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Nicaragua Canal – The Basic Facts

DB-Discussions about the Nicaragua Canal are now similar to discussing abortion, gun control and how to fight terrorism. Most people have made up their minds and they will not allow facts to cloud their reasoning. We have no idea if building the canal is economically feasible and we do not understand why they are building new ships that are too big to go through the Panama Canal. But this project is much bigger than just the canal, it is a large investment in a country that remains the second poorest in the Americas. We need a game changer to break the poverty cycle. We can only hope Nicaragua will make the right decisions and it results in a greater Nicaragua.

We do know that even without the canal, Lake Nicaragua is becoming more polluted, the forests are disappearing and the lives of the indigenous people are not improving. If we do not have this major investment then what is the solution? Poverty appears to be the cause to many of the environmental issues Nicaragua is facing.

I think this article does a good job of laying out the facts and shows the many sides of the story.

Nicaragua’s interoceanic canal: will the benefits outweigh the risks?

Updated February 2015

On 13 June 2013, the Nicaraguan National Assembly approved a law to grant the Hong Kong Nicaragua Development Company (HKND) a 50-year concession, renewable for a further 50 years, to build and operate a 173-mile (278 km) canal across Nicaragua. If this project goes ahead it will be one of the largest infrastructure projects ever undertaken in Latin American history. The Nicaraguan government argues that such a project is the only way to lift the country out of centuries of under-development and high levels of poverty, and that the canal will protect the environment nationally and globally. Critics argue that the associated social, economic and environmental risks are too high a price to pay. In this briefing we look at the arguments for and against this controversial megaproject.

If the canal project goes ahead it will be one of the largest infrastructure projects ever undertaken in Latin American history.

Facts and Figures 

   After the first year of operations, Nicaragua will receive a 1% stake in the canal consortium with its share increasing by 10% each decade. In addition, Nicaragua will also receive $100 million in each of ten annual payments for the concession.

   The 173-mile canal, costing an estimated US$50 billion, could handle the world’s new generation of container ships including those already too large to navigate the Panama Canal, which it would therefore complement rather than compete with. The project would include two deep-water ports, a railway, two new cities, tourist complexes, a free trade zone, a new town, an oil pipeline, and an international airport.

   On 7 July 2014, the Advisory Commission for the Development of the Grand Canal announced that the route would begin at the mouth of the Brito River south of Rivas, pass through Lake Nicaragua and end at the mouth of the Punta Gorda River in the South Caribbean Autonomous Region. According to HKND and the UK Company Environmental Resources Management (ERM), the route has been chosen to minimise the impact on protected areas and wildlife of the Mesoamerican corridor, the area’s water resources and indigenous territories, and to minimise the displacement of communities. However, because the critical viability studies have not yet been completed the exact details of parts of the route have not been finalised.

   The project was launched on 22 December, 2014 and construction will take an estimated five years. However, as of 31 January, 2015 none of the companies contracted by HKND has completed studies related to economic viability, social and environmental impact or technical and design studies.

Why Nicaragua? Why Now? According to information presented in London in May 2014 by Paul Oquist, Minister- Secretary for National Policies of the Nicaraguan Presidency, there are three key factors that have led to the canal proposal: the country’s favourable geographical position; its abundance of underused water resources, and the fact that since 2007 the government has demonstrated its capacity to successfully formulate and implement human development plans. These include annual increases in GDP of 4-5%, single-digit inflation, doubling of exports, creation of one million jobs, reductions in inequality and attracting high levels of Foreign Direct Investment (increased 4.7 times since 2006). Over this period poverty has decreased from 48% to 42%, and extreme poverty from 17.2% to 7.5%. By 2020, Nicaragua aims to generate 94% of its energy from renewable sources – which will mean significant reductions in its CO2 emissions – and will have the capacity to export energy to other Central American countries.

Where will the money for canal construction come from? HKND will provide the estimated $900 million for feasibility studies. According to Paul Oquist, funds for constructing the canal and associated infrastructure are likely to come from the following sources: HKND, Bank of ALBA, private equity funds, private investment banks and other private investors.

However, it will be a challenge to raise the long-term financing required for a project that would not generate income for at least six years during construction. The key question is whether Chinese government-backed entities – state-owned banks and enterprises – will be willing to invest funds. As of 31 January, the US Company McKinsey, responsible for the economic viability study, has yet to release their report. In December 2014 Wang Jing announced that HKND is planning to source much of the capital from a stock exchange listing.

What is the geopolitical significance of the canal? Since China entered the World Trade Organisation in 2001, Latin America has rapidly become a key strategic partner, a key source of natural resources to feed China’s economy and population of more than one billion. The visits by President Putin and Chinese President Xi to Latin America in July 2014 were an indication of shifting geopolitics. Both attended a meeting of BRICS (Brazil, Russia, India, China and South Africa) leaders, who agreed to set up a new bank with initial financing of $50 billion. A China – CELAC (Community of Latin America and Caribbean states) Summit took place on 8-9 January, 2015 to ‘deepen mutual trust and expand cooperation’. At this meeting China committed investments of $250bn in Latin America over the next decade and trade is set to increase to $500 bn. http://www.bbc.co.uk/news/world-latin-america- 30982544?utm_source=GEGI+BBC+Oped+Eblast&utm_campaign=GEGI+BBC+Oped+Eblast&utm_medium

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‘a Chinese built canal in the middle of the Americas would graphically symbolise the accelerating shifts in geopolitics.’ Brookings Institute

What control will Nicaragua have and how will it exert this control? The government has set up a Canal Commission with ten sub-commissions to oversee the environmental, financial and execution aspects of canal construction, including the issuing of construction contracts. Key figures in this Commission are: President Manuel Coronel Kautz spokesperson Telemaco Talavera, Laureano Ortega, representing ProNicaragua, the government foreign investment agency, and Paul Oquist. The Commission has also appointed regional spokespeople to liaise with the communities who will be directly affected by the Canal.

Will the canal be economically viable? What about the Panama Canal? The canal would be able to accommodate the world’s largest ships which are too big to use the expanded Panama Canal, including Maersk Line’s new Triple-E ships – pictured below. It is estimated that 5-10% of current global shipping is unable to pass through the Panama Canal.

Globally, the canal would save the largest ships 5,000-7,000 miles on each journey from Asia to ports on the eastern seaboard of the US, the Caribbean and Latin America, because they would not have to travel around Cape Horn. In summary, fewer ships, shorter journeys and substantially more fuel efficiency will mean reductions in CO2 emissions.

On 4 June, 2014, Keith Svendsen of Maersk, the world’s largest shipping line, stated in ShippingWatch that the company was backing the project. He pointed out that there is currently a waiting list to sail through the Panama Canal, and its expansion will only enable it to handle ships of up to 336 m in length, while Maersk Line’s new series will be 400m.

According to the HKND Company presentation of 7 July, 2014, on completion about 5% of global trade will pass through the Nicaraguan Canal. HKND CEO Wang Jing stated: ‘Central America is at the centre of North-South and East-West global trade flows, and we believe that Nicaragua provides the perfect location for a new international shipping and logistics hub. We believe this project will serve that still unmet need.’ 

However, critics point to other factors that may affect the viability of the project. Alternative routes through the Bering Straits are opening up as the Arctic ice melts and may significantly reduce demand for the canal. On 18 January, 2015 the South China Morning Post quoted Andy Lane of Container, Transport International Consultancy claiming that ‘a second waterway connecting the Pacific and Atlantic will be a hard sell given current global trade patterns.’ He goes on to point out that ‘with the global manufacturing base shifting to Asia, more shipping lines are expected to use the Suez Canal to reach the east coast of the US.’ He points out that the project may struggle to attract investors because the annual “return after 25 years would be less than two per cent” and buying US government bonds would be much more profitable. http://www.cargobusinessnews.com/news/012215/news4.html

What is the background of HKND CEO Wang Jing? Wang Jing is the lead Chinese investor, a billionaire entrepreneur with more than 20 mining, infrastructure and telecommunications enterprises in 35 countries, including the Beijing Xinwei Telecom Technology company. HKND is registered as a consortium in the Cayman Islands.

Which companies are conducting feasibility and impact studies, who is commissioning the studies and when will they be reported? What is the timeline for construction? The studies are being carried out by the following companies on behalf of HKND: the British firm ERM (social and environmental impact), New York-based McKinsey & Company (finance), MEC Mining of Australia (excavation), SBE Belgium (locks), US-based Kirkland Ellis, LLP (legal), and China Railway Construction Corporation (technical feasibility studies). Modifications have been made to the route on the basis of ERM interim reports in July and November, 2014. Their final report is due for publication in April, 2015. Dates for the release of the other reports have not been announced.

Preliminary work started on 22 December; according to HKND the Canal itself will take an estimated five years to build. However, their most recent document notes that this schedule would “create significant logistical, procurement, and workforce challenges”.

The Nicaraguan Academy of Sciences (ACN) has called for an independent, external environmental impact assessment. Jorge Huete-Pérez, ACN’s president stated: “This is an issue that needs to be addressed in an appropriate manner and with appropriate studies. When you leave it to the discretion of the company that has the concession I think there is a serious conflict of interest. Normally a serious environmental impact study takes years. We would like to see an independent study of experts in different fields: ecology, sociology, law, etc.”

‘extensive studies would be needed to fully evaluate and minimise risks; these studies would take years to prepare.’ Jaime Incer Barquero, former environmental advisor to the presidency

In November 2014, the ACN invited the Inter-American Network of Academies of Science (IANAS) and the International Council for Science – Regional Office for Latin American and the Caribbean (ICSU-LAC) to co-host a workshop to identify the potential environmental and social impacts. Their concluding statement ends: “Well-established international best practices require that environmental assessments be completed, vetted, and published before work begins. The government’s actions are leading to an atmosphere of mistrust, confrontation and repression. We call on the Nicaraguan government to halt the project until these studies are completed and publicly debated.” The full statement can be read here: http://www.limnology.org/news/nicaragua_canal.pdf1 and here is a link to findings from the November workshop. http://www.interacademies.net/File.aspx?id=26001

What about Nicaraguan public opinion on this project? According to a poll carried out by M & R consultores between 13 and 29 December 2014, 61% of respondents fully support the canal. Regarding the protests against the canal during recent months, of those living along the route 44.2% supported the protests and 44.6% were against. Further away from the canal route, disapproval of the protests grew with 51% of residents of Managua, Carazo, Granada, and Masaya disapproving of the protests and 34.3% supporting them.

http://myrconsultores.com/pdf/sismo_resultados/sismo_43_web.pdf 

What economic benefits will Nicaragua gain from the canal? According to Paul Oquist, the overall objective of encouraging Foreign Direct Investment is to eradicate poverty, in particular extreme poverty. To do this, an annual growth rate of 8-10% is necessary: ‘We need a way out of poverty; the canal will provide this.‘ Oquist states that the canal would mean reductions in dependence on foreign aid, and an increase in GDP of 10% in 2015 and 15% in 2016. Nicaragua suffers from severe unemployment and underemployment; currently only 700,000 of Nicaragua’s working population are formally employed. According to an HKND statement of 7 July, canal construction would employ 50,000 workers, half of them Nicaraguan and the other half Chinese and other nationalities.

The trade unions affiliated to the National Workers Front (FNT) support the canal because of the jobs that will be created directly and indirectly. They see the project as a way to reduce unemployment and eliminate poverty, and argue that without the canal Nicaragua will be consigned to decades of further poverty. Adrian Martinez is the coordinator of the Confederation of Self Employed Workers (CTCP), one of the trade unions that make up the FNT. Martinez point outs that for the 60,000 CTCP members the Canal presents an enormous opportunity.

He explains that the Canal would improve the economy and create jobs: ‘It would provide us with alternative employment, selling food and other things to the construction workers, but also other employment for building workers, carpenters etc. For us this is extremely important.’ These jobs will include not only those working directly on the canal but also on the infrastructure associated with the canal. The government is providing technical training for hundreds of young people so that they have the necessary skills to take up employment related to the Canal construction.

Nicaraguan economist Adolfo Acevedo warned that the UN Economic Commission on Latin America and the Caribbean (ECLAC) estimates that between 2015 and 2020, some 353,200 Nicaraguans will enter the labour force and therefore those 25,000 canal jobs will absorb barely 7% of these workers. He went on to say that Chinese workers are likely to import their food and other needs directly from China and save their salaries or send much of that money home to their families rather than spend it in Nicaragua, thus reducing the potential amount of indirect employment in Nicaragua.

What about the environmental and social impact? Proponents and opponents of the canal agree that the key area of major concern is the environmental impact of such a vast project, particularly on Lake Cocibolca (Lake Nicaragua), the largest reservoir of water in the region. However, there is disagreement about whether the canal would contribute to protecting the environment globally and nationally or whether the potential environmental and social risks are too high a price to pay.

In ‘El Canal Interoceanico por Nicaragua: Aportes al debate’ published by the Nicaraguan Academy of Science, Jaime Incer Barquero (former environmental advisor to the presidency) and other environmentalists, engineers and academics express strong concerns about the ecological degradation of eco and aquatic systems, especially dredging and maintaining a channel across Lake Cocibolca 103 km long, 27 m deep and 270-500 m wide. Barquero points out that ‘extensive studies would be needed to fully evaluate and minimise risks; these studies would take years to prepare.‘ Jorge Huete, president of the Nicaraguan Academy of Science, claims that 400,000 acres of forest would be destroyed during the construction, and criticises the lack of scientific impact studies.

Other key points raised in this and other publications are: high levels of vulnerability to erosion; threats of seismic activity; climate change and maintaining water levels in the lake in periods of drought; habitat destruction of aquatic species in the lake and on the coasts; contamination of the lake, which is a critical water source for drinking and irrigation; salt water entering the lake; interrupting the passage of animals through the Mesoamerican corridor; the threat of foreign organisms; displacement of people along the canal route; and threats to the rights of indigenous peoples on the Caribbean Coast.

Other criticisms include the apparent absence from the Concession Agreement Framework of guarantees related to the protection of human rights, labor rights and the rights of indigenous peoples, and the amount of power and control that HKND would have over the project.

While acknowledging the risks, the Nicaraguan government and HKND argue that the environmental impact would be strongly positive at a global and national level. There will be far fewer, energy efficient, larger ships that would mean a 35 per cent reduction in emissions.

Despite major advances since 2007 in reducing poverty, Nicaragua remains the second poorest country in the Americas after Haiti. Paul Oquist argues that Nicaragua is not an ecological paradise; deforestation is 70,000 hectares annually and land reforested is 15,000 hectares. Tax revenues from the canal would be used to mitigate deforestation and the impact of climate change. Thus the canal could play a significant role in reforesting Nicaragua. Camilo Lara (Nicaragua Recycling Forum) warns that without the canal the environment will deteriorate dramatically as the population rises.

The very viability of the canal depends on vigorously proactive environmental recovery and conservation policies to ensure sufficient water and guarantee its efficient use. HKND CEO Wang Jing stated: ‘I take all responsibility for any environmental damage. I have told my employees that if we make a mistake on this front, we will be dishonoured in the history textbooks of Nicaragua,’ acknowledging the devastating consequences of past foreign interventions.

The fundamental question is how Nicaragua can break the cycle of environmental depredation that derives directly and overwhelmingly from entrenched poverty that has already had an extremely damaging effect on Nicaragua’s natural environment, biodiversity and wildlife.

What organisations oppose the canal and what actions have they taken? Concern, fueled by a lack of

consultation and a sense of uncertainty, has escalated among people living in communities along the proposed route. These communities are now organised into the National Committee for the Defence of the Land, Lake and Sovereignty.

Many communities are concerned that they will have their property expropriated and they will be displaced to unknown destinations. HKND estimate that some 29,000 people will have their land expropriated, while other sources such as the NGO Cinco http://cinco.org.ni/es/noticias say resettlement and expropriation would directly affect around 80,000 people. One factor that could account for the uncertainties is an announcement on 12 January 2015 by Canal Commission spokesperson Telemaco Talavera, that the total territory to be used for the canal has been halved from 675 square miles to 323 square miles.

HKND and the Government are preparing a Resettlement Action Plan in accordance with Nicaraguan law, but a list of properties affected has not yet been released. Telemaco Talavera has assured owners that they will be paid a fair price for their properties and will be offered better living conditions.

Since September, 2014, twenty-two protests and road blocks along the route have been calling for Law 840 related to the canal concession to be revoked. The most violent of these protests (reported in the international press) happened on Christmas Eve when police ordered anti canal protesters to clear a road block in El Tule, When they refused the police used tear gas, at which point about one hundred protestors regrouped and attacked the police with firearms, machetes, stones and sticks injuring one police officer critically with a bullet in his right lung. Police responded with more tear gas and rubber bullets, arresting 44 people, some of whom were allegedly held illegally according to the Nicaragua Centre for Human Rights. A total of 21 people were injured, 15 of whom were police officers and six were protesters.

For further information about the protests see Russell White, LAB: http://lab.org.uk/nicaraguas-grand-canal-3-no-excavation-without-consultation

What has the reaction of the US been to the construction of a canal with a concession held by the Chinese in what they have historically regarded as their ‘backyard?’ Very muted, given that US companies will be bidding for contracts associated with the actual construction and sub contracts. In their first public statement, on 6 January the US Embassy in Managua stated that Embassy personnel had listened to groups for and against the canal and urged that all stages of the project, including feasibility studies, environmental studies and financing “be carried out in an open and transparent way.” The statement also asked for clarity on the bidding process for foreign companies and indicated that the Embassy was closely following the methodology for resolving property disputes.

On 10 January, HKND responded that they are committed to “the open, transparent and international nature of the Project, and we strive to include both local and international companies in the development of the Project.” On their website http://hknd-group.com/portal.php?mod=list&catid=35 HKND they provide a list of examples of what they have done in conjunction with the Canal Commission to achieve these goals, including meetings with people who have properties along the route, with international environmental and financial organisations.

Conclusion

The fact that Nicaragua remains the second poorest country in the Americas after Haiti is an indictment on the ‘development’ model imposed on Nicaragua over the past century. Arturo Cruz, former Nicaraguan ambassador to the US and a professor at the INCAE business school in Managua points out that poverty drives the continued extending of the agricultural frontier into more and more of Nicaragua’s rain forests, “I think the country’s poverty is a bigger problem than the environmental concerns. If we don’t achieve a more prosperous country in next five to ten years—with or without the canal—we will see severe damage to the environment.”

The Nicaraguan government argues that the canal is the only way of lifting the country out of entrenched poverty and addressing environmental destruction exacerbated by climate change; opponents argue that the immense levels of destruction and dislocation the canal will cause far outweigh any potential benefits.

Nicaragua Solidarity Campaign, February, 2015

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