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Cablegate: U.S. Firm Expects Labor and Housing Constraints On

VZCZCXYZ0000
RR RUEHWEB

DE RUEHZP #1719/01 3031644
ZNY CCCCC ZZH
R 301644Z OCT 07
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 1341
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RHMFISS/COMDT COGARD WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAUSA/DEPT OF HHS WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUENAAA/SECNAV WASHDC
RUEKJCS/SECDEF WASHDC

C O N F I D E N T I A L PANAMA 001719

SIPDIS

SIPDIS

FOR STATE WHA/CEN - TELLO

E.O. 12958: DECL: 10/01/2009
TAGS: ECON ETRD PM PREL
SUBJECT: U.S. FIRM EXPECTS LABOR AND HOUSING CONSTRAINTS ON
PANAMA CANAL EXPANSION

REF: A. PANAMA 2374
B. PANAMA 807
C. PANAMA 1107
D. PANAMA 1236

Classified By: Economic Section Chief Timothy P.Lattimer - Reasons 1.5(
d&e)

1. (C) SUMMARY. On October 16, 2007, EconOff met with
Bechtel's Peter Pappas, Principal Vice President, and Paul
Gibbs, Business Development Manager, to discuss Bechtel's
design/build contract bid on the $5.25 billion Panama Canal
expansion project. The contract winner is scheduled to be
announced during the fourth quarter of 2008. Pappas said
Bechtel will have to train virtually all of the Panamanian
workers it would hire. Pappas and Gibbs said that they feel
that the Panama Canal Authority (ACP) may have underestimated
the amount of work required to manage the design/bid contract
bidding process. They said Panama's current infrastructure
is inadequate to handle the movement and housing of the
necessary workers and equipment for the project. Pappas said
the lack of adequate roads and the need for temporary worker
housing would likely hamper the project. Regardless of which
consortium wins the design/build contract, Pappas and Gibbs
said there will very few opportunities for U.S. suppliers.
Pappas said that if Bechtel wins the contract, the majority
of the material, equipment and workers would come from
non-U.S. suppliers. END SUMMARY.

------------------------------------
ACP May Have Underestimated the Task
------------------------------------

2. (U) On October 16, 2007, EconOff met with Pappas and Gibbs
to discuss Bechtel's design/build contract bid on the $5.25
billion Panama Canal expansion project. The design/build
contract is estimated at $3 billion. (See reftel A.)
Initial bids for the pre-qualification round are due by
November 15, 2007. It is anticipated the list of
pre-qualified bidders will be announced during the first
quarter of 2008. The contract winner is scheduled to be
announced during the fourth quarter of 2008.

3. (C) Pappas and Gibbs said that the ACP may have
underestimated the amount of work required to manage the
design/bid contract bidding process. Pappas said that the
process was about 3-4 months behind schedule. He noted that
the deadline for bid submissions had already been moved from
October 31 to November 15, and it could be pushed to an even
later date. Pappas said that while the canal expansion is a
desirable project for Bechtel, it would be a medium sized
project for them. Pappas said that Bechtel currently has six
projects around the world that exceed $5 billion in value.
The Bechtel executives would not speculate on the potential
for any cost overuns for the expansion project.

----------------------------------------
Contractor to Face Lack of Skilled Labor
----------------------------------------

4. (C). Pappas said that of the approximately 6,000 workers
needed, Bechtel would be lucky to find 1,000 skilled
Panamanian workers. Pappas said Bechtel will have to train
virtually all of the Panamanian workers it would hire. Pappas
said Bechtel would have to bring in hundreds of its own
trainers and would have to import a number of foreign skilled
workers. Pappas and Gibbs said Bechtel realizes it will have
to compete for workers with Occidental Petroleum's proposed
$7-$8 billion refinery project in Panama's Puerto Armuelles
area. (See reftels B and C.)

--------------------------------------------- --------------
Road and Housing Constraints Could Impact Expansion Project
--------------------------------------------- --------------

5. (C) Pappas and Gibbs said that Panama's current
infrastructure is inadequate to handle the movement and
housing of the necessary workers and equipment for the
project. Pappas said Bechtel would have to build the
necessary (and currently nonexistent) access roads and
housing for thousands of workers on each of the Pacific and
Atlantic entrances to the canal. The alternative, Gibbs said,

was to have hundreds of buses transporting workers daily.
Each described this as completely unworkable given the
current state of already saturated roadways. The much-touted
Panama City-Colon road, which is scheduled to open January
2009, is seriously behind schedule according to Gibbs. He
believes the road will not be built before the third quarter
of 2009 at the earliest. Pappas and Gibbs said the road is
crucial to the movement of personnel and equipment for the
project.

6. (C) Pappas said that the current environmental impact
study does not contemplate the construction of temporary
worker homes. In his opinion, the environmental impact study
is worthless without acknowledging the need for worker
housing near the work sites. He also said that the Torrijos
administration's position that the GOP would not build, or
allow, temporary worker housing sites is unrealistic if the
ACP is to complete the project within the stated budget and
timeframe.

--------------------------------------------- ---------------
Most Materials and Equipment to Come From Non-U.S. Companies
--------------------------------------------- ---------------

7. (C) Regardless of which consortium wins the design/build
contract, Pappas and Gibbs said there will very few
opportunities for U.S. suppliers. Pappas said that if
Bechtel wins the contract, the majority of the material,
equipment and workers would come from non-U.S. suppliers.
Pappas said the U.S. does not have the raw materials needed
(such as cement and rebar), there are few U.S. companies
which have any expertise in the expansion project, and much
of the heavy machinery they would contract for would come
from Asian and European suppliers. Gibbs said U.S. companies
are uncompetitive in this field and noted that the sole U.S.
bidder on the first of the five excavation contracts had a
bid twice as high as the winning bidder. (See reftel D.)
Of the 60 companies that attended the design/build contract
pre-qualification meeting on September 17, 2007, the only
U.S. construction companies present were Bechtel and MWH of
Colorado. The Bechtel bid is being handled from their London
offices.

----------------------------
Comment - Reality Setting In
----------------------------

8. (SBU) Bechtel's comments reaffirmed Post's view that the
canal expansion project will encounter some serious
obstacles. The lack of skilled workers continues to concern
every major company seeking to do business in Panama. Now
that the expansion project is in the hands of knowledgeable
professionals, they have begun to ask inconvenient questions
about how the GOP and the ACP will provide needed ancillary
services (roads, housing, energy, healthcare, and training).
Bechtel appears convinced that the GOP is not up to the task
and that it will fall to the contractors to provide the
necessary infrastructure, training, and housing. Despite the
GOP's efforts $88 million effort to train Panamanians to work
on the canal expansion project, it is becoming increasingly
clear that there will not be enough qualified Panamanian
workers. Given Panamanian laws requiring that 90% of the
workforce be Panamanian, contractors will be required to
expend significant time, effort and money to train the
requisite number of Panamanians. While the ACP claims it has
built in adequate reserves for delays and budget overruns in
the $5.25 budget, the lack of skilled labor has the potential
to result in significant delays and possible cost overruns.

9. (U) Given Bechtel's comments in paragraph 7 and the few
remaining canal expansion contracts up for bid, it appears
that U.S. companies will have limited opportunities for
further participation. Currently it is anticipated that only
two U.S. companies will bid in the design/build contract as a
significant participant. As Bechtel states, much of the
material and equipment will come from non-U.S. companies.
Further, the remaining four excavation contracts will almost
assuredly go to non-U.S. companies; especially given that
only one U.S. company bid for the first excavation contract
and bid double the amount of the winning bid. To date, U.S.
participation in the canal expansion process has been limited
to winning the services contracts (environmental impact,

legal, and project manager). This reflects the nature of
U.S. foreign direct investment in Panama, where the bulk of
the investment is in financial instruments, banks, holding
companies and some wholesale businesses. Aside from
Occidental Petroleum's proposed oil refinery, U.S. companies
are not participating in any of the other large scale
infrastructure projects in Panama. Most of the other large
scale infrastructure projects in Panama are being handled by
Colombian, Brazilian and Spanish companies. End Comment.
EATON

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