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Nicaragua: What’s Really Behind the Canal Project – by Evan Ellis

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Nicaragua’s National Assembly, dominated by the ruling Sandinista party, authorized a 100-year concession to the Hong Kong-based HK Nicaragua Canal Development Investment Co. for the development and eventual operation of a new $40 billion canal through the Central American country. Although HK Nicaragua had been publicly working on the canal deal in Nicaragua for more than a year, the June 13th vote by the National Assembly was symbolic.

The vote served as the kick-off for a project that has been part of the national consciousness since Panama, rather than Nicaragua, was selected as the region’s first trans-continental canal at the beginning of the 20th century.

The amount of money and effort already spent to convince the media and international financial markets that the project is real suggests that phase 1, analysis and design work, will indeed begin. Ironically, though, how the project ends will likely depend on the government of the People’s Republic of China.

It is striking that the HK Nicaragua, a small company with no previous construction experience, could be at the center of what could be the most strategically important global logistics project of the 21st Century. In the processthe project is instructive about how the concept of China as a source of funds, as well as a market, is becoming part of the lexicon for those who do business in Latin America.

While the initial analysis and design phase of the Nicaraguan canal project will likely go forward over the next two to three years, the much more expensive construction phase of the project, if it happens, will have a plan and a lead contractor very different than that which was approved by the Nicaraguan National Assembly. This is because the present project does not have an economic logic that will facilitate conventional market financing. And HK Nicaragua does not have the financial ties, the construction contacts, or the management capability to realize the project.

Although the new “economy of the Pacific,” is expected to more than double projected shipping volumes in the coming decades, the nature of that demand will not support the ability of two canals to operate at a profit. To begin, the $40 billion investment which is required for the current project will make it difficult to secure a near-market rate of return on the volume capital being invested.

While a key differentiator of the proposed new canal would be its ability to accommodate the new generation of post-post Panamax ships, the burden of maintaining the canal open for such traffic, including deeper, broader, and more frequent dredging, would compound the curse of high capital costs with high operating expenses. Moreover, because the majority of such large ship customers would be carrying low value added cargoes such as bulk grains, metals, minerals and petroleum, the faster transit times offered by canal passage would not necessarily be a discriminator, while the costs that the canal would have to charge would make it difficult to compete economically with current routes, such as those to Asia circumnavigating the horn of Africa, or future routes through the Arctic, opening up thanks to global warming.

In competing for part of the business of smaller ships that currently transit the Panama Canal, it is also relevant that the Nicaraguan Canal will begin as an unproven entity, without being able to compete on price against established routes through an existing canal that is seen to function relatively well.

These arguments help to explain why, despite years of talking about a new canal, the Nicaraguan government has not been able to attract major global investors and construction companies to the project. It also explains why the Russian government, when it was beginning to renew its political courtship of the Sandinistas in 2008, considered, then ultimately decided not to pursue funding such a canal, even though doing so would have both advanced its political and geostrategic objectives in the region, and benefitted Russian companies.

Beyond the absence of economic logic for the canal, the company receiving the concession, HK Nicaragua does not have the ability to execute a project of this magnitude (HK appears to stand for Hong Kong, the home base of the company’s CEO, Chinese entrepreneur Wang Jing). By contrast to large Chinese state owned enterprises that do construction work such as Sinohydro, China Harbour, or China Water and Electric, HK consortium has no demonstrated capability in the construction sector, nor known relationships with major Chinese banks, or any indication that it has the staff or expertise to manage a project in which billions of dollars of contracts would have to be let under conditions of maximum international scrutiny.

Indeed, it is almost unthinkable that those who will be called upon to invest the $40 billion, an estimation of what will be required, will accept that a small company with no track record in the industry manages a project of international strategic importance, involving complex international maritime issues and numerous stakeholders and subcontractors, in a country whose legal and institutional environment is already subject to serious concerns.

Given the problems with the project, the level of planning and effort that has gone into convincing the world that it is “real” is particularly striking. When the authorization for the Canal was put before the Sandinista-Controlled congress for an almost automatic approval, the HK consortium had a well-crafted strategic communications and public relations plan in place, including a professional website providing both information on the project and the appearance of a “serious” company (www.HKND-GROUP.com), as well as consulting agreements with both McLarty and Associates of Washington DC, and the financial firm McKinsey & Company.

In the case of McLarty, if the project is really about building a canal in Nicaragua, the decision to invest in a firm recognized for its lobbying in Washington DC is a curious one. In the case of McKinsey, if the project will actually be financed by Chinese capital, hiring an exceptionally well connected New York financial firm is equally mysterious.

The Sandinista control of the Nicaraguan Congress, and the millions that have already been spent on planning, consulting and preliminary work suggests the intent and ability to take the project forward in its initial phases. What is not clear is what will happen when the project, without either market logic or a credible administrator, reaches the point when the analysis of alternatives and environmental impact studies have been completed, initial design work is done, and it is time to spend “real money” to dig waterways and build structures.

Of course, the company itself can be transformed and/or the concession modified. In the end, if the project goes forward, and is not delayed, it is likely to be for geostrategic reasons, as much as economic ones.

While there is no evidence that the Chinese government is playing a behind-the-scenes role in the Nicaragua Canal project, it is interesting to note that it will be one of its chief beneficiaries. In addition to lowering costs, and increasing options for moving the products that its companies ship to the region, and the raw materials and foodstuffs that it purchases, the canal project itself will be a source of geostrategic leverage for the PRC.

In three years, in 2016, the preliminary phase of the project will have been completed, and its backers will be looking to secure funds and bidders to proceed with the next phase. The nervousness of the project sponsors will be augmented, at the time, by the operation of the newly expanded Panama Canal attracting increasing volumes of post-Panamax size ships which could not previously transit the canal.

In this environment, the PRC, which is likely to be even more financially well off and economically powerful than today, will play a decisive role regarding whether the project goes forward; if the PRC chooses to “save” the second canal project, it will secure an astronomical influence over both the new canal and the Nicaraguan government, by contrast to the Panama canal which prides itself on being open to all, and beholden to no country save Panama.

On the other hand, even if Beijing does not “save” the canal, it will still bolster its influence in the region if it plays its cards well. The logic is as follows: Since the new canal would destroy the profitability of the competing Panama Canal, with the Panamanian government having just sunk  $5.25 billion into its expansion, the PRC would be in a strong position to extract conditions from Panama for choosing not to back the Nicaraguan canal.

The important question regarding the Nicaraguan canal is not whether the project is “real,” but rather, what the project says about the new Chinese presence in Latin America. Thus, is this how the Chinese will conduct business and politics in the region? And will China transform the strategic environment in the region for all involved?

* Dr. Evan Ellis is a professor at the Center for Hemispheric Defense Studies in Washington, D.C. He has published over 50 works on Latin America and its relationship with China, and has presented his work in 24 countries.

Source: The Manzella Report

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