Funding issues dog Nicaragua and Panama canals

HONG KONG — The Central American canal projects continue to generate questions over funding — where it will come from in the case of the proposed Nicaraguan plan, and where it is going in the Panama Canal upgrade.

The investment required is no small potatoes, either. Cost estimates of digging the the 172-mile canal across Nicaragua have been put at $50 billion, and the $5.25 billion Panama Canal upgrade has already overrun costs by $1.6 billion.

Work officially began on the Nicaragua project last week, but there remains no clear indication of where the funding will come from. The mysterious telecoms entrepreneur Wang Jing runs the company behind the canal project, Hong Kong Nicaragua Canal Development Co., or HKND, and according to news reports only $200 million in funding has so far been sourced.

At an event to mark the start of the project, Reuters reported that Wang and Nicaraguan officials dodged questions about financial backers and mounting delays that will continually push up the cost of construction, already four times Nicaragua’s GDP.

Even though the “ground breaking” ceremony was held last week, key feasibility studies have been postponed to April and excavation work is not scheduled to begin until the second half of next year. Yet despite the delays, HKND is standing behind its five-year completion schedule.

The Panama Canal is a third of the distance of the proposed northern waterway and was completed by the U.S. 34 years after French engineers started the project. Admittedly, it is 100 years old and the technology at the time was rudimentary, but the five-year timetable set for the completion of the Nicaragua canal is leading many to surmise that China will be bankrolling its construction.

“If the canal goes ahead, it will be because the Chinese government wants it to, and the financing will come from China’s various state firms,” according to Arturo Cruz of the INCAE business school, a former U.S. ambassador to Nicaragua, reported Reuters.

China’s state owned enterprises have seemingly bottomless coffers when it comes to mega infrastructure construction, and no project is too grand. Yangshan container port was constructed between two islands 20 miles off Shanghai and connected to the mainland by a six-lane highway bridge that took 6,000 workers two-and-a-half years to construct. Once all port phases have been completed in 2020 it will have cost almost $20 billion. The Three Gorges Dam officially cost $37 billion but observers believe it was almost double that.

But the most recent example of mega spending on infrastructure could be seen on Saturday when Beijing opened the gates on its $32 billion South-North Water Diversion Project. It will channel more than a billion cubic meters of water from the southern provinces to the parched north via a 720-mile network of pipes and channels, but critics are already saying it will only be a short-term solution.

Then there is also a political element to consider. A Chinese-funded canal across Nicaragua will give the country a strategic foothold in Central America, which some see as a direct challenge to the U.S. and its Panama connections.

Yet many in the industry continue to view the plans skeptically. While the Nicaragua canal will be longer, deeper and wider than the Panama waterway, Panama Canal officials have questioned the economics of the project, and dismissed the canal’s competitive threat to its own canal, which is set to debut a third set of locks in early 2016.

That deadline is under threat as funding continues to be a problem for the Panama Canal upgrade. The consortium involved in the expansion project is making fresh claims for cost overruns totalling $737 million, according to Agence France-Presse.

The news agency reported that canal administrator Jorge Quijano confirmed the Panama Canal Authority had received two claims that will be evaluated, but he warned that they would “be difficult to justify.”

Is is the latest setback for the above-budget, behind-schedule project that will expand the canal by adding a third set of locks to allow the handling of container ships of up to 10,000 TEUs. Work began in 2007 but regular labor disputes and cost-overruns have delayed construction.

Excavation work is on hold after negotiations broke down between the consortium and its workers, who have been on strike since Dec. 23. About 1,000 workers are still on strike demanding better treatment and safety, and talks are set to resume Monday.

Shippers of goods between Asia and the Americas will benefit from strong competition between two canals through Central America, but there is no need to start revising supply chain strategies any time soon. The Panama Canal will eventually be expanded a day late and a few dollars short, but huge question marks remain over the viability of the Nicaragua project — questions it seems only Beijing can answer.

Contact Greg Knowler at gknowler@joc.com and follow him on Twitter: @greg_knowler.

http://www.joc.com/international-trade-news/funding-issues-dog-nicaragua-and-panama-canals_20141227.html

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