Can you spare $1.6 billion?

A spectacular dispute over the expansion of the Panama Canal highlights the dangers of issuing public works contracts on the basis of a badly designed bid auction.

The consortium that won the contract to build three locks, is threatening to halt all work within days, unless it is paid $1.6 billion.

This would be an increase of 50%, compared to what was originally supposed to spent on the locks by Grupo Unidos por el Canal, a consortium of Sacyr Vallehermoso of Spain, Italy’s Impregilo, Jan De Nul of Belgium, and Panama’s Constructora Urbana.

The budget for the entire expansion project was set at $5.3 billion in 2009.

Any increase in the cost of the project would make the canal less competitive with other options, including the Suez Canal.

Grupo Unidos offered to do the job for close to $1 billion less than any other bidder, in order to blackmail the project later, say companies which lost the lock-construction contract, according to reports in Spanish media.

Not so, says the consortium, blaming the problem on unavoidable cost overruns.

Unfortunately, disputes such as this have been common in other countries of the region, including the recent re-fitting of two Mexican refineries, each of which ended up costing $2.5 billion, nearly twice the amount originally budgeted.