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The Panama Canal Expansion Dispute

Author: Naomi Yang
by Naomi Yang
Posted: Aug 11, 2019

The Panama Canal expansion plans have been the subject of increased media attention, and a representation of a failed project. Since the expansion was proposed in 2006, to date, talks have collapsed between the Panama authorities and the European Consortium. The question that begs to be answered is who is to blame for this failure in the expansion plans, and whether the blame on the European Consortium on low balling is unsubstantiated or not.

Brief History of the Panama Canal

The Panama Canal is a magnificent structure with a rich history. The Panama Canal has a structure spanning back to the sixteenth century, after a suggestion was made for a piece of land to be cut out somewhere in Panama to shorten the trips made towards the Spanish ports from Ecuador, Asia and Peru. This was in the year 1524, when this suggestion was made to Charles V, for this reason, and also because of the concerns raised on the risky nature of moving treasures through the isthmus. Consequently, plans for the working on the canal went underway in 1529, but the European wars and the power struggles in the Mediterranean Sea kingdoms saw this project postponed.

Several other suggestions for the construction of a canal were presented but were all futile, as steadily the Spanish government’s interest in the canal dwindled and finally faded away completely. This dream would be reawakened in the nineteenth century by the literature of Alexander Von Humboldt, and finally, the Spanish government formally authorized the constriction of the canal, as well as the creation of a company to construct it. Its construction was further favored by the discovery of gold in California in the late 1840s, whose demand for miners resulted in a growth of the interest of Americans in the construction of the canal. One of the interesting facts is that following the surveys conducted in the next couple of decades – between 1850 and 1875, the only practical routes were one across Panama, and another one via Nicaragua. In the late 1870s, the company organized for the construction of the canal across Isthmus failed, and French company was later organized in 1880 to construct the Suez Canal.

The man behind the French company – Ferdinand Marie de Lesseps, put forth a suggestion for the creation of a canal through Panama following his success in the Suez Canal in Egypt ten years earlier, driven by the rationale that a great deal of mileage would be reduced on trips to areas such as New York to San Francisco and back. De Lesseps was appointed chairman for the construction of this canal. The United States Congress would then create a commission in 1899 to examine the possibilities of Central American Canal, after which Lesseps assets were traded to the United States for a price of forty million dollars towards this task. The treaty between the United States and the New State of Panama was signed, which stipulated that Panama’s independence was guaranteed, and a perpetual lease of a ten mile strip for the canal was secured, a move that saw Panama compensated handsomely, first with ten million dollars as the initial payment, followed by an annuity of a quarter million dollars, starting from 1913.

Discussion

Despite this rich history, the Panama Canal has been at the center of the media frenzy and debate following its expansion. The disputes arising from the expansion of the Panama Canal are consequent of cost overruns after a bid is accepted. The expansion contract of the Panama Canal was obtained by a European consortium, but this consortium "low balled" the Panama authorities. Thus, the main area of contention is thus whether this dispute should have been foreseen, and the actual reasons behind the eruption of these disputes. The expansion of the canal went through in the year 2006. During this period, the government of Panama had already regained full control over the Panama Canal, and the people of Panama passed through a vote to expand the canal to further its maritime needs. The people of Panama felt that high traffic in the Canal had reduced the economic potential of the canal, and the expansion would allow for larger ships to access the canal, and reduce the wait since the expansion would see the creation of two entrances, one on the pacific, and the other on the Atlantic.

The budget for the expansion by the Administration del Canal de Panama was five and a quarter billion dollars, but the European Consortium won the bid for 3.1 billion dollars. However, this project has been the subject of debate following the overruns in costs, and as a result, the European Consortium Grupo Unidos Por el Canal (GUPC) has threatened to stop the expansion process unless the Administration del Canal del Panama pays an additional 1.6 billion dollars for additional costs. In an attempt to resolve this case, GUPC sought mediation via the European Commission. Did the European Consortium do this deliberately?

Dan Molinski of the Wall Street Journal explains that the talks scheduled to end the disputes broke down, based on who would eventually foot the bill for 1. Billion dollars of costs overruns. The talks which went on for a month broke down after the Panama Canal Authority walked out on the talks, which means that over ten thousand jobs created by the expansion of the canal are under the risk of being lost. Members of the canal authority hold the opinion that the GUPC is solely to blame for the collapse of the negotiations, and accuse the consortium of demanding exorbitant and undeserved amounts of money on unsubstantiated costs.

There seems to be enough blame to go around, since Panama’s president also blamed Panama former administrator for the crisis, referring to his role in the awarding of the contact in 2009 to the GUPC Consortium (AFP n.p). The President of Panama blames the former administrator since the GUPC bid was over three hundred and sixty million dollars lower than the budget, and also much lower than the bids presented by the competing companies. With reference to the dispute, President Martinelli supports the views of Lopez and other scholars who argue that Panama authorities should have anticipated this dilemma, especially because the company was under bidding, and also because the state of the company wasn’t secure. AFP brings to light the fact that Sacyr was battling financial problems even after it made its bid. Sacyr, which controls forty eight percent of the European Consortium, was deeply in debt at the end of the year 2008, valued at over fourteen billion in debts, which was approximately seven times its market value. Thus, all evidence supports the low ball theory. The canal contract was one of the life strings that would keep the company afloat, and as such this would explain the reason for the low bid, especially considering the fact that Satyr was battling insolvency at the time.

GUPC, on the other hand, has cited geological difficulties as the reason behind thus unexpected costs, claiming that they resulted in the expenditure of more cement than initially anticipated. To their defense, various authors have pointed to the lack of a comprehensive assessment of the environmental and socio economic impacts of the expansion, which has raised concerns about the legitimacy of the expansion project and the procedures undertaken in the awarding of the contract. The end result of this delay will be a halt of the project by up to five years. It would thus seem that history is repeating itself again, especially referencing the many failed attempts of the construction of the canal in the 1880s, as well as the difficulties and challenges experienced way before that that saw the postponement of the project, as indicated in the historical background part of this paper. However, while there is still hope for the Panama Canal to rise above its challenges as it has had in the past, many of the perceived benefits will unfortunately be postponed as well.

In answering whether the expansion contract disputes should have been foreseen, this paper concludes that the failure of the prevailing administration at that time in managing the awarding to the contract is to blame, and indeed, Panama authorities were low balled. This is because of the concerns raised by authors on the lack of transparency and legitimacy in disclosing all the material facts of the expansion. However, while this can be disputed, it is difficult to dispute the fact that the Panama authorities awarded the contract to a company that was facing very harsh financial problems during the time, and whose financial future was bleak. Additionally, it is difficult to justify the fact that this was done in full knowledge of the company’s financial position, and the bid accepted was less than the estimated bid by over one billion dollars. The cliche, cheap is expensive is very much applicable in this case, and the Panama Canal authorities should really have foreseen these failures, and should have exercised greater diligence in the awarding process.

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Author: Naomi Yang

Naomi Yang

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Member since: Aug 08, 2019
Published articles: 1

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