Rough Waters on the Panama Canal

File under public private partnership pandemonium: in case you missed it, the multi-billion dollar expansion of the Panama Canal has been put on hold due to cost overruns and accusations of corruption.

Like any good Spanish company working in South America, infrastructure giant Sacyr underestimated the cost of its building work and claims to have run into several unexpected roadblocks with bribe-hungry officials in the process. Now asking the Panama Canal Authority for an extra $1.6bn to complete the expansion project, the Spanish company has come up dry. The Authority refused the demand in January, putting the completion date at serious risk and generally endangering the credibility of the entire project.

The Authority, which is a semi-sovereign entity run at arm’s length from the government, and a legacy of the American-run canal authority, is justifiably livid. After all, who else has the gall to ask for billions more after a construction budget has been agreed? (Ask Santiago Calatrava, seems like it’s a thing in Spain).

Obviously, the case has entered arbitration and both sides are rightly anxious for a settlement, but I’m curious about the implications of this project for other Spanish infrastructure firms in Latin America. I’m also intrigued by the response of the Spanish government in Madrid, taking a more active role in this dispute than one might expect out of a central government (the EU has also gotten involved).

But frankly speaking, from what I know of the Panama Canal Authority, particularly from my analysis of it a few years back for a bank sovereign rating I was lucky to perform, I’d probably be taking a closer look at Panama’s than I would at the beleaguered Spanish-led consortium. Brushing off fears several years back that corruption could cast the project asunder, the PCA’s chief haughtily declared Panama to be ready for business far before its time in a 2009 interview with the FT.  But with the Canal contributing a significant portion of the country’s government budget, and the sad reality of Panama’s continuing status as a tax haven and dodgy financial center, and upcoming presidential elections, I’d bet the farm that the current government is trying to get every sweet drop of graft they can before abandoning their posts.

It all goes to show you foreign investment, large public works, and tax havens are a toxic mix. It also speaks volumes to the desperate bind that Spanish firms are in while their domestic economy continues to stagnate.

It also might be a case for occupation before building canals (ask France and Britain), but unfortunately for Spain, that ship sailed in 1898.

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