The New Panama Canal: A Risky Bet

How a $3.1 Billion Expansion Collided With Reality

By WALT BOGDANICH, JACQUELINE WILLIAMS and ANA GRACIELA MÉNDEZ



PANAMA CITY — On July 8, 2009, the champagne finally flowed.
 
After an intense two-year competition, a consortium led by a Spanish company in severe financial distress learned that its rock-bottom bid of $3.1 billion had won the worldwide competition to build a new set of locks for the historic Panama Canal.
 
The unlikely victors toasted their win at La Vitrola, a sleek restaurant in an upscale neighborhood east of downtown Panama City. Within days, executives of the four-nation consortium, Grupo Unidos por el Canal, flew to Europe to begin planning the project.
 
This time, there would be no champagne. Disputes quickly erupted over how to divide responsibilities. Some executives appeared not to fully grasp how little money they had to complete a complex project with a tight deadline and a multicultural team whose members did not always see things the same way.
 
Internal arguments soon gave way to bigger problems. There would be work stoppages, porous concrete, a risk of earthquakes and at least $3.4 billion in disputed costs: more than the budget for the entire project.
 
Seven years later, and nearly two years late, the locks have finally been declared ready to accept the new generation of giant ships that carry much of the world’s cargo but cannot fit in the original canal.
 
To mark the occasion, Panama has invited 70 heads of state to watch on Sunday as a Chinese container ship becomes the first commercial vessel to attempt the passage from the Atlantic Ocean to the Pacific through the larger locks.
 
For more than 100 years, the canal has been a vital artery nourishing the world economy, a testament to American engineering and one of the signature public works of the 20th century. The new locks, built by Panama without help from other governments, were sold to the nation and the world as a way to ensure that the canal remained as much of a lifeline in the hyperglobalized 21st century as it was in the last. 
 
But when the speeches and the celebrations end, one inescapable fact will remain: The expanded canal’s future is cloudy at best, its safety, quality of construction and economic viability in doubt, an investigation by The New York Times has found.
 
In simple terms, to be successful, the new canal needs enough water, durable concrete and locks big enough to safely accommodate the larger ships. On all three counts, it has failed to meet expectations, according to dozens of interviews with contractors, canal workers, maritime experts and diplomats, as well as a review of public and internal records.
 
The low winning bid, a billion dollars less than the nearest competitor’s, made “a technically complex mega-project” precarious from the outset, according to a confidential analysis commissioned by the consortium’s insurer. “There is little room in the budget for execution errors or significant inefficiencies,” the analysts, from Hill International, wrote in 2010, adding, “This is a high-risk situation.”
 
Among the biggest risks is the concrete that lines the walls of the six mammoth locks punctuating the path between the seas.
 
Last summer, water began gushing through concrete that was supposed to last 100 years but could not make it to the first ship. The Hill analysts had warned that the consortium’s budget for concrete was 71 percent smaller than that of the next lowest bidder. The budget also allotted roughly 25 percent less for steel to reinforce that concrete.
 
Then there is the lock design. Tugboat captains say they cannot safely escort the larger ships because the locks are too small with too little margin for error, especially in windy conditions and tricky currents. In fact, in a feasibility study obtained by The Times, the Panama Canal Authority had earlier concluded that the tugs needed significantly more room.
 
The tugboats themselves are a problem, especially the 14 new boats purchased from a Spanish company, mostly for the expanded locks. To maneuver safely, they must be precisely controlled, but according to captains, they are so unstable that they operate best going backward, something that cannot be done while towing ships through the canal.
 
“The Spanish tugs are perfectly awful,” said Iván de la Guardia, the head of the tugboat captains’ union. Confidential documents obtained by The Times show that the canal authority bought the tugboats for $158 million from a company later represented by the son of Jorge L. Quijano, the canal’s administrator.
 
Iván de la Guardia, the head of the canal tugboat captains’ union, called new Spanish-made tugboats “perfectly awful.” Fred R. Conrad for The New York Times
 
 
The new locks exist for one reason: so that huge “neo-Panamax” ships can move far greater quantities of cargo through the canal. For them to do that, the waterway must remain deep enough so that fully laden ships do not hit bottom. But canal officials discounted warnings that they needed new sources of water, and during a recent drought, shippers had to significantly lighten their loads.
 
Canal officials had assured the country that no new reservoirs were needed. Later, Mr. Quijano took to scolding Panamanians for using too much tap water, which comes from the same freshwater lake that supplies the canal.
 
The consequences will be wide-ranging if the canal does not deliver as promised. American grain and soybean farmers and producers of liquefied natural gas, for example, may find it harder to sell to Asian customers. Asian manufacturers may forsake the struggling ports on America’s East Coast for those in the West. Or they, and ultimately consumers, will shoulder the added cost of going the long way around, through the Suez Canal.
 
At the same time, the canal’s success may be undercut by external forces: chiefly the slowdown in global trade, especially from China.
 
At the center of the story is the Panama Canal Authority, which oversaw the design of the new locks and chose the winning bidder. In a small country dominated by an old-money elite, where the very lifeblood is the canal, the authority is a power center unto itself, a government within a government.
 
The canal authority says that while any large, complex project is bound to encounter unexpected problems, the new locks are sound and safe.
 
“We can have a difference of opinion over one point or another,” said Roberto Roy, the president of the canal’s board of directors. “The one thing over which we cannot disagree is that the canal is a project that will bring an enormous amount of benefits to the public.”
 
Mr. Quijano said that in tests this week, canal workers were “performing the lockages with a high grade of precision and have maintained the highest standards of safety.” He added: “This is one of Panama’s finest hours. The country is elated.”
 
The consortium’s chief executive, Giuseppe Quarta, said tests had proved the group’s “technical ability in delivering a high-quality, fully functioning project.”
 
A trouble-free canal would cast a favorable light on a country embarrassed by government scandal and by the Panama Papers, which brought a local law firm international ignominy for setting up secret offshore accounts for wealthy customers from around the world.
 
Even residents who privately criticize canal management are reluctant to speak up for fear of appearing unpatriotic.
 
Eldon Gath, a geologist based in the United States, discovered quickly just how sensitive some Panamanians are about the canal. After Mr. Gath prepared a report for the canal authority noting the earthquake risk from faults under the canal, he recalled, Panama’s president at the time, Ricardo Martinelli, went on the attack.
 
“President Martinelli told us we had insulted the republic,” Mr. Gath said.

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