A Canal to Nowhere? Weighing the Risks in Nicaragua

Nicaragua Canal

For nearly 200 years, some of the most ambitious people in Nicaragua have dreamed about building a canal connecting the Caribbean with the Pacific. In 1826, U.S. Secretary of State Henry Clay presented such an idea to Congress, but Congress turned it down. In 1899, the U.S. almost started work on such a project, until a rebellion in Panama, aimed at gaining its independence from Colombia, opened up a much shorter route to the goal of connecting those two great bodies of water — the Panama Canal. Thanks to the Canal, the Republic of Panama has become the wealthiest nation in Central America, while Nicaragua has languished as the second-poorest country in the Western Hemisphere, behind only Haiti.

Now, an obscure Chinese company appears poised to revive the dream of building that canal across Nicaragua. Supporters call it a major turning point. Detractors call it an idea that should have never resurfaced. Will the Nicaragua canal ever get built? The project carries risks for the Chinese as well as the Nicaraguan government and people — and the country’s relatively pristine environment. Apart from the environmental and social risks, there are also more hidden challenges for the private- and public-sector players involved in making such a deal.

Recently, Environmental Research Management, a privately owned British consultancy, presented the Nicaraguan government with a 14-volume, 11,000-page report on the environmental impact of the proposed 172-mile, $50 billion Nicaragua Canal Development Project, which would link that country’s Pacific coast with its Caribbean coast. Conveniently for the project’s Chinese investors, the report concluded that the project, to be financed by Hong Kong-Nicaragua Development (HKND), headed by billionaire Wang Jing, is “feasible,” not only in terms of its impact on the environment, but the country’s “social resources, community health, cultural heritage” and its local economy.

Why are the Chinese so interested in Nicaragua? Wharton management professor Minyuan Zhao says that the Nicaraguan canal project may reflect two trends going on in China. First, Chinese firms, often supported by the government’s “going-out” policy, tend to find opportunities in countries that are in need of capital but are shunned by investors from developed countries, including the United States. “There is a reason why there is not a lot of FDI (foreign direct investment) in Nicaragua,” says Zhao. The ability and willingness to navigate challenging business environments can give Chinese firms an edge over their Western competitors. Second, China is eager to find a market for its excessive capacity at home. Typically, Chinese firms not only invest in the host countries, but also bring workers and supplies with them, Zhao explains.

“The reality is, we know very, very little about the case in Nicaragua, relative to the size of the project.” –Minyuan Zhao

Nicaragua lacks the educated workforce and modern infrastructure that would make it more appealing to foreign investors. On the World Bank’s rankings of Best Places to Do Business, Nicaragua ranks 119th out of 182 nations — well below such countries as Colombia, Peru and Mexico, which have attracted growing volumes of FDI from investors in North America, Europe and Asia. According to the CIA World Factbook, the per capita income of the average Nicaraguan was only $4,800 in 2014.

Little has been revealed about Wang Jing, the founder, chairman and CEO of HKND. According to that company, Wang is also the board chairman of “more than 20 enterprises which operate businesses in 35 countries.” According to the company, some Chinese state-owned enterprises, including heavy machinery manufacturer XCMG Group and engineering firm Gezhuba Group, are planning to participate, but no one is saying what roles they plan to take or how much they will invest.

Zhao notes that Wang is “a mystery. Most people don’t know who he is.” If Wang were operating in a more transparent environment, she notes, “he would attract more scrutiny.” Nevertheless, taking the mystery out of Wang’s business empire would not be easy. Last October, for example, when China’s Anbang Insurance Co. bought the Waldorf-Astoria Hotel in New York, the media had to dig deep to trace the names of Anbang’s ultimate owners. “It was like peeling off an onion,” Zhao says of the process of identifying the complex ownership structure behind the firm.

And yet, China’s popularity in some host countries is bolstered by its reputation for getting things done quickly, notes Zhao. In China, big projects — such as the Three Gorges Dam and South-North Water Transfer Projects — have been completed or are underway, even though their environmental implications are still being debated. In Africa, many large infrastructure projects become reality after the Chinese arrive. So why not a canal in Nicaragua? “After all, the Chinese are known for their capabilities in large infrastructure projects, if they can handle the institutional risks,” Zhao says. “But that’s just a hypothesis. The reality is, we know very, very little about the case in Nicaragua, relative to the size of the project.”

‘A Number of Risks and Challenges’

According to Margaret Myers, director of the China and Latin America program of the Inter-American Dialogue, a Washington-based think tank, despite all the hype, “I do not think we are going to see much progress in the next few years” with regard to the canal. However, enough people “are taking the project seriously” to warrant a conversation about it. Why are the prospects poor for completion? For one thing, Myers says, “I don’t think they have the financing in place. Despite the Nicaraguan government’s insistence that the project is moving ahead, there are a number of risks and challenges.”

A key starting point: With the completion of a third set of locks, which will double the capacity of the Panama Canal in 2016, it is not clear if there is enough demand for a major new canal connecting the Pacific with the Caribbean, notes Myers.

Supporters of the Nicaragua project argue that it will spur growth, much like the Panama Canal gradually transformed the remote, tropical backwater of Panama into the region’s leading center for financial services.

Myers notes that the consensus among observers is that the Chinese government is not actually backing the Nicaragua project, despite any ties to Beijing that Wang may have. Although the Chinese government is interested in the project, “it will wait and see how things progress” before deciding what role, if any, to take in the project, she adds. In 2011, China and Colombia announced that the two nations were talking about constructing a 250-mile railway — or “dry canal” — that would link the Pacific port of Buenaventura, across Colombia to that country’s Atlantic Coast. But the two countries have yet to announce any timetable for enacting such plans. Meanwhile, China, along with Peru and Brazil, are indeed moving ahead on plans to build a $10 billion transcontinental railway that would cut across the Andes and connect Pacific port cities with the Atlantic coast of South America.

A Second Panama?

Supporters of the Nicaragua project argue that it will spur growth, much like the Panama Canal gradually transformed the remote, tropical backwater of Panama into the region’s leading center for financial services, and boosted its profile as a center for tourism and, more recently, eco-tourism.
Skeptics focus on the negative implications. Luis Carlos Buob, an attorney at the non-profit Center for Justice and International Law, says that “there is a great potential for damage to the environment due to the unprecedented scale and scope of this project.”

He noted at a conference sponsored by the Inter-American Dialogue that Lake Cocibolca, otherwise known as Lake Nicaragua, is the largest tropical fresh water lake in Central America. The new canal, he warned, would be four times as long as the Panama Canal, and would require dredging not just once, but recurrently. The thousands of ships that would use the canal would “exacerbate the potential for hypoxia,” or oxygen shortages, thus posing a “threat to unique sea life that have great economic value.”
He added that the environmental risks from any spills from supertankers traversing the new canal “could kill the lake, because there is no room for dispersion” of the spills. “The Exxon Valdez spill cost $9 billion,” Buob said, but there “was a lot of room for dispersion” in that case. Not here. Moreover, the new canal would act as a physical barrier “to impede the migrations of many species and gene flow, including 22 endangered species” such as jaguars, sloths and tapirs.

Buob and others have called for a transparent, cost-benefit analysis of the environmental costs and risks, which would “monetize the value…. It is incumbent on scientists and NGOs to voice their concerns,” and urge the suspension of the project until such an analysis is completed, he added.
Critics also charge that the Nicaraguan government has pushed through the project without much public debate, or regard for the rights of the nation’s impoverished indigenous communities. Pedro Alvarez, professor of civil and environmental engineering at Rice University, recently told a public hearing of the Inter-American Commission on Human Rights that there has been almost no public debate about the canal — its goals, risks and targets.

Alvarez noted that thousands of Nicaraguans will be displaced from their homes as a result of the project, but there has been “no pre-consultation with the local people” or “respect for their cultures.” Last December, dozens of people were wounded by tear gas and other weapons in Nicaragua when the police and military allegedly used excessive force to control a public demonstration against the project. Although the Nicaraguan police argued that the protestors used guns, machetes, stones and sticks to attack police, organizers claimed that their demonstration was peaceful.

“There is a tendency to think of China as a monolith, when in fact there are so many diverse actors.” –Margaret Myers

Tenuous Connections

The Nicaragua canal controversy has also cast a spotlight on Chinese entrepreneurs or investors. Myers warns that many such individuals do not have close ties with their own government, despite the common presumption that they do, given the powerful role of the government in the Chinese economy.
“There is a tendency to think of China as a monolith, when in fact there are so many diverse actors,” Myers notes. “Some of them are affiliated with the government, but many others are not.” For those outside of China, that means having to do due diligence into the background of those actors. “All Chinese entrepreneurs have connections with the Chinese government, but that doesn’t mean that they are supporting Chinese government objectives,” adds Myers.

Jacques DeLisle, director of the University of Pennsylvania’s Center for East Asian Studies, says that in China, “there are large numbers of people who claim to be politically well connected, but it is hard to evaluate whether that’s true or not. If you are far enough up the food chain and you’re dealing with big enough people, you can certainly figure it out — say, the daughter-in-law of the premier or something — but when you’re playing with some lower-level people claiming connections, or less direct connections — that’s murky.” Such individuals “may or may not be lying about who they are and what they can deliver.

“It is a question of being able to evaluate what people claim,” DeLisle says. “Part one of that is to get them to be relatively precise about what they can deliver, as opposed to [claiming], ‘I know all these people in high places.’ And then it is about doing whatever due diligence you can about this person’s behavior and position.”
As elsewhere around the world, this is more easily said than done, DeLisle notes. “To the extent that there is corruption, it tends to hide. It is hard to know that you have found out what you need to know…. China is not a terribly transparent place.”

Image credit: “NicaraguaCanal.5” by Ekem – Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:NicaraguaCanal.5.jpg#/media/File:NicaraguaCanal.5.jpg

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