Peru’s discussions over a law concerning punishment to Odebrecht threatens to scupper a potential $1.4bn agreement it signed with China Three Gorges (CTG) for the Chaglla hydroelectric power plant, sources have said.

Last August, the Chinese firm agreed to buy the facility from the embattled construction firm, putting to bed what most thought, were the final touches on a deal spanning more than two years.

According to one M&A source, the delay in determining the law, or punishment to Odebrecht, could see CTG walk away from the acquisition. While not firm, CTG’s departure would effectively leave Peru and Odebrecht with nothing but Chaglla itself.

“If the Peruvian government and Odebrecht play hard ball, the person with the cheque book may walk,” the source told LatinFinance on Wednesday.

The agreement was scheduled to close last month, but remains on hold because Peru’s central government has not confirmed how much of the proceeds it will keep as a penalty to Odebrecht. Peru’s insistence on retaining proceeds from Odebrecht’s asset sales is designed to prevent the company from sending money abroad.

“It is very politically-charged,” the source added. “This law is not just tied to Chaglla, but every deal directed to Odebrecht… Peru does not want to come across as being soft [on Odebrecht], but it also needs to think about who holds the key to getting money – the buyer.”

Brazilian Odebrecht was implicated in the country’s Lava Jato investigation, admitted to bribing government officials and subsequently it agreed to pay a number of corruption penalties in various jurisdictions.

To understand the break down, a second advisory source said Odebrecht must pay any debts, or taxes, pertaining to Chaglla in addition to paying the Peruvian government its designated fine. One sticking point between the pair is what constitutes debt, the source said, and this has further delayed the negotiation.

“[Debts] must be paid off first and there are fights as to what is debt and what is not,” he said. “It appears, the government is being strict and not very ‘commercial’ over what defines debt.”

Peru’s existing urgency decree does not specify what Odebrecht must pay in fines, but a revised version of the law will likely charge the construction firm 50% of the proceeds for Chaglla. According to media reports, a new bill to advance this law is to be voted on Thursday March 8.

Odebrecht is under investigation regarding bribery in Colombia, Ecuador, Panama and Peru. The company was asked to leave Peru after it admitted to paying at least $29m in fines between 2005 and 2014.

Located in northern Peru, the 456 MW Chaglla facility had generated interest from Canadian investor Brookfield, Chilean utility Colbun and US energy investor Contour Global, sources previously told LatinFinance.

Odebrecht secured $774m in project financing for Chaglla from commercial and multilateral lenders in July 2013 and signed a 15-year power purchase agreement with state-owned Electroperu in October 2016.

Itau BBA, Scotiabank and SMBC Nikko were financial advisors for Odebrecht, while White & Case was its legal advisor. Bank of America Merrill Lynch advised a CTG-led group, while Sullivan & Cromwell was legal counsel.