Spanish officials to start talks with Panama over canal cost row

By Lomi Kriel

PANAMA CITY (Reuters) - A Spanish government team will meet officials in Panama on Monday to try and end a cost dispute between a Spanish-led consortium expanding the Panama Canal and the waterway's operator that threatens to stall the huge infrastructure project.

Spain's public works minister, Ana Pastor, begins a day full of meetings by holding discussions with officials for the building consortium fronted by Spanish construction firm Sacyr known as Grupo Unidos por el Canal (GUPC).

Later in the morning she is due to meet Panama's President Ricardo Martinelli, who last week accused the GUPC of "great irresponsibility" when it threatened to suspend work on January 20 if the canal operator did not pay for big cost overruns.

The GUPC also includes Italy's Salini Impregilo, Belgium's Jan De Nul and Panama's Constructora Urbana.

Arguing that the project to build a third set of locks for one of the world's main maritime cargo routes had suffered unforeseen setbacks, the GUPC said $1.6 billion in added costs had been incurred, blaming the Panama Canal Authority (PCA) for carrying out flawed studies of the geological terrain.

An angry Martinelli turned on Spain and Italy, saying their governments had given him assurances they would see through the $3.2 billion project to build the locks, prompting Pastor to fly to Panama to seek an end to the impasse.

The head of the PCA, Jorge Quijano, has said Panama is prepared to discuss the cost overruns if they prove justified, and a Panamanian official told Reuters the government has considered putting together a bailout with the parties involved.

However, that possibility is complicated by the fact that the Spanish government has been coping with a deep economic crisis that has put a strain on the country's finances.

After her discussions with Martinelli, Pastor is due to meet the canal operators and give a statement to the media at around 5.30 p.m. local time (2230 GMT).

THIRD PARTY?

On Sunday, the PCA maintained a firm stance, again rejecting the GUPC's arguments on the overruns and saying that the consortium would have to take its arguments to the arbitration panels the two sides agreed on when the contract was signed.

PCA head Quijano told Spanish newspaper El Pais that "the two page letter" the GUPC had submitted last week did not justify its demands and that the consortium would need to provide more detailed information to make a viable case.

If work on the project did stop, the authority could take steps to ensure it was completed regardless, "be it by a third party or by the PCA," Quijano told the paper.

Sacyr won the bid on the canal contract in 2009 with a $3.12 billion offer, which was considerably lower than that of rivals, as well as below the $3.48 billion reference set by the PCA.

Less than six months later, top Panamanian officials including Martinelli and his vice president, Juan Carlos Varela, were already worried about how the project was progressing, according to U.S. diplomatic cables published by Wikileaks.

The canal expansion, whose total cost is about $5.3 billion has been one of the top priorities for the government of Martinelli, whose term in office ends mid-year.

Sacyr, whose debts at the end of September were three times its market capitalization, has also staked a lot on the canal expansion, and depends heavily on its foreign business.

The company made 55 percent of its revenue outside Spain in the first nine months of 2013, and Panama contributed 25 percent of its 1.3 billion euros ($1.78 billion) in international sales, the company said in its 2013 nine-month earnings statement.

(Additional reporting by David Adams in Miami; Writing by Dave Graham; Editing by Simon Gardner and Eric Walsh)

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