Bottom line: Is the Nicaragua canal even feasible? Not in the timeframe and budget set forth by HK Nicaragua Canal Development Investment Co. Ltd. (HKND). If the project happens, much of the financing is likely to come from the Chinese government, which may consider the project a worthy strategic goal of planting a ‘flag’ in Latin America and helping facilitate global trade on their own terms.
On 13 June, the ruling Sandinista National Liberation Front (FSLN) pushed through a vote in Nicaragua’s National Congress on the “great inter-oceanic canal law” (Law 840). As set forth in that bill, HKND has the sole rights to build an inter-oceanic canal deeper and wider than the Panama Canal and operate it for 50 years, with the possibility to extend the operations contract for another 50 years. The language of the law is extremely favorable to HKND, precluding lawsuits over environmental damages and including plans to build and run a parallel railway (“dry canal”), an oil pipeline, deep-water ports at either end (e.g. Corinto and Monkey Point), at least one major airport, and free-trade zones.
Votes came in entirely along party lines, with every Sandinista congressional representative voting for the bill, except one: Olga Xochilt Ocampo Rocha. On 24 June, Ocampo--who actually refrained from voting either for or against the bill--received a notice from the Supreme Electoral Council (CSE) that she was being removed from office, without further explanation. At the end of the day even indigenous legislator Brooklyn Rivera--who spoke to his colleagues of the unjust seizure of indigenous land contemplated by current canal plans and warned of the risk in violating indigenous rights in the Región Autónoma del Atlantico Sur (RAAS)--voted with his party, the Sandinistas.
On 6 August, the opposition Liberal Party filed a case with the Supreme Court asking them to rule the law unconstitutional, arguing that the contract violates laws that guarantee national sovereignty, protect indigenous land (Law 445) and ownership of private property . They point out that there was no discussion with municipal governments and the contract was awarded without a public solicitation of bids (violating Law 37).
Although the final vote in the legislature was 61-25 in favor of granting HKND the canal concession, public attitudes are much more suspicious of the new law. Rumors are circulating that the entire initiative was instigated by one of President Daniel Ortega’s sons, Laureano Ortega, for personal enrichment. Numerous NGOs, among them environmental organizations like the Nicaraguan Alliance on Climate Change (ANACC) and the Nicaraguan Foundation for Sustainable Development, are sounding the alarm that plans so far do not address the drastic potential impact on Nicaragua’s natural resources, including Lake Nicaragua (also called Lake Cocibolca), the largest body of fresh water in Central America.
During a debate on a canal through Lake Nicaragua in May 2007, Ortega said “there is not enough gold in all the world that could make us give up Lake [Nicaragua] because the great lake is the largest reserve of water in Central American and we aren’t going to risk it for a mega-project like an interoceanic canal.” His tune has certainly changed: on 14 June 2013, Ortega said “This project….will bring wellbeing, prosperity and happiness to the Nicaraguan peoples…we have arrived to the promised land”.
Current plans for the canal are not final, making it difficult for opponents to assess the impact, although all the routes (ranging from 200 to 280 kilometers) publicly considered by HKND make use of Lake Nicaragua to shorten the amount of dry land that must be traversed. The mostly commonly cited route is from Bluefields (Isla del Venado) to Brito.
Aside from its size, the canal project in Nicaragua is particularly complex for engineers because of a much greater tide differential between the coasts. Tides differ in time and sea level where the disparity can reach up to 20 meters, mostly with a higher level in the Pacific.
Perhaps one of the most enlightening snapshots is this: Ortega’s environmental advisor, Jaime Incer Barquero, opposes the canal, but his business adviser, Paul Oquist, supports it.
Similar to the decision by Ecuador’s President Rafael Correa to open the Yasuní National Reserve to oil drilling, Ortega can and probably will argue that the economic development that will come from the project outweighs the environmental and cultural impact which developers will try to minimize.
Ortega and HKND project spokesman Ronald MacLean-Abaroa (a former World Bank manager) say the project could drastically lower the unemployment rate in Nicaragua and double the nation’s GDP.
Critics point out that much of the work will require a greater education level and technical skills not currently present in the majority of the Nicaraguan population, which may lead to significant outsourcing for contracts . Anti-canal demonstrators are calling Ortega a vendepatria, or traitor who sold his country.
The owner of HKND and sole investor at this stage is Chinese billionaire Wang Jing, who publicly claimed HKND will choose the canal route that has the least impact on the environment and culture of Nicaragua even if that option comes with a higher price tag. But Wang is a businessman—if the cost difference is minimal, it makes sense to avoid potential litigation and spend a bit more upfront, but it is doubtful he will fund the construction of a canal that avoids Lake Nicaragua.
According to the Comisión de Trabajo Gran Canal the only way to avoid contamination of Lake Nicaragua is to avoid ship traffic through the lake--a decision that would increase the cost and difficulty to the point that the project wouldn’t make sense.
Chinese businesses are also not known for sustainable development, and other less-friendly administrations in the region may look for grounds to halt work during the construction phase.
For instance, UNESCO oversees the management of the San Juan River Biosphere Reserve. The San Juan River flows out of Lake Nicaragua and reaches the Atlantic coast at a point where both Nicaragua and Costa Rica claim the territory. Moreover, if the canal impacts and potentially pollutes watershed areas outside Nicaragua, other states may file a case for international arbitration that could be problematic for HKND despite the backing of Nicaragua’s government.
For its part, Nicaragua has a clear reason to do everything in its power to facilitate the canal development: the total cost of the project is estimated at $40 billion, and Wang himself is prepared to invest at least $100 million for the initial studies and pre-project design phase.
If the canal does get built, per the current contract, HKND will pay the government of Nicaragua $10 million per year and awards Nicaragua 1% ownership interest, increasing by 10% every 10 years (so that at the end of 50 years, Nicaragua will have 51% ownership).
HKND has hired PricewaterhouseCoopers, McKinsey & Company Inc., McLarty and Associates, China Railway Construction Corp. and Environmental Resources Management to work on various preliminary planning and development. The involvement of these serious actors means that, at a minimum, the initial stages of canal development are already in motion—an opportunity for engineering and maritime design firms to work on a mega-project.
According to its own incredibly optimistic forecast, HKND plans to break ground in 2014 and finish construction in 2019. Wang said he estimates the potential revenue of the Nicaragua Canal at $5.5 billion a year; for perspective, the Panama Canal currently earns about $2 billion annually (roughly half of which is eaten up by costs) and it is not operating alongside a competitor.
Such projections demonstrate HKND’s lack of experience. Competition from the Panama Canal, already functional, well-managed and undergoing its own $5.25 billion expansion, will push prices down further. The canal in Nicaragua will need to make $1 billion a year just to cover costs and maintenance, which will be higher with a longer and larger canal (520 meters wide by 27.6 meters deep).
Adding to the skepticism, Wang landed in Nicaragua as head of Xinwei, a Chinese telecommunications firm. Xinwei landed a $700 million contract to build a national wireless network in Nicaragua in 2012. Construction has not yet begun. Although the government did solicit bids for that contract, competing telecom companies including Claro and Movistar dropped out before the final phase.
Some sources in Nicaragua say the technical requirements were tailor-made for Xinwei, preventing any other company from having a real shot at the contract. Xinwei allegedly paid $20 million up front for that contract, even though Nicaragua originally set $90 million as the starting bid.
Other media outlets have reported on Xinwei’s inflated self-promotion; though the company claims to be rolling out major wireless networks in dozens of countries (among them Russia, Ukraine, Cameroon, Gabon and Cambodia), it appears that virtually all of the $327 million Xinwei earned last year came from money earned in China as a wireless equipment wholesaler.
In 2010, Xinwei won a contract to help deploy the McWiLL® broadband wireless system to improve the digitization in Panama, including for the Panama Canal operations, but that contract ended following testing. Despite claims to the contrary by its own PR department, no one has been able to find a single major national wireless network that Xinwei built or that it is operating.
Wang himself apparently did develop and patent unique wireless technology that can serve as an alternative to other wi-fi providers. (He says his educational background is in Chinese medicine, but his resume remains something of an intentional mystery.) He owns mines in Thailand and Cambodia, and purchased Xinwei in a 2010 takeover for $16 million.
The development of a major infrastructure project like the canal in Nicaragua is clearly far beyond the scope of Xinwei or Wang’s experience. Still, Wang insists that his plans are serious, which means that HKND is trying to find $8 billion in private capital this year. So far, he pledges that he is committed to financing the project entirely with private funds. His circle of billionaire friends may be in a position to pony some part of the capital, but in our estimation the project is likely to cost much more than $40 billion. There are very few places an entity can secure that kind of cash, Chinese development banks being one of the most obvious.
The geopolitics of the Nicaragua Canal project are apparent—China has an opportunity to build critical infrastructure in the Americas that will impact global trade. More than a business opportunity it would be a demonstration of its rising influence, even at the doorstep of the US.
It is not yet clear whether China is pondering that investment, but we believe it is likely that the fate of the inter-oceanic canal in Nicaragua lies in the ledgers of banks in Beijing. The canal will not be complete in five years, but in that time we should know whether the plans are scrapped or progressing.
If it moves forward major logistics, construction and maritime operations companies will be vying for a piece of the action. In that case, some other company will probably buy out the HKND contract.
There is concern that depending on the management and transparency of the canal administration, the canal could fall into a pattern of use that arbitrarily rewards or penalizes particular shippers or shipments. For instance, if the Chinese government runs the canal, they could prohibit the US from moving military carriers in the canal at their own discretion or they could subsidize energy shipments from “friendly” governments such as Venezuela’s. More seriously, it is possible that an inter-oceanic canal could become a lucrative hub for traffic in contraband and illegal materials if there is not proper oversight.
A thousand kilometers to the south, Panama has decades of experience managing maritime operations. The Panama Canal expansion will allow for larger “post Panamax” ships to travel through its locks, but does not match the Nicaraguan plans that would even be able to handle aircraft carriers and other super-sized ships . The project, which is running about six months behind schedule, should be complete in 2015. Builders are installing new gate locks now. The expansion will add a lane and double the volume of goods that can transit the canal. Panama may add on a container terminal and roll-on roll-off facility in the Pacific.
Some analysts say China may leverage HKND’s project to extract better terms from the Panama Canal Authority (ACP), which is revising tariffs that will be published in 2014. If the Nicaragua Canal comes to fruition, the ACP will be forced to revise its pricing.
One of the main propellers for both canal investments is the increased flow of goods on cargo ships, and especially of energy commodities. Balancing trade is a key to the process. Currently, ships laden with Chinese manufactured goods travel to the east coast of the US. If they have to return to Asia empty, it is a costly proposition, but if those ships were carrying LNG from the US or iron, coal, or other commodities from Latin America, it would expand trade in new ways. The Gulf of Mexico is already the biggest and most advanced LNG processing center, and the shale revolution in the US means the US could become a competitive exporter to China and other Asian markets if they could get the LNG to the Western Pacific Rim quickly and cheaply. But many of the LNG ships on order are too large even for the widened Panama Canal, which brings us back to the question of Nicaragua’s Canal project.
Unfortunately, it is exactly the sort of project (financed by foreigners, possible threat to environment, potential negative impact on local culture) that can quickly mobilize unconventional local opposition and/or complex litigation. In the worst case, that could mean guerrilla subterfuge, vandalism. It almost certainly means construction crews will face opposition and interference at work sites and along roads that can cause costly delays.
It is not unthinkable that a local judge (or international tribunal) issues an injunction against some aspect of work. And all of those presume that untested HKND can even muddle through the initial phase of exploration, feasibility and impact studies, and preliminary designs. The project may flounder within the next 18 months. If so, Panama will be ready. If not, Nicaragua will be fertile ground for well-connected investors.
1. A similar project, the Tumarín hydroelectric plant, built in the RAAS with financial backing and assistance from the Inter-American Development Bank (BIS), the Central American Bank for Economic Integration, Brazil’s Development Bank (BNDES) and a Brazilian consortium is more than US$300 million over budget and two years behind schedule. (It is now scheduled to begin operations in 2016.) The US$1.1 billion Tumarín project has been held up in part by problems related to eminent domain and the value of real estate for people displaced by the project. According to the Superior Council of Private Businesses (COSEP), the canal initiative could face the same issues – land value will increase all along the canal route, so compensating people appropriately will be more costly than initial projections which look at current tax surveys.
2. At least one analyst also pointed out that Nicaragua is not considered a “safe investment.” Populist rhetoric from the Sandinistas raises nationalization concerns for some, though the involvement of China would probably lessen that possibility.
This report was compiled by Southernpulse.com exclusively for Oil & Energy Insider.