I have been tinkering with my mickey-mouse financial model for the Nicaragua Canal.
There is one way to make the Nicaragua Canal look like a decent investment: assume that it comes in on-time and on-budget (which we did) hits all its transit targets (which we did) and that the ships are all sized at the maximum possible (which we did) but also that the Nicaragua Canal will be able to raise average tolls at the same 6.8% rate that the Panama Canal has managed since the 1999 handover. If you believe that is possible, then you can manage a positive 6.1% return through 2030 and a respectable 12.2% return through 2040; breakeven happens in 2027.
Do I believe that is possible? No. Do I believe that equity investors would accept that return? No. Do I believe that with enough debt equity investors might be persuaded to that they could get an acceptable return? Uh ... maybe.
We come back to that whole government-involvement thing. The Nicaragua Canal will need a lot o low-cost debt to be viable even under the most heroic assumption. The project only flies if Beijing decides that it wants it to and is willing to back that up with government money. A whole lot of government money.
Stephen Kaplan is just down the metaphorical hall. I should ask him if he thinks the Chinese government would want to back this ... and if so, why. One colleague of mine suggested “colonization” as a goal of its own. Me, I don’t think the Chinese government thinks that way, at least not in this hemisphere. So I am back to thinking that this project isn’t going to happen.
I have no special insight into Chinese strategic thought. I have heard that it might be about secure access to Venezuelan oil or Trinidadian natural gas, but if I were in the Chinese leadership I would not think building the Canal Rojo a sensible way to attain that goal. Is there any Chinese strategic question to which the Nicaragua Canal is the answer?
My mind has never left insider land speculation, with suckers holding swamp land in the end.
Posted by: shah8 | February 08, 2015 at 02:01 PM
I'm with you on that, with the caveat that some of the subprojects will probably be built.
What I'm curious is whether there is a reason for the Chinese government to pay for this thing.
Posted by: Noel Maurer | February 08, 2015 at 02:07 PM
You've got me, guv'nor
two guesses
1) Chinese government is paranoid about having an alternative shipping access than "US controlled Panama", scare quotes, natch.
2) Internal factions in SOE fought it out, and the losers got this sweetener for cooperation.
My bet is on the first one. Remember, China does a number of internal projects that doesn't really make sense and is a net negative, out of a need for psych security blanket--like the North South water project sending super expensive water to Shandong or something. China wanted a diplomatic friend, and wanted a *useful* diplomatic friend, and spending money on them like the Soviets used to do with Cuba. The good lord knows this doesn't really have ROI of anything China does in Africa
Posted by: shah8 | February 08, 2015 at 07:36 PM
China has the most to lose once the US dollar becomes old fashioned.
Building and/or buying tangible assets and diversifying those investments abroad like cheap Africa and Latin Americas make a good business/investment sense in the macro perspective.
China is known for a long term strategic play. Don't be deceived by those Chinese eyes, they can see very far and very wide. Trust me, I'm married to one.
Posted by: Marwin | February 09, 2015 at 08:23 AM