Incredulity was perhaps the main international reaction to the news on 11 June that the Nicaraguan government had awarded a virtually unknown Chinese company a 50-year concession to build a new canal across the Central American isthmus, at an estimated cost of US$40bn. A few weeks on, massive question marks remain, but some of the economic arguments are becoming clearer.
In brief, the story so far: Nicaragua’s President Daniel Ortega awarded a 50-year concession to build and operate a new canal to HKDN, a new company registered in Hong Kong and controlled by 40-year old mainland China businessman Wang Jin. It describes itself as a “privately-held international infrastructure development company”.
Included in the project are proposals to build a trans-isthmus freight railway, an airport and two duty-free zones. The concession can be extended once (so to 100 years in total). Under the preliminary framework bill approved in parliament back in July 2012, the Nicaraguan government gradually would take back majority control of the scheme over the life of the contract (to have 51% of HKDN shares, with Wang maintaining a minority interest). This was not included in the actual text of the concession awarded this year, although it appears to be the assumed deal.
Little is known of Wang’s background, apart from the fact that he has no civil engineering experience, although he runs a small company called Xinwei Telecom. His main adviser for this project appears to be Ronald MacLean Abaroa, a former mayor of the Bolivian capital La Paz (he served four consecutive terms between 1985 and 1997), who has also worked as a World Bank official and who HKDN describes as its official spokesperson. Wang says progress already has been made to begin raising the estimated US$40bn worth of investment required for the project, and that work should begin next year.
Although questions abound, the economic arguments for this second canal do have some weight. The existing Panama Canal, which currently takes around 5% of world cargo trade, is being expanded at a cost of US$5bn. When work is completed next year the Panama Canal will still be restricted to taking ships of 65,000 tonnes or less. At first glance it might be argued that with world trade on a somewhat sluggish recovery path, there will simply not be enough demand for the services of two canals linking the Atlantic and Pacific across Central America. In this scenario, each will be condemned to cutting its charges in a desperate struggle for business and neither will be economically viable. The picture changes, however, if you assume that energy and trade needs will boost demand for megaships, both container vessels and giant tankers.
Lin Boqiang of the China Centre for Energy Economic Research at Xiamen University seems to have exactly that in mind, telling China Daily that “the canal will accommodate large liquefied natural gas carriers and oil tankers from the United States and Venezuela heading towards China. The new canal will become a lifeline in global energy trade”. There is some evidence that China has its eyes on importing US gas produced by hydraulic fracturing and that some of the biggest US LNG export terminals will be on the east coast (such as the Texas Gulf Coast or Louisiana).
Some analysts conclude that this in fact is a Beijing government project, something that Wang formally denies. For a virtually unknown businessman, however, he had certainly been able to pull in important companies to collaborate. He says US-based McKinsey & Co have been retained as advisers, and that the project also has the support of China’s largest construction company, China Railway Construction Corp. Although small, Xinwei Telecomms appears, according to its website, to have received various official visits from a number of top Chinese officials, including president Xi Jinping.
There is a very long list of unknowns at this stage. The route of the canal has not been determined, although it will have to go through Lake Nicaragua, raising a number of important environmental issues. Nicaragua’s indigenous communities who could be affected by the project have not been consulted. Neighbouring countries such as Costa Rica have expressed concern over the impact on shared river systems. No environmental impact assessment has yet been conducted.
Nicaragua’s opposition questions the way in which the concession has been granted, with no competition. Nicaragua and China do not have diplomatic relations (Managua has traditionally recognised Taiwan). The US, which has a long-standing ‘strategic interest’ in the Panama Canal, will be unfavourably disposed to what might be seen as a China-controlled alternative so close to its own borders. Perhaps indicative of the US attitude was a comment from Evan Ellis, a professor at the US National Defence University, who asked: “Are international shipping companies going to trust a one-guy shop with minor telecommunications experience to be the system integrator on a US$40bn project in a country whose transparency is already subject to question?”
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