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A Nicaraguan canal is not a “field of dreams”

A groups of experts warn that the changing patterns of international trade hinder the promotion of the Canal as a viable project

“El Gran Canal Interoceánico de Nicaragua” – “The Great Interoceanic Canal of Nicaragua”: it has a Nineteenth Century ring to it. At the end of that century, in fact, the ambition of kings and magnates since 1567 was nearly realized. But in 1902, Panama’s lobbyists in the U.S. Congress snatched away the prize.

More than a century later in 2012 on a trip to China, Laureano Ortega Murillo, the son of Nicaraguan President Daniel Ortega Saavedra, met Wang Jing, a Chinese telecom billionaire. Neither had any experience building infrastructure. Wang reportedly floated the idea of finally digging a canal across Nicaragua between the Pacific and the Caribbean in a message the son conveyed back to his father.

Once again, though, Nicaragua’s competitors have stolen a march on the Gran Canal. This June, the nearby Panama Canal is scheduled to inaugurate a major expansion that will allow many more and much larger ships to pass between Atlantic and Pacific. And in 2015, an upgrade of the Suez Canal was completed as well, broadening the existing channel and adding a new one between the Mediterranean Sea and the Indian Ocean.

So far, the gestation of Nicaragua’s canal has been secretive, with little public elaboration of the business model, investors or active partners in the enterprise. Half-glimpsed through the fog of public relations, it seems almost a work of magical realism. If the project were a novel, the salesmanship of a Chinese entrepreneur might react alchemically with the longing of an aging president to leave a massive legacy. Somehow the volatile mixture would transmute into golden infrastructure, a cornucopia of canal tolls and jobs, catalyzed by the longing of many Nicaraguans to jump start the development of their poor but enterprising country.

In the non-fiction world, however, enabling laws were passed and concessions signed at breakneck speed, and with little due diligence or debate. Soon environmentalists and scientists were sounding alarms. Small farmers and indigenous groups began to demonstrate against the Canal. But the Nicaraguan government and Hong Kong Nicaragua Canal Development Group (HKND), Wang’s shell company, shrugged off the objections and announced in December 2014 that work had begun.

Then last summer, the Chinese stock market tanked and over 80 percent of Wang’s $10 billion fortune evaporated. In November, HKND announced that major work on the canal would be suspended until late 2016, probably after the national elections, with some preparations around the Pacific port continuing. The best efforts of the infrastructure paparazzi have found a few spadefuls of dirt turned over by dignitaries and a few kilometers of access road built. But for the moment, the Gran Canal remains primarily an artifact of PowerPoint and YouTube.

As China’s markets recover, will work start up again? Here’s the thing: a canal is not a “field of dreams.” If you build it, there is no guarantee that the ships will come.

The question is not simply whether you can do the engineering for an infrastructure giga-project billed as the biggest earth-moving effort in history: a 278-kilometer (173-mile) channel with gargantuan locks capable of handling the biggest ships afloat. You can’t just convince construction partners that you can bring the project in on a reasonable budget and schedule. Nor is it enough to show the nation and the world that it can be done without excessive environmental or social damage, or that it will produce significant net benefits for the host country.

Before you even get to those questions, you have to demonstrate that sufficient demand will exist for the new infrastructure, and that the project can capture enough of that demand away from competitors with compelling enough cost/benefit curves for potential customers. Then you have to convince international financiers that it will turn a profit big enough that they will want to invest or lend you money.

To meet these requirements, big infrastructure projects generally start with feasibility and viability studies before beginning any work. HKND did retain McKinsey & Company, a prominent U.S. consultancy, for an economic feasibility study. But in June 2014 the consultant requested payment and discontinued work on the project, according to Greg Miller of JOC.com, a business web site. Nevertheless, he said, the Nicaraguan government continued until recently to imply that McKinsey was still working on the report, at one point saying that the report would be delayed until April 2015. HKND has declined to release any details of whatever analysis McKinsey delivered, deeming it a “commercial secret”.

The endangered white elephant

Whatever McKinsey’s conclusions were, within the international shipping and port industries the prevalent skepticism is thick and caustic.

“The Nicaraguan canal is at this point a gigantic white elephant,” said Jean-Paul Rodrigue, a prominent Canadian transport geographer at Hofstra University. He believes the project is not economically feasible. “Most people in the industry think there is not, within a foreseeable future, enough demand,” he told me in a phone interview.

The corruption behind the canal is “absolutely mind-boggling,” according to Rodrigue, author of a standard transport geography textbook.

“It’s simply a land grab and a real estate project. That’s what they’re betting their money on.” The canal concession enables HKND to expropriate large areas of land for the canal and side projects, and requires compensation for current owners merely at assessed value – although more recently HKND has said it would pay a fair price for the expropriated properties. “The conflict of interest behind this is banana republic-type behavior,” he said. “How can the international community gain any confidence in such a process?”

Rodrigue contrasted Nicaragua’s approach with Panama’s handling of its $5.43 billion canal expansion to be opened this June. “It’s completely different in terms of transparency, in terms of who’s funding it, in terms of how it’s managed,” he said. “It’s night and day compared with Nicaragua.” Before beginning the expansion in 2006, the Panama Canal Authority submitted a referendum on the project to voters. It passed with 76.8 percent of the vote.

Rodrigue’s views are not outliers. Trade economist Paul Bingham told me that at a recent conference of harbor and port officials in Florida, he never heard the Nicaraguan canal mentioned once. The American Association of Port Authorities is hemispheric, with members mainly from North America, Central America and the Caribbean. Bingham, a consultant with the Economic Development Research Group in Los Angeles, has done studies for the Panama and Suez Canals and other Central American infrastructure projects.

The AAPA participants spent a lot of time discussing the Panama Canal’s new set of locks, Bingham said, as well as the expansion of the Suez Canal. But the third contender for their attention, rather than Nicaragua, was the Arctic Sea route, which is a promising future alternative as the polar icecap recedes.

Why not Nicaragua? “I think it’s that none of them believe it’s actually going to happen,” Bingham said. “From what they’ve read about the cost, the physical length of the canal, and the alternative routes that already exist, they’re dismissive of it. They discount it enough that they don’t spend the mental energy or the time talking about it, because they think it’s so implausible.”

Is there any possible scenario in which a Nicaraguan canal could still be built? “Given what’s happening globally with the shipping industry now, if it still does make sense, it seems it’s facing further delays given macroeconomic conditions,” a veteran industry analyst told me, speaking on condition of anonymity. “It’s got some very serious headwinds politically and economically. And it will be very interesting to see if they can get past those challenges. Maybe someone can operate a port on one end.”

Industry doubts about the project surfaced early on. A businessman with interests in Central America, who requested anonymity, told me that at a 2012 conference of ports and shipping companies in Brussels, a Nicaraguan government official who gave a talk about the canal project was “basically laughed at because his presentation was just not credible,” particularly the schedule and budget. The Nicaraguan delegation, said the businessman, left the conference abruptly.

In January 2015, the South China Morning Post, a Hong Kong newspaper, asserted that current global trade patterns make the Nicaraguan project “a hard sell” to private investors. Andy Lane of Container Transport International Consultancy told Jing Yang and Toh Han Shih that he calculated that “the annual internal rate of return after 25 years would be less than 2 per cent” for the Nicaraguan canal, and pointed out that you could do better with much less risk buying U.S. government bonds.

Since the crash of the Chinese stock market last year, a drumbeat of doubts has mounted in the international media. David Z. Morris of the business magazine Fortune recently noted “deep questions about the canal’s economic fundamentals.” Captain Andrew Kinsey, a maritime risk consultant, told the magazine: “I don’t think it’s driven by a viable business plan with regards to ocean freight.”

Headwinds

Has the Gran Canal Interoceánico missed the boat? Clearly, the project’s viability is dubious on several fronts. And on all of these, the historical timing looks dicey.

All the routes that would compete with the Gran Canal have recently expanded their capacity, and boast decades-long track records of reliable, profitable operation. At the same time, Nicaragua’s geography, internal and external, puts hard limits on the opportunities for any transportation project across it.

HKND is betting that it can capture a slice of the growth of Chinese demand for transport of its exports and imports to and from the Atlantic sides of North and South America. Yet that gold rush may have peaked, and the Chinese economy appears to be on a glide path down from the skyrocketing expansion of the previous decade.

The Gran Canal would have to attract some of the new ships too big to fit through even the expanded Panama Canal. But the southwesterly shift of manufacturing in Asia appears to be rearranging the routes on which containers will be flowing. And the shipping industry is undergoing route changes for the biggest ships and downsizing that may make it harder for Nicaragua to reel in the new leviathans.

Even if all the stars lined up for a Nicaraguan canal, its closest competitor, Panama, has already held talks with a major Chinese firm on a further expansion that would match Nicaragua’s planned lock and channel size. The Panama Canal Authority says it could build this “fourth set of locks” much more cheaply and probably faster than Nicaragua.

Turf and surf

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Any new player venturing into the global shipping market is moving into a tough neighborhood. Some well-established transportation systems have been serving routes between Asia and the Atlantic side of the Americas since the age of steamships. Ports, shipping companies, railroads and allied industries form a tightly integrated mesh spanning much of the globe, and they may not welcome a new kid on the block.

The major competitors in this market are the two canals, Suez and Panama, plus the trans-Pacific U.S. West Coast intermodal (ship-to-train) system.

The Suez Canal, which opened in 1869, bisects Egypt to connect the Mediterranean Sea with the Red Sea and the Indian Ocean. It is 193 km (120 miles) long, and can accommodate ships with a maximum beam (width) of 77 meters (254 feet) and draft (depth below waterline) of 20 meters (66 feet). It is a sea-level canal with no locks, so it has no length limits. Transit times typically range from 11 to 16 hours.

The “New Suez Canal”, a year-long, $8.4 billion expansion project, opened in August 2015. The upgrade did not change the dimensions of ships that could pass through. But by widening channels and providing bypasses, the changes will purportedly double the capacity for traffic from 49 to 97 ships per day.

Even prior to the expansion, Suez hosted most shipping between Europe and the Arabian Gulf, as well as South, Southeast and East Asia. It also handled a smaller share of the traffic between the Atlantic Coast of North America and those regions, excepting EastAsia. Tonnage throughput has grown steadily over the past 15 years, except for a dip during the Great Recession.

In the global economic scrum, the Suez Canal has some built-in advantages for attracting the big ships. Vessels don’t have to wait to pass through locks, which reduces transit times and costs. Its channel is already deep and wide enough to handle nearly all ships afloat, even most of those that can’t fit through Panama’s new expansion.

The Panama Canal, southeast of Nicaragua in Central America, has been operating since 1914. It traverses the isthmus in 80 km (50 miles), with locks on both the Atlantic and Pacific sides that raise ships 85 feet for the central part of the canal. Its length is less than half of that of Suez.

A nine-year expansion project, known as the “third set of locks”, is scheduled to be completed in late June. New locks have been built and new channels dredged to allow the passage of ships with a maximum length of 366 meters (1,200 feet), beam of 49 meters (160 feet) and draft of 15 meters (50 feet). These dimensions are still smaller than those of the Suez Canal. Transit times will range from 8 to 10 hours, faster than the Suez. The Panama Canal Authority estimates that the project will double the traffic the canal can carry.

The expansion will dramatically raise the size of ships that can pass through the waterway. Previously, the canal could handle container ships of up to about 5,000 TEUs (twenty-foot equivalent units), or 2,500 containers. An average container is roughly 40 feet long, or two TEUs. The expanded canal will allow the passage of ships carrying 13,000 to 14,000 TEUs, nearly tripling the maximum size. This will accommodate many of the bigger vessels in service, but some newer ones will still be too massive. For example, the largest container ships now hold over 19,000 TEUs. These and giant bulk carriers too big to pass through the Panama expansion are known as post-Neo Panamax ships.

Panama also offers the advantages of a mature transport hub with infrastructure and support services for shipping and commerce. These include major ports and container terminals at both ends of the canal, a railroad and pipelines across the isthmus, logistics services for shippers, and financial services. A Nicaraguan canal would either have to develop these, which could take some time, or use Panama’s.

The other major alternative in this market, the Asia to U.S West Coast shipping route, delivers large volumes of goods to California and the Pacific Northwest. But it also connects efficiently with U.S. railroads in what is known as an “intermodal” system, which competes with Panama and Suez for traffic to parts of the U.S. interior. This is because containers bound for U.S. inland destinations via Panama or Suez also need to be loaded onto trains in Gulf or East Coast ports.

The West Coast intermodal route tends to be more expensive but faster, because the containers travel farther by train and less far by ship. For the northern Midwest as far east as the Mississippi, and sometimes into the Ohio Valley, some industry observers give this West Coast intermodal route the economic advantage. Here again, Panama’s loss of potential container traffic would also be Nicaragua’s disadvantage.

Although the Panama Canal expansion was expected to take some traffic away from the West Coast intermodal system, the main West Coast ports have expanded, themselves. With deeper channels and larger cranes, most are now able to handle the largest post-Neo Panamax container carriers.

Nicaragua’s big dig

To walk into the melee and grab market share away from these heavyweights, a Nicaraguan canal would have to perform some fancy engineering and economic footwork. But the basic geography through which it would be dug is not encouraging.

A canal across Nicaragua would be 278 kilometers (173 miles) long, according to HKND, about three and a half times as long as Panama. Like Panama, it would have two sets of locks and would have to build a lake in the middle to supply water to them. These locks would be 520 meters (1,706 feet) long, 75 meters (246 feet) wide, and 27.6 meters (91 feet) deep. The maximum dimensions of vessels that could pass through would be slightly smaller than these dimensions, but they would include container carriers of up to 23,000 TEUs.

Some 107 km (66 miles) of the canal would cut across Lake Cocibolca (also called Lake Nicaragua). The lake is so shallow, though, that most of the channel across it would have to be dredged to make it deep enough. Ships going across a large, deeper lake might be able to operate at closer to ocean speeds, but ships in a channel, whether through land or under water, would have to cruise much slower.

HKND estimated that the average transit time would be 30 hours, compared to 8 to 10 through Panama. This means that ships would have to either navigate the canal by night, which could pose difficulties, or tie up. It’s not clear whether this contingency was included in the 30-hour estimate. Going from Asia through Nicaragua, rather than Panama, to the U.S. Gulf Coast might take something like 500 nautical miles off of a sea voyage of 11,000 or 12,000 miles, because Nicaragua is further northwest. But the time saved there would mostly be lost in the longer transit time through the canal.

Overall, consultant Andy Lane estimated in the South China Morning Post, a Nicaraguan canal would allow only 16 vessel transits per day, less than half Panama’s average of 34.

The longer time in the canal would translate into increased costs for each vessel. Tolls would have to be twice as high for Nicaragua as what Panama charges, Oscar Bazan, executive vice president of the Panama Canal Authority, told Peter Tirschwell of JOC.com.

Construction costs and times announced by HKND have also been met with incredulity. HKND continues to say that the canal will be completed in five years. It initially estimated the total cost of the canal at $40 billion, later raising that to $50 billion.

“Whatever figure they give you, you just multiply by two”, said geographer Jean-Paul Rodrigue.
By the time work resumes in late 2016 at the earliest, more than two of the five years from the official ground-breaking will have elapsed. Panama’s much smaller $5.43 billion expansion took nine years, and digging the original canal took intermittent efforts over a span of more than 30 years.

Recently, several analysts and officials have estimated the ultimate costs of a Nicaraguan canal at between $70 billion and $100 billion. The track records of many infrastructure mega-projects suggest that these numbers are not pessimistic.

Nicaragua would not only have to pay off these enormous costs, but also make a profit on operations for investors. In contrast, Panama and Suez have long since retired nearly all their construction costs, so their tolls and fees mainly have to cover just operational costs and profits.

Ultimately, Bazan estimated that, given the kinds of markets and routes involved, “if you put all that cargo together there is not enough cargo volume for two canals.” And in an interview with Mark Szakonyi of JOC.com, Panama Canal Authority chief Jorge L. Quijano opined that the Nicaraguan Canal was not a “feasible investment from a private investment standpoint”.

The Middle Kingdom machine

Wang Jing

The maturing of China’s economy may be the most ineluctible of these trends. It has been the main source of demand for more transportation capacity across the Central American isthmus. The Middle Kingdom has long since emerged as a relentless economic engine swallowing mountains of commodities and other inputs, sucking up capital, extruding vast skeins of infrastructure, and outputting a mind-boggling variety and volume of manufactured goods.

Economic forecasting is always fallible, but a broad consensus expects that engine’s RPM to ramp down from screaming racetrack speeds to the steady hum of a powerhouse industrialized economy. The soaring real GDP growth that peaked at 14.2 percent in 2007 has dropped to a still lively 6.9 percent in 2015. This long-term slowdown is not cyclical, but represents the movement of the economy away from infrastructure and manufacturing, so another burst of acceleration is unlikely. China will continue to build infrastructure, of course, but its progress should gradually decline from the giddy pace of the past period.

China’s leaders have also made a strategic decision to move away from coal for power generation. In the short term, this will mean importing more natural gas. But in the medium to long run, the smart money is on China’s renewable energy production expanding rapidly. In 2014, grid-connected solar generation grew 67 percent, while wind and nuclear expanded 25.6 percent and 36.1 percent respectively. China already dominates the manufacture of photovoltaic solar panels, with 58.1 percent of the global market. As Melanie Hart, Director for China Policy at the Center for American Progress, wrote: “It is clear that coal growth has fallen off a cliff, renewable energy is surging, and … China is on track to not only meet the climate commitments its negotiators are putting on the table in Paris but also to potentially do so ahead of schedule.”

Chinese wages have also grown in step with the economy. In response, manufacturers seeking reduced labor costs have begun to move south and west to lower-wage economies such as Vietnam, Cambodia, Laos and Myanmar.

As China’s already huge urban middle and working classes grow, its economic strategy is shifting towards encouraging increasing internal consumption of the consumer goods it formerly exported. But most of these goods will be manufactured at home or nearby. Few to none will be loaded onto container ships in the ports of the U.S., Europe or Latin America. As the industry analyst put it: “It seems China can extend its own manufacturing of consumer goods for its own population, and is planning to do just that. And they will move up the manufacturing ladder, getting away from low-end to higher-end goods.”

Overall, East Asia will continue to generate the steady imports and exports of an industrialized region. But nowhere else is likely to approach the boom of post-Millennium China. This means competition for the economic pie of which Nicaragua is trying to grab a slice is likely to grow fiercer.

Facts on the water

EFE/Alejandro Bolívar
EFE/Alejandro Bolívar

 

All of these trends – the slowdown of China’s infrastructure boom and increase in consumption, the southwest-ward movement of manufacturing, and the trend towards more renewable energy sources – have serious implications for the viability of a Nicaragua canal.

According to the industry analyst, global cargo moving in general is facing a “bleak situation.” For Brazil, a major export and import partner with China, imports this January “dropped off a cliff, something like a 30 or 40 percent decline,” and exports fell steeply, too.

Container trade is the biggest component of global shipping. It also tends to be the most profitable, as cargo that travels in containers usually has much higher value by weight or volume than the commodities hauled by bulk carriers. The manufactured goods China has been exporting in such profusion mostly ship out on container carriers.

Hard geographical realities come into play here. As the analyst explained: “If it’s coming from North Asia – northern China, Korea, Japan – and it’s going to the U.S. East Coast, it’s shorter and makes more sense to ship it through the Panama Canal. If it’s coming from Southeast Asia, it’s actually shorter and quicker to go through the Suez.” Even for southern China – U.S. East Coast routes, the distance differentials between the two canal routes are small.

The southwesterly drift of Asian manufacturing, then, will send more container traffic west and less east. “That will benefit the Suez and hurt Panama,” the analyst said. It would also hurt a Nicaraguan canal.

Recent decisions by three of the biggest shipping lines seem to ratify this view of a changing seascape. The two biggest container operators, Maersk Line and Mediterranean Shipping, recently formed an operational alliance called 2M that will send all traffic between Asia and the U.S. East Coast via Suez, according to Jing and Toh of the South China Morning Post.

And the third biggest container shipping line, CMA CGM of France, announced recently that it will deploy all six of its newest, biggest container ships on the trans-Pacific trade between Asia and the U.S. West Coast. “Huge game changer,” the industry analyst told me. “Because they will leverage the economies of scale in that market. Freight rates average right now about $843 per TEU in the Asia – U.S. West Coast market, so it will generate a lot more revenue. But what will happen is, the other lines will of course have to follow suit. And we’ll see very soon a rate war on the trans-Pacific.”

The picture for bulk carriers, which transport loose grain, coal, oil and other non-containerized commodities, is not much more encouraging.

As infrastructure construction slows, demand for products like iron ore from Brazil is easing off. HKND cites this commodity as a potential source of demand for a Nicaraguan canal. However, nearly all Brazilian iron ore shipped to East Asia currently goes out of Brazilian ports across the Atlantic, around the Cape of Good Hope and across the Indian Ocean. The enormous Valemax bulk carrier ships, designed for the Brazilian mining firm Vale SA, are too big to fit through even the expanded Panama Canal, but theoretically could pass through a Nicaraguan one.

Yet only theoretically: for most Brazilian ore exports, the Cape route is much shorter than any one through Central America. And significantly, no tolls are charged to round the Cape. Even for ore coming out of Ponta da Madera on Brazil’s northern coast, the difference in distances is small between the Cape and Panama, and the long transit time and high tolls for a Nicaraguan canal would reduce the its competitiveness with the Cape route. Nor is there any indication, if Brazilian exporters did decide to take this westerly route, that they would want to use Valemax ships: they could just as easily use the smaller but still sizeable vessels that fit through the expanded Panama Canal.

Another Chinese commodity import that HKND claims could benefit from the Nicaraguan canal is coal from Colombia and the Eastern U.S. But as mentioned above, China’s coal imports are already in free fall, dropping 11 percent in 2014 and 37 percent for most of 2015. And the strategic options for liquid natural gas in the nearer future and renewable energy in the longer run mean that the odds of coal imports coming back are slim to nil.

Liquid natural gas is also on the HKND roster of possible markets the Gran Canal could capture. China will no doubt increase its LNG imports in the near future, and U.S. exports from the Gulf Coast are quite competitive. Here again, though, transport realities intrude on facile optimism. According to the Panama Canal Authority, Q-Flex liquid natural gas carriers, the second largest class of ship currently in use, will be able to squeeze through Panama’s new 3rd set of locks. So the expanded Panama Canal will be able to absorb any growth in Chinese demand for some time. Currently, the largest LNG carriers, the Q-Max class, are being used only between Qatar and the Far East across the Indian Ocean. If they were ever shifted to the Gulf of Mexico trans-Pacific route, they might conceivably use a Nicaraguan canal. But that’s a long-run hypothetical, and China’s turn toward renewable energy sources means that the LNG import boom might peak before a Nicaraguan canal could profit from it.

For petroleum tankers as well, it’s an open question how much of their traffic a Nicaraguan canal could attract. The expansion of the Panama Canal could significantly increase crude and petroleum-product transport through it. Ships slightly larger than the Neo Panamax draft limits can unload enough oil to allow them to pass though, while sending it across the Trans Panama Pipeline, and then re-loading it on the other side. However, this adds to shipment costs.

There are currently two TI-class supertankers in operation. They are classed as ULCCs (ultra-large crude carriers) and cannot fit through even the Suez Canal. However, the biggest tanker ever built has since been scrapped. Most large tankers are in the VLCC (very-large crude carrier) class, and are used to carry oil from the Persian Gulf through the Suez Canal to Europe, Asia or North America. It is not clear whether they could be operated profitably on routes through the Central American isthmus.
Sea monsters

Beyond specific products or routes, the shipping industry itself is a moving target. A trend that has surfaced recently could reduce a Nicaraguan canal’s target traffic: the ever-increasing sizes and numbers of container mega-ships may have reached a tipping point where increased costs on shore begin to outweigh the operational economies of scale gained with size.

According to a study by Drewry Shipping Consultants, an influential British firm, “While bigger ships help carriers reduce voyage costs, these savings are increasingly offset by higher port and landside costs meaning that total system cost savings are small and declining. Larger vessels place greater demands on ports, where channels have to cater for deeper draughts and on terminals, which need to upgrade equipment, yard facilities and manning levels to effectively handle increased peak cargo volumes.”

As the industry analyst speculated: “The next wave of order book, which is the ships waiting to be built in shipyards, might actually be a wave of smaller ships.”

For a canal trying to attract the biggest vessels, this reversal could translate into less demand by the behemoths, and more sensitivity to toll pricing.

A related development that might reduce canal usage is the increasing popularity of hub-and-feeder arrangements, which couple big ships going back and forth on transoceanic “pendulum” routes with smaller ships on regional routes. “I don’t see the need or demand for these VLCCs [very large container carriers] to transit a fourth set of locks,” the industry analyst asserted. A fourth set of locks on the Panama Canal would have the same capacity as a Nicaraguan canal. For example, a lot of ships come across from Asia to the west side of Panama, but don’t cross the Isthmus. “They offload at a hub port there on the west side of the Canal”, he pointed out. “And then feeders take millions of containers a year down to Peru or Chile or Ecuador.”

Panama again?

Clearly, a lot of pieces of this puzzle would have to fall into place to make a Nicaraguan canal feasible. But even if new demand were to materialize in any of these areas, HKND would probably not be the best-positioned alternative to meet it.

The eternal rival, Panama, held discussions beginning in 2014 with China Harbour Engineering Company Ltd, a large, experienced state-owned enterprise, on expanding its canal again by building a fourth set of locks capable of handling ships large enough to pass through the Suez or Nicaraguan canal.

The Panama Canal Authority is about to complete its current expansion mega-project, which will give it ample credibility with the marine transport industries and investors. The Beijing-based CHEC has 50 overseas branches covering more than 80 countries, and 8,000 employees. It is China’s largest international contractor and the world’s second largest dredging company. For 30 years has completed large transport and infrastructure projects around Asia, Africa, Europe and Latin America.

“Looking at our geology and the experience we gained with this current expansion, we estimate it’s a project that could cost between $16 billion and $17 billion,” PCA Administrator Jorge L. Quijano said in a March 2015 news conference. Quijano estimated that the project could be completed in 15 years, and could be financed by issuing bonds or using the Canal’s own revenues.

Manuel Benitez, PCA deputy administrator, had previously told Bloomberg: “We are always analyzing the market and as soon as we can economically justify it [the fourth set of locks] we will begin. If … the demand exists, we are ready to begin.”

However, a major customer of the Canal added a caveat: “The big question for any future expansion of the Panama Canal is, will trade growth sustain that extra investment,” cautioned Robbert Jan van Trooijen, then Latin America and Caribbean CEO of Maersk Line, whose container ships transit the Panama Canal 300 to 350 times a year. “For me, to see any of those (mega) ships coming near Latin America, that’s the very distant future.”
The China card

Many discussions of the Nicaraguan canal end with a caveat: if the People’s Republic of China really wanted to build it, it could.

But why would the Chinese government want to?

Both Wang Jing and China have denied that the government is involved in this project. HKND is a private firm based in Hong Kong. Wang Jing’s corporate flagship, Beijing Xinwei Telecom Technology Inc., has a People’s Liberation Army general on its board and has done work for the military. But that doesn’t mean that the government has any special relationship with it.

A canal across the Central American isthmus, if successfully completed, could be a high-profile billboard for China’s arrival as a new world power. But it’s doubtful that the Nicaraguan project would offer China any particular geostrategic advantage. A private Chinese company would be operating it, and Nicaragua would still ultimately be the sovereign power responsible for security issues. Oddly, Nicaragua still has diplomatic relations with Taiwan, which rules out formal relations with the PRC.

A hundred years ago, perhaps, such a canal might have allowed Chinese dreadnoughts to pass through while U.S. naval vessels were blocked. Even back then, though, that would have been tantamount to an act of war. Today, such a gesture would be nonsensical. Commercially, if HKND tried to grant any special privileges to Chinese navigation, global shipping markets would frown on it. Overall, investing in a Nicaraguan canal would be a prohibitively expensive and financially risky way for China to make a geopolitical point.

If the Middle Kingdom wanted to more subtly tout its infrastructure prowess in the Western Hemisphere, it might be smarter to invest in CHEC’s eventual construction of Panama’s fourth set of locks. This would cost something like one-fifth of the Nicaraguan canal’s price tag. But it would showcase the value that Chinese business could add to what used to be a U.S. outpost watching over both Americas. And it would build on the contributions of other Chinese firms, such as CK Hutchison Holdings Limited, the big Hong Kong conglomerate that already operates a major container terminal in Panama.

Chinese firms, both state and private, have been building impressive amounts of infrastructure and pouring foreign direct investment into many Latin American countries for some years now. The Chinese strategy there tends to be heavy on the commercial, light on the geostrategic, and notably decentralized. While the PRC would doubtless discourage a project that it saw as contrary to Chinese interests, otherwise it does not seem to overtly manage these initiatives.

As geographer Jean-Paul Rodrigue put it: “You have to be very careful when you talk about China – you’re not talking about a single mind in a single person. We’re talking about a varied sea of interests, some of them conflicting. Some of them are public, some of them are state enterprises, some of them are private companies.”

China is freeing entrepreneurs to try things and fail or succeed on their own, according to economist Paul Bingham. He’s seen signs of slow but noticeable change towards allowing even state-owned enterprises to fail. “They’re not backstopping anybody just because they happen to be Chinese,” he said. “They’re saying, ‘You can go and try this, and as long as you’re not against our national interest, we’re not going to stop you. But on the other hand, if you start losing money, don’t come looking for us to bail you out.’”

Is HKND’s postponement of work on the canal for another year an indicator that Wang Jing does not have strong government or private-sector backing to pick up the slack? “I’m sure that’s really what the bottom line is,” Bingham said. “He’s not going to have the resources.”

China may throw its weight around in the South China Sea. But as R. Evan Ellis of the U.S. Army War College observed in a paper for the World Economic Forum: “In Latin America, China’s role is more low-key and deferential than in some of the regions geographically closer to the Asian power. Although the region is also the target of Chinese diplomatic and military initiatives, Latin America mainly feels the impact of an increase of Chinese companies operating in the region and growing trade with China, which is slowly leaving its mark on the economies of Latin America and the Caribbean.”

Neck deep in a shallow lake

MAN02. MANAGUA (NICARAGUA), 6/07/2014.- Fotografía cedida por la Presidencia de Nicaragua hoy, domingo 6 de julio de 2014, que muestra al empresario chino Wang Jing (i), dueño del HKND Group, concesionario del Canal interoceánico por Nicaragua, mientras es recibido por directivo de la Agencia Oficial de Promoción de Inversiones y Exportaciones de Nicaragua (ProNicaragua), Laureano Ortega Murillo (d), en el Aeropuerto Internacional Augusto C. Sandino de Managua (Nicaragua). El Gobierno nicaragüense, junto a Jing, presentará en los próximos días la ruta y otros detalles del proyecto Gran Canal por Nicaragua a través de una campaña de comunicación en todas los departamentos del país que incluye transmisiones televisivas, de acuerdo con la información oficial. EFE/César Pérez/Presidencia de Nicaragua/SOLO USO EDITORIAL
El empresario chino Wang Jing (i), dueño del HKND Group, concesionario del Canal interoceánico por Nicaragua, mientras es recibido por directivo de la Agencia Oficial de Promoción de Inversiones y Exportaciones de Nicaragua (ProNicaragua), Laureano Ortega Murillo (d). EFE/César Pérez/Presidencia de Nicaragua

With or without the People’s Republic of China, HKND and the Ortega administration could find themselves immersed in a legal and political quagmire.

Many see the root of the problems in the initial failure of the Nicaraguan government to broadly involve citizens in vetting or approving the project. The canal concession, codified in Laws 800 and 840, was branded “neo-colonial” and “environmentally damaging” by Bello, a columnist in The Economist magazine. It gives HKND tight control over a wide swath of land around the canal for a term of 50 years, with an option to renew for another 50. Critically, it allows expropriation of lands even beyond that zone for assessed value, which would have been significantly lower than market value even prior to the project. In return, the Nicaraguan government gets small change, $10 million annually, and begins to receive shares in HKND only after ten years. The enabling legislation was reportedly rammed through the National Assembly in a few days with little information or debate, long before any feasibility or environmental-impact studies were made public.

Although HKND later backpedaled and said that it would pay a fair value for the land, the damage was done. The vagueness of the revised offer didn’t reassure many of those concerned about loss of their property and communities.

In Autumn 2015, HKND released the promised environmental and social impact assessment by ERM, the British consulting firm it had hired. The government and HKND treated it as a stamp of approval to go ahead with the project, but the opposition found that it raised important doubts, and in many areas pointed to the need for further study.

Many Nicaraguan environmental groups have researched the potential damages the canal could cause to the ecosystems of Lake Cocibolca, the region’s biggest source of fresh water, and threats to biosphere reserves, biodiversity and endangered species.

Jorge A. Huete-Pérez, then-President of the Nicaraguan Academy of Sciences, and Axel Meyer of the University of Konstanz, Germany, published a 2014 commentary in the scientific journal Nature warning that a canal could “wreak environmental ruin” on Nicaragua, and calling for an independent environmental assessment. Other national and international media have extensively covered the canal’s potential environmental effects. And several groups have reviewed the environmental and social impact statement, and called for the repeal of Laws 800 and 840 on environmental and social grounds.

On the Caribbean coast, the canal would cut through the supposedly protected lands of the indigenous Rama and Kriol peoples. Facing heavy pressure from the government to grant their permission for the project, their autonomous government has resisted, filing a complaint against the expropriation of their lands with the Inter-American Court of Human Rights. Amnesty International has also issued a statement in support of their claims.

In other areas in the path of the canal, small farmers and rural communities who oppose the concession have formed a new opposition movement called El Consejo Nacional para la Defensa de la Tierra, Lago y Soberanía (National Council for the Defense of the Land, Lake and Sovereignty). They have mounted an ongoing series of over 60 demonstrations, sometimes taking convoys of trucks to Managua, the capital, a journey of several hours. Some of the convoys have reportedly been blocked by the police. They also filed a petition to the National Assembly calling for repeal of Law 840, with more than 28,000 signatures. But the Assembly rejected the petition.

These anti-canal activists have also joined forces with community groups fighting against mining concessions and for miners’ union rights in northern areas of the country. They call their common efforts an “anti-extractive” movement. Back in the 1980s, President Ortega’s party, the Frente Sandinista de Liberación Nacional (FSLN – Sandinista National Liberation Front), dynamically organized many communities to overthrow the Somoza dictatorship and rebuild the country. Its literacy campaign and process of drafting a new constitution were landmarks of genuine community involvement. It’s a sad irony that the modern, more business-oriented FSLN dominated by Comandante Ortega and his family has again incited some campesinos and rural communities to organize, but this time against his own project.

Nevertheless, many people in the rest of the country, and some in the path of the canal, support the project and are enthusiastic about its promise of jump-starting Nicaragua’s economic development. That support, though, may be eroding. In January 2015, a Cid Gallup poll found that Nicaraguans supported the canal project 54 percent to 39 percent. A year later, another poll found that more people were losing hope that the canal would bring them benefits. Among respondents, 34 percent considered the canal “pure propaganda” and 25 percent said that more technical studies were needed.

Even if the canal is never built, the concession to HKND also includes ports at both ends, an airport, a railroad, an oil pipeline, roads, a free-trade zone and tourism complexes. Some of these auxiliary projects could well become viable enterprises on their own. If Wang Jing and the Ortega government ever give up on the Gran Canal, they might fall back on some of these potential stand-alone business ventures. Many of these projects, however, might still need to resolve conflicts with the opposition to land expropriations and the resulting human-rights lawsuits.

The advice of London vice-mayor Isabel Dedring in a piece for McKinsey & Company seems ever more pertinent: “E before I” (engagement before infrastructure). In other words, “Consulting stakeholders before digging makes for better, cheaper projects.”

Models of development

Whatever the fate of the Gran Canal Interoceánico, there is a deeper question here which seems to have been lost in the increasingly heated debate: What is the best path of development for Nicaragua? Even if the country could become a second Panama, would that be the best route to take?

There are other potential models near at hand. Next door is Costa Rica, which despite its sometimes prickly relationship with its northwesterly neighbor, represents another tested model of how a Central American country can build a sustainable economy while improving the living standards of most of its people. The Tico template of eco-tourism, modest-scale agriculture, and electronics exports has raised average incomes to second place in Central America (after Panama), reduced poverty, and created a fairly stable macro-economy.

Nicaragua already has some of the same elements as Costa Rica within its borders. It boasts extensive biosphere reserves along parts of the Caribbean coast and in the north, with small-scale eco-tourism projects incubating in several parts of the country. Its small farmers are facing a crippling drought and need much more support in many areas, but there are some promising efforts to provide better infrastructure for them. The World Bank has a productive relationship with Nicaragua and supports numerous projects there, some of which it sees as models for the region. The International Monetary Fund recently closed its offices in Managua because it said that it saw little need for its programs there and, in effect, that Nicaragua could take care of its own macroeconomic and financial stability.

In the energy sector, the growth of renewable sources in Nicaragua is the fastest in Central America. It was recently recognized by the Climate Reality Project, along with Costa Rica and Sweden, as one of the world’s three leading nations in renewable energy production. Building this sector into an international competitor could be another avenue toward inclusive economic development.

Of course, Nicaragua may not want to become a second Costa Rica either. There are plenty of other examples in the world to steal good ideas from.

If the big ditch is finally not dug, could the failure possibly spark a real national debate on why it created such high hopes? Even if Nicaraguans can’t get rich quick from the canal, could they find better ways for everyone to get richer slowly, starting from the bottom up? In fact, wasn’t something like that a driving force of the Sandinista Revolution?

Volcanoes

When Panama outflanked Nicaragua over a century ago, Panamanian lobbyists swayed the U.S. Congress by distributing Nicaraguan postage stamps showing a volcano erupting. Their tactic helped convince lawmakers that Nicaragua was too geologically unstable to safely host a canal.

In recent months, five volcanoes in Nicaragua have erupted. Another one only a few miles from the canal route, Concepción, is also active and last erupted in 2010. This time around, though, it looks as if the volcanoes will be the least of the problems of the Gran Canal Interoceánico.


Peter Costantini is an independent analyst and journalist based in Seattle, United States. 

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