Never go with the lowest bidder, but if you do, drink Dos Equis

I’ve recently given a lot of interview on the Panama Canal expansion and forgot to blog about it here. But now there’s a reader request! So I’ll give the short version, since I’m on the road to Alabama.

Four points:

1. This recent New York Times story is spot on, although the tone is much too dire. It needs to be kept in mind that the teething pains are normal on big construction, all the way down to the leaking concrete, with one exception ...
2. The tugboat issue. That is a big deal. Saving money by going with tugboats instead of locomotives was boneheaded stupid. I have been asking around to see if the new locks could be retrofitted with locomotives; so far, I do not know how much that would cost. 
3. The earthquake risk is real, but applies to any project along the West Coast of the Americas. The water issue is also real, but can be solved if it becomes pressing. They are both overblown. (Which is not to say that an earthquake could not happen!) 
4. The expansion is a big deal for the United States ... but only for certain sectors, specifically American agriculture and coal. Those exports will see a big stimulus from lower export costs to Asia. Individual ports will gain, but that’s mostly from cannibalizing West Coast traffic. Details here, third story down, “The Panama Canal authority Panama Canal prepares for bigger vessels.”
5. The problems stem from the Panama Canal Authority’s (ACP, for its Spanish initials) decision to go with the lowest bidder. In theory, the ACP saved between $1.1 billion and $2.9 billion. In reality, they will have saved less. 

The original expansion was budgeted at $6 billion. (Some sources will say $5.25 billion, but that does not include some ancilliary construction.) The Sacyr-led consortium (Grupos Unidos por el Canal, or GUPC) made a bid for $3.1 billion. ($3.118 billion, IIRC.) Bechtel put in a bid for $4.2 billion and Grupo ACS bid at $6.0 billion. The gap was stunning: more so, since Bechtel all as much admitted that they were lowballing at $4.2 billion. 

Right now, the expansion is overbudget by $550 million in delays and $250 million over cement quality problems. (Forgive the lack of footnotes; I’m writing this quickly from memory.) GUPC is claiming that it is owed $3.5 billion in overruns. So far, $930 million of those claims have been adjudicated; the GUPC has won $350 million. If their success rate of 37% holds, they will receive a total of $1.3 billion. That will push the total cost of the project up to $8.1 billion. ($6.0 billion + $550 million + $250 million + $1.3 billion.)

That is a total overrun of 35%, which is in fact awesome for a project of this size, whether public or private. 

One of the reasons for the high success rate is that the ACP is taking a very hard line in arbitration over the cost overruns. And they have a good case ... in fact, GUPC is already facing criminal charges in Panama. I wrote about the ACP’s super tough bargaining position back in 2014.

The NYT article paints the Canal director, Jorge Quijano, in a poor light regarding the tugboat decision. That is probably deserved. But the man has been a hell of a negotiator, the most interesting negotiator in the world of big megaprojects. I bet he drinks a lot of beer. 

Comments

[Carlos]

I sensed pressures to punch this story up. I don't know if the reporters had convinced themselves that the construction issues were larger than they were, all else being equal, or if editorial thought an important technical story about tugboats by itself wasn't enough for the resources they had allocated, or some third thing.

[Carlos]

(The counterfactual near and dear to our hearts would be, the expansion as on time and on budget with the same level of construction quality as the Big Dig.)

[JKR]

To Carlos's point, the story in print spread from the front page right column (biggest news of the day) to TWO entire double sheets of the paper, or four-plus pages. That included the photos of course, but it does represent a substantial investment in print (and it included maps and diagrams, which lately have been in short supply in the printed newspaper; I remember when nearly every "Journal" article came with its own mini map showing the hamlet/town/city the reporter was writing from).

As Noel puts it, the earthquake issue is kind of a non-starter. Earthquake insurance can be bought, and meanwhile, until there is an earthquake, we can still use the new larger locks on the canal for commerce. And after the earthquake, who knows? Maybe the giant tsunami will wipe out all commercial activity along the Pacific Rim and there will be no need for a canal.

Thanks, Noel, for providing your apt thoughts to the article. I really appreciate it, and am as always looking forward to buying the first round when we meet up again.