The Panama Canal Locks and perils of low-ball bids

As the new Locks to the 50 mile long Panama Canal, constructed at a cost of $5.4 bn, opened for traffic on Sunday, the Times has a fascinating account of the problems faced during construction, 

On July 8, 2009... 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... 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.

The bid process that led to the developer selection appears to have been flawed,

Three consortiums — including one led by Bechtel, an American company with an international reputation for taking on big, difficult projects — pursued the contract. The financially weakest consortium was led by a Spanish company, Sacyr Vallehermoso, which American officials called “nearly bankrupt” in one cable and “technically bankrupt” in another. Sacyr’s consortium included a Panamanian company owned by the family of the canal administrator at the time, Alberto Alemán Zubieta. The company, Constructora Urbana, in which Mr. Alemán himself previously owned stock, had already done millions of dollars in business with the canal. The other two members were Impregilo, a large Italian contractor, and Jan De Nul, a Belgian company that specializes in dredging and excavation. In March 2009, after 15 months of contentious negotiations, the three consortiums submitted their sealed bids... That July, with the nation watching on television, the bids were opened, and the result was a shocker: The underdog Sacyr group had won... When one of the bidders makes a bid that is a billion dollars below the next competitor, then something is seriously wrong

And the rock-bottom bid has thrown up the expected deficiencies,

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, Hill International... 

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... 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 canal authority bought the tugboats for $158 million from a company later represented by the son of Jorge L. Quijano, the canal’s administrator.

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.

Poor quality of concrete and other materials, skimping on standards, and cronyism appear pervasive in the project. And then there are the standard issues of emergent project risks, like water availability in the Gatun Lake which supplies water to the Locks and design challenges with the size of locks, numbers of tugboats, and so on.

This is yet more evidence that in large infrastructure projects, it is always better to structure the bid process in a manner that emphasizes the importance of technical proficiency and financial capability of the bidder over merely the lowest bid amount. In fact, in mega projects like the Panama Canal extension, with several unknown unknowns, and where cost over-runs are inevitable, it may even be appropriate to have internal benchmark pricing for major components and disqualify bids that low-ball estimations below a certain floor threshold on each of those major heads.