BlackRock's Panama Ports Deal Faces Scrutiny Amid Audit Findings and Geopolitical Tensions

BlackRock's expected buyout of two key ports on the Panama Canal which was to be a $22.8 billion deal is now encumbered with much more intricate circumstances because of an audit which is claiming breaches of contract from the seller, CK Hutchison Holdings Ltd. The audit that is being conducted by Panama's Comptroller General's Office is questioning the lawfulness of a contract renewal from 2021 which was given to CK Hutchison's Panama Ports Company subsidiary. \n\nThe audit is claiming that Panama Ports Co. did not obtain the necessary authorization from the office of the comptroller to exceed the scope of the original contract, and that they abused tax exemptions that were meant to be utilized for denying payments to the Government of Panama. If true, then the estimated underpayment of hundreds of millions of dollars in possible fees appears to be a realistic computation. Anel Flores, the Comptroller General of the project, has estimated that Panama Ports Co. has used tax exemptions to evade paying $1.3 billion of which they owe $300 million. As a result, tax exemption outlay of $850 million is suspect. He also remarked that the firm has stopped complying with a contract that required the firm to pay ten percent of the net income as a share to the Government.The comptroller plans to complain criminally against the maritime and Panama Ports officials who are responsible for the contract renewal. She plans to submit the audit results to the Panama Maritime Authority, which will then determine if it is possible to rescind the contract. The dispute as stated is legal, and the legal processes to resolve it may take around six months to a year, which while attempting to do resolve it will generate significant uncertainty and the risk of the complete transaction. Compounding, the matter is further complicated with prevailing geopolitical tensions particularly with the US and China. The Trump presided saw it from the US’s perspective as a shift toward further diminishing the Chinese hold around the Panama Canal waterway. Reports from China suggest that China is also bothered by the transaction and it has threatened to block the transaction unless it’s state owned shipping company Cosco is included as an equal partner. While BlackRock and its partners are open to Cosco’s participation, it does seem difficult to get it done before the exclusivity deadline.Although CK Hutchison maintains that the transaction is strictly commercial, the audit's timing and the deal's development against the backdrop of intensified U.S.-China relations have raised concerns that the two are somehow linked. The transaction’s completion hinges on receiving regulatory approval from the government of Panama. Furthermore, the results of the ongoing audit and any subsequent litigation will be essential for the deal's destiny.