.

A canal official familiar with the process said the authority would not need to turn to a giant construction company if the contract is rescinded, as 67 percent of the locks portion is already complete.

The consortium has said the canal authority is being "unjust" to expect it could fully cover the cost overruns, which officials and diplomats had worried were inevitable after its contract bid undercut the nearest competitor by $1 billion.

It said it has offered a co-financing proposal including $800 million in new and existing funds, while asking the canal authority to put in $100 million.

But Quijano said that the consortium had in reality only offered $100 million. He said the remainder consisted of $300 million in loans the GUPC had taken out over the past few years and converting the $400 million Zurich completion bond into backing for another loan.

A major sticking point in the consortium's proposal called for extending the moratorium on repaying the canal authority a $784 million advance until as late as the end of arbitration, which Quijano called unacceptable.

He said he was willing to extend the moratorium, which he has already delayed for a year so GUPC could fight its claims, until at least the end of 2015, if not longer.

"That's enough for them to carry on with the work and complete the work," he said. "We cannot pay for all of GUPC's deficiencies and ... bad decisions made along the line."

Negotiations were further complicated because Impregilo had taken over the lead from Sacyr, he added.

(With reporting by Jose Elias Rodriguez and Sonya Dowsett in Madrid and Danilo Masoni; Editing by Simon Gardner and Lisa Shumaker)

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