When tiny Panama decided, in 2007, to expand its canal, it had little choice but to put the project out to international tender, since it had neither the funds nor the technical know-how to do it itself.
The project would double the canal’s capacity, allowing ships with up to 12,000 containers to use the canal — 8,000 more than is currently possible. Given the sheer scale (to get an idea, check these photos), economic importance and international prestige of the project, bids came flying in from all directions — including from some of the world’s biggest construction firms such as U.S. giant Bechtel.
The initial estimated cost of the project was 5.25 billion dollars — a huge financial undertaking for a country with total GDP of less than 60 billion dollars. So, imagine, if you will, the Panamanian government’s pleasant surprise when a consortium of firms called the United Group for the Canal (GUPC, for its Spanish acronym), lead by the Spanish company Sacyr, put in a bid for just over three billion dollars — two whole billion dollars less than the government’s expected budget.
It was an offer Panama could hardly refuse. However, what the Panamanian government didn’t know at the time — but certainly does now — was that Spanish construction firms habitually underestimate total costs when submitting bids for large public projects. In fact, as a contact of mine in one of Spain’s largest water companies recently told me, it’s a practice that’s not just widespread but is actually enshrined in Spanish law.
Put simply, when a local or regional government puts a job out for tender, companies submit bids in the knowledge that they will later be able to renegotiate upwards, with zero legal repercussions. The result is that neither the best or the cheapest bids are often chosen for big public works in Spain.
In fact, as the Bárcenas affair has shown, the government seems to have two main criteria when it comes to selecting public works contractors: 1) Are they the, ahem, chepest? 2) When was the last time they gave us one of those nice unmarked, heavily filled envelopes?
This also appears to have been the operating logic behind Sacyr’s rediculously under-budget bid for the canal project. However, when it tried to pull the “oh, shit, this might cost you just a little more” ruse, it discovered that Panama’s government would not cave in quite so easily.
When GUPC informed ACP, the administrator in charge of the project, that more lucre would be needed to finish the work — 1.6 billion dollars, to be precise — ACP’s response was to threaten to cancel the 3.2 billion dollar deal and look for another contractor to finish the work.
Since January 7, both sides have been locked in fierce negotiations. ACP’s refusal to pay up the money and its continued insistence that the consortium should honour the conditions of the contract signed in 2009 has left GUPC with insufiicient liquidity to continue work on the canal’s third set of locks. Indeed, as El Confidencial reported this past Wednesday, so tenuous is the group’s financial situation that it can’t even cobble together the 50 million dollars needed to pay providers and the salaries of the little more than 1,000 workers left on the project.
None of this should come as a surprise to anyone familiar with Spanish business practices. Dependence on outside financing is rife among large Spanish corporations. Typically, most — if not all — of their operational funding needs are met through bank loans or the issuance of bonds in the financial markets. According to a paper published by the Bank of International Settlements, the result is that in Spain corporate debt accounts for more than half of non-financial debt, which itself now exceeds 350 percent of GDP.
For that reason alone, the Spanish government is desperate for a solution to be found as quickly as possibly to the current impasse. But with the Canal Authority unwilling and GUPC unable to cover the shortfall, the 1.6 billion dollar question is: who will pay it? The project’s main insurer, Zurich Insurance, may have to pony up some of the cash — but almost certainly not enough to cover all the costs.
And that, dear reader, is where the Spanish taxpayers will likely come in.
Another Day, Another Bailout
Evidence is already surfacing that in 2009 Spain’s former “socialist” (ha!) govermment pledged 200 million dollars as the project’s guarantor. Through the majority public-owned insurance firm Cesce and in direct contravention of basic procedures, the government effectively put its voters on the tab in the event that the project wasn’t completed.
Now, with the Rajoy government in control, there can be little doubt of its willingness to stump up public money to save not only Sacyr’s butt, but its own face. After all, the longer this goes on, the more international attention it will bring to the finances of Spanish companies and the more damage it will do to the Spanish “brand” — the term currenty en vogue to denote Spain’s tattered overseas reputation.
It’s a term that Sacyr’s own president, Manuel Manrique, used during testimony last year in the Bárcenas case. As Publico reports, Manrique complained to Judge Pablo Ruz of his “indignation” at the investigation launched by the Madrid High Court into the dodgy accounting practices of the governing People’s Party, which, he claimed, was doing untold harm to the “Spanish brand”. It was yet another reminder of the limiteless bounds of the chutzpah of Spain’s business and political elite — the same elite that is single-handedly destroying Spain’s international reputation.
For his part, Manrique is accused by the People’s Party’s former treasurer, Luis Bárcenas, of making an undeclared donation of 200,000 euros to senior members of the party to seal a deal that would grant his company complete control over the management of waste (Tony Soprano, anyone?) in Spain’s southern city of Toledo — a charge Marique continues to deny, in complete contradiction of what his predecessor at Sacyr, Luis del Rivero, told investigators.
Given the harm his company’s dodgy practices in Panama has done to Spain’s overseas reputation, Manrique will perhaps think twice before pontificating on the importance of the Spanish “brand”. Not that it will matter: the damage has already been done, and what’s more in a sector in which Spain is currently one of the world’s leaders. And that damage can only be partially undone through yet another taxpayer bailout of a Spanish construction firm.
Whether the money will be enough to convince the Panama Canal Authoritities to continue working with GUPC, rather than laying down the red carpet for Bechtel, only time will tell.
As for overseas investors, this episode should serve as a stark warning of the growing risks of investing in some of Spain’s blue chip companies. Like Sacyr, many have very high debt levels and are also heavily exposed to Latin America. Indeed, according to a 2012 report by U.S. investment bank Morgan Stanley, the region accounts for 33 percent of Spanish companies’ revenues, by far the highest in Europe.
For the likes of Spanish telecommunications behemoth Telefonica and lender BBVA, Latin America generates over half of group sales. Granted, the investments have yielded rich pickings, providing companies with a slice of the fast growth and surging consumer demand in powerhouses such as Brazil, Chile and Mexico as well as healthy margins to offset shrinking revenues at home.
But now many Latin American economies are also shrinking. Some, like Argentina, are in free fall. And if history has taught us anything, it is that when things turn sour south of the Rio Grande, the numbers quickly begin curdling on the books of the corporations and banks most exposed to those markets.
As I outlined here, the 1994 Tequila Crisis in Mexico required an precedented IMF and US Treasury bailout to save US banks from total collapse. The question is: if markets continue their decline in Latin America and the assets on the books of Spanish firms suddenly become billion-dollar liabilities, who will rescue them?