Are Nicaragua canal plans driven by geopolitics?

Nicaragua has dreamed since 1826 about building a canal connecting the Caribbean with the Pacific. It was then that U.S. Secretary of State Henry Clay presented the idea to Congress, and Congress turned it down.

The U.S. almost started work on one in 1899 before a convenient revolution in Panama opened up a much shorter route. Now, a Chinese company appears poised to revive the dream. What is not clear is why.

The HK Nicaragua Canal Development Investment Co. estimates it can complete the canal in five years at a cost of $40 billion, but more realistically, it will cost at least twice that amount and take 10 or more years to build the 173-mile-long canal; it’s already taken the Panama Canal more than 10 years to build a third set of locks on its 50-mile-long route at a projected cost of $5.25 billion.

While $40 billion might suffice to build a sea-level canal, it won’t go very far if the HKND Group plans to build locks, as it states on its website it will do. The HKND Group offered no details of where or what size the lockswill be.

So the company is not likely to be seeking a return on its investment, at least not in the next few decades. “This project just makes no economic sense,” said Elliott Abrams, senior fellow at the Council on Foreign Relations and former assistant secretary for inter-American affairs during the Reagan administration. “I don’t know who is paying for this, but it’s an awful lot of money for a project whose economics don’t seem to me to be demonstrated,” he said in an interview with JOC.com.

Abrams worries about security concerns raised by the project. “What confidence would one have that a canal being run by a corrupt leftist regime whose closest relations are with Cuba and Venezuela would in fact police this canal?” he said. “It would be an excellent way for terrorists and drugs to move through this hemisphere.”

Analysts question whether HKND, a privately owned company based in Hong Kong, has the wherewithal to finance or the expertise to build a project on the scale contemplated, leading to speculation that the Chinese government is behind the project.

“We see it as part of a very long-term strategy for Beijing where they are looking at expanding their maritime influence globally,” said Rebecca Keller, science and technology analyst for Stratfor, a geopolitical intelligence and advisory firm based in Austin, Texas.“They are looking at more influence and control over global sea lanes, at alternative trade routes to ones that may be perceived as controlled by Western powers.”

She said the canal project is the largest such investment in a series of port and infrastructure investments in other parts of the world. “We have already seen the first stages of this in Southeast Asia and Africa, where you have seen a lot of Chinese investment in infrastructure and ports. It’s along those same lines.”

Rainiero Salas, president of the Panama Canal Pilots Association, agrees with this view. ”It seems like something that is very real, but it seems that it’s something that’s more geopolitical than a business,” he told JOC.com.

He said money is already being invested in the project. “Studies are being made. It may take longer than what they say it’s going to take. It may cost more than what they say it’s going to cost. But it’s not about the money. This is geopolitical.”

The HKND Group has stated that it will begin construction on the canal in December, but has said nothing about how it will raise the capital necessary to finance it.

“I’ve seen project estimates as high as $100 billion,” Keller said. “The financing is completely speculative as far as we can tell.” It is highly unlikely that it can raise project finance on international capital markets, especially given the lack of information about the project’s feasibility.

The HKND Group has said Chinese state-owned enterprises, including the XCMG Group, a heavy machinery manufacturer, and Gezhuba Group, an engineering and construction company, plan to participate in the project, but it’s not clear as to how or how much money would be involved.

Wang Jing, the HKND Group’s founder, is a 41-year-old telecom executive who is also its chairman, CEO and owner. He is little-known outside of China. His bio on HKND’s website says he is “board chairman of more than 20 enterprises which operate businesses in 35 countries.”

Jing has been quoted as saying his group is a private enterprise that will build the canal without Chinese government financing. But “the distinction between the government and private industry in China is sometimes hard to make,” Abrams said.

The U.S. government has not commented on China’s involvement in the canal project, because “they don’t want to fan the flames,” said Richard Feinberg, professor of international political economy at the University of California at San Diego. “They don’t believe this is going to happen, so why get into it? One could imagine scenarios in which there is a military and security aspect to a large Chinese presence just under our border, but that’s way down the road.”

He termed the relations between Washington and Managua as “correct,” but that they are “not particularly friendly.” The two countries work together on issues of common concern, including drug trafficking and criminal networks.

“Nicaragua is considered one of the better performers on that score in Central America these days,” Feinberg said.

He declined to comment on the motivations behind the canal, but said the development of the Nicaraguan canal by a private Chinese company is similar to the pattern that led the British government to take over control of India from the British East India Co. after the Great Mutiny of 1857.

“In the event that this project moves ahead, it could become a very big prestige project for the Chinese government.” This could lead Beijing to take the project over from the private developer, he said.

For now, the Chinese government does not appear to be directly involved in the project. “Beijing is keeping its distance from this Nicaraguan canal to some extent. They have a buffer in HKND through it being a private company,” Keller said. She said the Chinese private sector is playing an increased role in Chinese foreign direct investment. “It does give Beijing some protection against a risky investment.”

The government of Nicaraguan President Daniel Ortega approved the project in July, and Chinese surveyors are already at work in Nicaragua plotting a route for the canal and taking a census to identify the land and villages that will have to be expropriated to make way for the project. HKND has retained the consulting firm McKinsey & Co. to provide a feasibility study of the canal, but the report has not yet been released.

The initial timeline for some information was Oct. 15 after the census was complete, but now the Spanish language press is saying more information may be released at the end of October. The census has already sparked demonstrations by local farmers protesting the possible seizure of their land.

The protests could eventually jeopardize the project if they grow in intensity. “There is a limit to how much social unrest can be handled by the Ortega administration, and so, should the protest escalate to a certain point, we could see a backing down because of those,” Keller said.

The project has raised significant environmental concerns. The proposed channel, which would measure anywhere from 754 feet to 1,706 feet wide and 90 feet deep, passes through Lake Nicaragua, and ends in the Punto Gorda river on the Caribbean. The fresh water lake is 107 feet above sea level, which means that the group will have to build locks on both sides of the lake. Environmental groups worry about invasive species migrating from one ocean to the other through the canal. They are also concerned that seawater from the approach channels would mix with the fresh water of the lake, which is Central America’s largest lake and a major source of drinking water and irrigation.

Forests of the World, a Danish environmental group, has accused the Nicaraguan government and HKND of failing to involve indigenous people in the planning process, saying the canal will wreak havoc on forests and force people to move. “The canal is to be built straight through the Rama and Kriol territory, splitting it into two parts,” Claus Kjaerby, the group’s Central American representative, told the U.K.’s Guardian newspaper.

“It’s just like if someone wanted to build a bicycle trail through your garden and they do not consult with you.”

Together with local farmer protests and environmental concerns, the lack of project finance is fueling skepticism about the project’s feasibility. “We still remain highly skeptical. It will depend on the feasibility reports and when they come out as to the actual feasibility,” Keller said. “We remain skeptical because of the lack of information. It won’t be until the feasibility reports are released that we can really a gauge the possibility of the project.”

Source: Journal of Commerce