Consortium resumes work on Panama Canal expansion

A cruise ship is seen next to the construction site of the Panama Canal Expansion project on the outskirts of Colon City February 20, 2014.  [Photo/Agencies]

PANAMA CITY/MADRID - A Spanish-led consortium resumed expansion work on the Panama Canal on Thursday, raising hopes the two sides will finally draw a line under an acrimonious stand-off over massive cost overruns.

As workers returned to the construction site after a stoppage lasting more than two weeks, a source close to the consortium led by Spanish builder Sacyr and Italy's Salini Impregilo said it had resolved internal disagreements over the key issue of financing.

"The restarting of the works is being done in a way that will enable it to reach full pace in the shortest time possible," the consortium said in a statement. A source close to negotiations between the consortium and the Panama Canal Authority confirmed that work had resumed.

Work had been due to restart much earlier on Thursday. Canal authority said late on Wednesday it had agreed with the consortium to iron out a host of remaining issues, including the delivery dates of massive lock gates being built in Europe, over the next three days.

Sources with knowledge of the negotiations said a final deal on pending issues would be signed within three days.

The parties have agreed to deal with the core of the dispute, $1.6 billion in cost overruns that the consortium wants the Panama Canal to pay for, via arbitration. The canal has said a two-week work stoppage means the project will not be completed until at least December 2015, a delay that could cost Panama millions of dollars in lost shipping tolls.

Delays are also a setback for companies worldwide that want to move larger ships through the waterway that links the US Gulf Coast to Asian markets.

A key part of negotiations is the role that insurer Zurich plays and whether it will convert a $400 million surety bond, taken out by the consortium in case the project was not completed, into backing for a loan to help raise the $1.5 billion in funding the canal authority says is needed to finish the project, sources with knowledge of the matter said.

Zurich does not want to put money into the project but has asked banks to do so, another source familiar with the matter said. The banks are asking for counter-guarantees, the source said. The parties of the consortium are each liable for their own obligations, not jointly, the source said.

Shares in Sacyr rose 4.3 percent on Thursday after news of the agreement to restart work. The project represents a quarter of the company's international revenue.

Salini Impregilo shares gained around 3.2 percent.

Zurich said it was in talks with both parties and was comfortable with its level of exposure to the project, which it said was limited due to reinsurance mechanisms and was well within its risk tolerance.

"As the discussions are still ongoing, we are not in the position to provide any further details," it said in a statement.