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).


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SUMMARY
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¶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.

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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