The settlement of the dispute over cost overruns between the Panama Canal Authority and the engineering consortium building its new set of larger locks leaves unanswered the questions of when the $5.25 billion expansion project will be completed and how much more it will cost in the end.

Lingering technical problems with the lock gate technology and problems with the geology under the excavation zone for the new locks and the channel leading from the locks on the Pacific side of the canal to the Culebra Cut are as yet unresolved and could cause further delays and inflate the ultimate costs.

These technical problems are likely to delay the project and boost its ultimate cost and may force the canal authority to raise tolls, according to Asaf Ashar, a port consultant and research professor with the National Ports & Waterways Initiative.

Slowdowns began in late 2013

All the Panama Canal Authority’s hopes for completing the expansion project on time and under budget were dashed on Feb. 5 when the consortium Grupo Unido por El Canal made good on a threat it issued in December to suspend work on the new locks, claiming it was owed $1.6 billion for cost overruns.

But even before GUPC suspended work on the locks this month, it had already cut its work force on the project and had slowed construction since November of last year, according to observers who have been in touch with engineers at work on the project who did not want to be identified. GUPC, which won the locks contract in 2009 with the low bid of $3.12 billion, has not been paying its sub-contractors since last year, and they too had slowed or stopped work on the project.

Geology causes problems for contractors

GUPC, which is made up of the engineering firms of Sacyr Vallehermoso of Spain, Impregilo of Italy, Jan de Nul Group of Belgium and Constructora Urbana of Panama, incurred the cost overruns because of unforeseen problems with the geology underlying the new locks. Ashar said the canal authority had not done borings on the subsoil before letting the contracts, so GUPC was not aware of the problem when it bid on the project.

GUPC is not the only contracting consortium that is having problems with the geology. The group known as ICA-FCC-MECO, which is building the 3.8-mile Pacific Access Channel, known as PAC4, is negotiating with the canal authority to recover $44 million in cost overruns, according to the Panamanian newspaper La Prensa. The consortium is also asking for an extension of time for completing the project.

The PAC4 channel, which connects the new set of locks on the Pacific side of the canal with the Culebra Cut, runs around the old Miraflores locks and is physically elevated above Lake Miraflores. As part of the PAC4 project, the consortium is building a 1.4 mile retaining dam along the channel to keep water from the channel from flowing into Lake Miraflores, but the dam is leaking.

Ashar said the overruns were attributable to the fact that an unforeseen fault zone underlies the channel and the dam. The canal uthority said it was too busy with the contract dispute to respond to questions from the JOC.  The canal authority said in its progress report on the expansion last year that the ICA-FCC-MECO consortium’s claims had exhausted the internal conflict resolution process laid out in the contracts and were being adjudicated by the Conciliation and Arbitration Center of Panama.

The cost overruns incurred by the two contracting groups working on the expansion project are not covered by their contracts with the canal authority, which only provides for payment in the case of rising costs of diesel fuel and construction materials such as rebar and structural steel. Canal Administrator Jorge Quijano said last month the canal authority has already paid about $150 million to $160 million for cost overruns authorized under the contract.

It is clear that if the canal authority were to have any hope of finishing the expansion project within a reasonable amount of time of its already-postponed end-2015 target date, it had to settle with GUPC. “There is a rule of thumb in the engineering business,” Ashar said. “The contractor always wins.”

The Canal Authority said today that it will pay GUPC $36.8 million for December invoices “to ensure that GUPC cancels pending payments and obligations to suppliers.” It said GUPC would start work on the locks again today.

Technical issues remain

The tentative settlement of the dispute still does not answer how the canal authority will be able to address the remaining technical problems that had already delayed the project, including unspecified “electromechanical problems,” presumably with the 16 rolling lock gates that are being fabricated by Cimolai in northern Italy. The first four gates were shipped to Panama last August for installation in the new locks on the Atlantic side of the canal, but the other 12 gates have not been shipped.

The overall canal expansion project is 72 percent complete. The canal authority said it and GUPC will discuss other contractual issues within the next three days, “such as the dates for the delivery of the gates, an implementation schedule for the remainder of the works, a timetable of repayment moratorium and other key aspects for the project’s development.”

Diversions to Suez likely to continue

Container shipping lines that use the canal are awaiting word on the new target date for completion to implement plans for new services through the canal. Many have already switched services from Asia to U.S. East Coast ports to the Suez Canal, where they can cut slot costs by using large post-Panamax ships that have greater economies of scale than the Panamax ships of around 5,000 20-foot-equivaent units that can transit the old locks.

The likelihood that the project will continue beyond 2015 will give East Coast ports more time to complete the harbor-deepening and other projects underway to accommodate ships of up to 13,000 20-foot-equivalent units that will be able to transit the new locks. But it will also mean that ever-bigger ships from Asia will call at East Coast ports via the Suez Canal.

The Panama Canal is likely to have difficulty regaining those services when it does complete its expansion, especially if it has to raise its tolls to cover added project costs, even though it can provide a shorter transit time from Asia to the East Coast than the Suez Canal route. As one East Coast port executive put it, “In the retail industry these days low cost trumps short transit time except in the case of electronics and fashion apparel, which have a limited shelf life.”