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### Viewing cable 09PANAMA550, IN BARGAIN BASEMENT BID, SPANISH TO EXPAND PANAMA

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09PANAMA550 | 2009-07-09 21:09 | 2010-12-18 12:12 | CONFIDENTIAL//NOFORN | Embassy Panama

`

    VZCZCXYZ0000
    OO RUEHWEB

    DE RUEHZP #0550/01 1902136
    ZNY CCCCC ZZH
    O 092136Z JUL 09
    FM AMEMBASSY PANAMA
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3575
    INFO RUEHMD/AMEMBASSY MADRID PRIORITY 0338
    RUEHRO/AMEMBASSY ROME PRIORITY 0237
    RUEHMIL/AMCONSUL MILAN PRIORITY 0022
    RHMFISS/CDR USSOUTHCOM MIAMI FL PRIORITY
    RUEAIIA/CIA WASHDC PRIORITY
    RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
    RULSDMK/DEPT OF TRANSPORTATION WASHDC PRIORITY
    RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
    RHEFDIA/DIA WASHDC PRIORITY
    RHEHAAA/NSC WASHDC PRIORITY
    RUEAUSA/PANCANALCO WASHDC PRIORITY
    RUEKJCS/SECDEF WASHDC PRIORITY
    RHEHAAA/WHITE HOUSE WASHDC PRIORITY

` `

    C O N F I D E N T I A L PANAMA 000550

    SIPDIS

    E.O. 12958: DECL: 07/07/2019
    TAGS: ECON EINV ETRD MARR PM EWWT PREL
    SUBJECT: IN BARGAIN BASEMENT BID, SPANISH TO EXPAND PANAMA
    CANAL

    REF: A. 2007 PANAMA 1899
    ¶B. 2008 PANAMA 320
    ¶C. 2008 PANAMA 732
    ¶D. 2008 PANAMA 820
    ¶E. 2008 PANAMA 851
    ¶F. 2009 PANAMA 195
    ¶G. 2009 PANAMA 519
    ¶H. 2009 STATE 69224
    ¶I. 2009 PANAMA 539

    Classified By: Ambassador Stephenson for reasons 1.4 (b) and (d).

    -------
    SUMMARY
    -------

    ¶1. (C) During a morning of high political theater, President
    Martinelli, Panama's senior government officials, consortia
    representatives, diplomatic corps, and the public (through
    live TV and an internet broadcast) witnessed the presentation
    of the technical scores and the opening of the financial bids
    on July 8. After brief real-time calculations, the Panama
    Canal Authority (ACP) announced that Sacyr's consortium won
    the bid to build the third set of locks, centerpiece of the
    $5.25 billion Panama Canal Expansion. Bechtel believes Sacyr
    broke EU anti-competiveness laws in obtaining its surety
    bonds and will protest if they find a smoking gun. The Sacyr
    win signals expanding Spanish influence in Panama and a
    potential loss of American export opportunities for the
    project (although much of the sourcing has not yet been
    determined).

    ----------
    SACYR WINS
    ----------

    ¶2. (U) President Martinelli, Panama's senior government and
    ACP officials, consortia representatives, diplomatic corps
    members, and the public (through live TV and an internet
    broadcast) witnessed the awarding of the locks contract, the
    centerpiece of the $5.25 billion Panama Canal Expansion, to a
    consortium led by Sacyr Vallehermoso S.A.. The other
    consortia members are Impregilo S.P.A. (Italian), Jan de Nul
    N.V. (Belgian), Constructora Urbana, S.A. (Panamanian and run
    by the first cousin of the Panama Canal Administrator),
    Montgomery Watson Harza (American), IV-Groep (Dutch), Tetra
    Tech (American), and Heerema Fabrication Group (Dutch).

    ---------------------------------
    PROCESS FOR DETERMINING SACYR WON
    ---------------------------------

    ¶3. (C) The ACP declared Sacyr to have the "best value"
    proposal. Out of a possible 10,000 points, Sacyr obtained a
    dominating 8089 points; Bechtel - 6770 points; and ACS - 6559
    points. The total point tally was composed from technical
    and financial scores. Sacyr had the highest technical score
    with 4089 points (out of a possible 5500), ACS - 3974 points,
    and Bechtel - 3790 points. The technical points ranking was
    "shocking" to a representative of CH2MHill (an
    American-firm), the Project Advisor for the expansion
    program. Previously, sources rated Bechtel's and ACS's
    technical plans to be about equal and both superior to
    Sacyr's. See ref G. The pre-announcement conventional
    wisdom on the technical plans was so prevalent that the
    audience collectively gasped when the Sacyr high technical
    score was announced. During a post-announcment meeting with
    the Ambassador, the subdued Bechtel reps speculated that the
    technical scoring committee was probably not comfortable with
    Bechtel's "innovative" design, because it did not fit neatly
    into the ACP's specifications. Bechtel reps dismissed
    challenging the technical evaluation process, noting from
    past experience that these technical evaluations can be
    highly subjective.

    ¶4. (C) After the award ceremony started, ACP and consortia
    officials retrieved the price envelopes from a nearby bank
    vault. The audience watched via streaming video projected on

    to giant screens, the OJ Simpson-esque drive to/from the bank
    and the "signing out" of the deposit box with the envelopes.
    The base price proposals were $3.1 billion for Sacyr, $4.2
    billion for Bechtel, and $6.0 for ACS, which led to financial
    point scores of 4000, 2980, and 2586, respectively. (The
    provisional prices were $103 million, $94 million, and $0,
    respectively.) The Sacyr base price elicited a cheer from
    the audience; many Panamanians are pleased that the locks may
    be built for less money than expected. Sacyr supporters
    cheered, because their victory was almost assured with the
    best technical score and lowest price.

    ¶5. (C) The spread on the bid prices is surprising. Sacyr was
    expected to be the low ball bid (due to its precarious
    financial situation and apparent financial backstop from the
    Spanish government), but both Bechtel and ACS reps had hinted
    to Embassy officials that their bids were just over $4
    billion. See ref G. However, the base price proposals lined
    up with the three bidding strategies outlined in ref D -
    lowball, value, or punt. The fact that ACS's $6 billion bid
    was almost double of Sacyr's was not expected and is
    interpreted by some as a punt. Bechtel reps state a
    consortium cannot even "pour the concrete" for $3.1 billion
    and hinted even their $4.2 billion price was closer to a
    lowball bid than a value bid. It is widely expected that
    during construction, Sacyr will attempt to renegotiate the
    price with the ACP.

    ¶6. (C) After the ACP declared Sacyr the "best value" winner,
    the ACP opened the sealed envelope with the price ceiling (la
    partida asignada) for the contract. Sacyr offered a base
    price below the ACP's $3.5 billion ceiling; as a result,
    further negotiation on price between the ACP and Sacyr is not
    needed. See ref G.

    -------------------------------
    NEXT STEPS IN THE AWARD PROCESS
    -------------------------------

    ¶7. (C) The ACP Price Verification Board will now verify that
    the process complies with ACP requirements and the ACP
    Contracting Officer will proceed to verify the contractor's
    qualifications. Both these steps should be pro forma, and
    the ACP expects to officially award the contract in a few
    business days. Upon announcement of the award, the ACP will
    notify all consortia members and allow the evaluation
    documents to be examined by all consortia. The winning
    consortium must renew its surety bonds within twenty-eight
    days. The losing consortia have three days to protest, once
    the five day notification period expires. The ACP
    Procurement Division must then adjudicate a protest within
    thirty days. Whether or not the losing consortia agree with
    the ACP decision, the ACP will proceed to sign the contract
    with Sacyr. Without defining "work," the ACP requires Sacyr
    to begin work seven days after the contract signing.

    ----------------
    BECHTEL PROTEST?
    ----------------

    ¶8. (C) Bechtel reps informed the Ambassador that at this time
    they only plan to protest the award if they can prove that
    Sacyr's $400 million performance and $50 million payment
    bonds (that must now by renewed from Zurich) are
    counter-guaranteed by a European government and undisclosed.
    If the bonds are counter-guaranteed, then Bechtel reps
    believe Sacyr and the backing European government(s)
    (probably Spain) broke European Union anti-competitiveness
    laws by not having this state aid declared. If true and if
    the potential remedy is significant, Bechtel might pursue the
    matter in court. However, counter-guaranteed surety bonds
    are not against the ACP bid rules. See ref H for background
    on this issue. However, we can not rule out some other type
    of Spanish government guarantee was provided to Sacyr
    (outside of the specific action of guaranteeing surety bonds)
    that would enable Sacyr access to the credit necessary to
    complete the project, preserve Spanish jobs, and prevent a
    rumored shock to Spanish banking system that could ensue from
    a collapse of Sacyr.

    ¶9. (C) Bechtel reps were not alarmed over past press leaks
    from Impregilo of the Sacyr consortium forecasting Sacyr's
    highest technical score and lowest price. They believe the
    leaks likely did not reflect undue access to inside
    information or skullduggery by the ACP. See ref G. Rather,
    the Bechtel rep opined, it was far more likely that Impregilo
    was engaging in puffery on the outcome in order to secure
    vital new credit.

    -------------------
    PANAMANIAN REACTION
    -------------------

    ¶10. (C) Overall, the ACP, President Martinelli, and the
    Panamanian public are clearly ecstatic about receiving a
    prima facie bargain basement price and that a Panamanian
    company (CUSA) is part of the Sacyr consortium. However, we
    understand there may be lingering doubts by some ACP Board
    Members and members of the government that the Sacyr
    consortium does not have financial ability to complete the
    project. Bechtel reported they had been called to a surprise
    meeting with VP/FM Juan Carlos Varela, who was clearly
    concerned about the big price spread and suggested the
    cabinet needed to ask ACP Administrator Aleman to provide an
    explanation.

    ------------------------
    CANAL EXPANSION OVERVIEW
    ------------------------

    ¶11. (C) The Panamanian people approved the overall Panama
    Canal Expansion project on October 22, 2006 in a National
    Referendum and the ACP broke ground on the first related
    excavation project on September 3, 2007. The expansion
    consists of three major components: construction of the
    locks, widening and deepening of the navigational channels,
    and deepening Lake Gatun. Of the various major contracts to
    complete the expansion, there is now only one left - the
    estimated $400 million PAC 4 excavation that includes the
    building of a dam. The ACP hopes to complete the expansion
    in 2014 for the 100th anniversary of the opening of the
    Panama Canal. Whether the expansion is completed on-time and
    on-budget may impact the 2014 Panamanian Presidential and
    National Assembly elections.

    -------
    COMMENT
    -------

    ¶12. (C) U.S. ECONOMIC IMPACT: Bechtel was expected to
    purchase $1.2 to $1.3 billion dollars worth of goods from
    U.S. suppliers. Sacyr has not provided post with their
    expected U.S. purchases; however, due to Sacyr's close
    relationship with European suppliers, the amount of U.S.
    exports could be substantially affected. American companies
    Montgomery Watson Harza (MWH) and Tetra Tech are minor
    partners in Sacyr's consortium; MWH and Tetra Tech have not
    requested commercial advocacy.

    ¶13. (C) LONG TERM: For over a hundred years, the Panama Canal
    remained at the core of the United States/Panamanian
    relationship. Two-thirds of all ships transiting the canal
    are traveling to/from a U.S. port and we retain a fundamental
    interest in the successful completion of the expansion
    project. However, the Sacyr win marks an increased tide of
    Spanish influence in Panama and - for now - injects an
    element of uncertainty in to the future of the canal
    expansion. What is undisputed, is the pride of Panamanian
    officials in moving this project forward under their
    sovereignty. See ref I.
    STEPHENSON

`