The Power and the Money

Misleading headline award: American business do not face a “culture gap” with Cuba

 Despite the criticism, the New York Times is better than it has ever been. And it is still the best newspaper on the planet in any language that I read. (Which would, if you insist, cover English, Spanish, Portuguese and French. I do not understand spoken French.) But its headline writers have been falling down on the job lately.

First they suggest that Nicaragua is fighting an insurgency. But when you read the article, it becomes immediately clear that is not what’s going on. 

Now we learn that “Culture Gap Impedes U.S. Business Efforts for Trade With Cuba.” Fascinating! I would have imagined that the U.S. would have had the smallest possible culture gap in the world with Cuba. After all, we have Florida! And they have baseball. Perhaps they are talking about some Communist mentality? Fascinating! After all, Cuba experienced one the few genuine Communist revolutions not imposed by the Red Army. It might have altered the mindset deeply! In fact, it almost certainly did. So I started to read with fascination.

Only to learn that the problem is that “threading the needle between Cuba’s rigid rules and the restrictions that the United States continues to impose is tricky.” They do toss in one paragraph about Americans baffled by slow Cuban official decision-making.

Uh ... legal problems and a slow bureaucracy do not a culture gap make, fellows. 

Nail, coffin, Nicaragua Canal

 I am still annoyed that one of my ... uh, not childhood, no, “pre-midlife”? “Early adult”? ... heroes endorsed the Drumpfster. So I will write an unrelated blog post instead.

In the past week, there have been a few news stories which have reduced the odds of a Nicaragua Canal from slim to “Not unless President Eleven goes full Drumpf.” 

First, China published what was accurately called “shocking trade data.” Add that to record capital flight, and the case for blowing part of the current account surplus on a giant prestige project in Nicaragua goes away.

Second, the New York Times published a way overblown article about renewed Contra violence in Nicaragua. Now, the headline is overblown: Nicaragua is not facing a serious insurgency. (To be fair, when you read the article, it is pretty clear that nothing is going on.) But it should remind everyone that the people displaced to build the Red Canal could turn violent if not properly compensated.

Finally, it looks as though cargo ships may not be getting any bigger. If that is right, then what little commercial rationale the Red Canal may have had goes away. (It didn’t have much.)

Kind of disappointing, but there you have it.

Nicaragua Canal still not happening

 Commentator Marc points out that HKND has now announced that it will postpone serious work on the Canal Rojo for another year. I have been saying for a while that this project is not going to happen unless the Chinese government makes a big and hard-to-hide financial commitment to the project. Right now, with China flirting with recession, such commitment seems further away than ever. 

Ortega agonistes

 Daniel Ortega is one of the animating forces behind the Nicaragua Canal. I always doubted that he believed the Canal would be built, but I did think that he expected his Chinese partners to go ahead with the subprojects. 

Well, Ortega just fired a shot across HKND’s bow. Exactly one week ago, President Ma Ying-jeou of Taiwan visited Managua. The two presidents of course met. And now it has leaked that President Ortega asked President Ma for Taiwanese official support in building a $500 million deepwater port at Monkey Point, Nicaragua, on the Caribbean coast. 

Monkey Point is less than four miles from the proposed end of the Canal Rojo. In the stunned words of an opposition legislator, Edmundo Jarquín, “What person, with a minimum of common sense, thinks it is possible to build two deepwater ports less than six kilometers apart?” 

Well, nobody. I have only two points. First, the Monkey Point project has been percolating for a while. A Brazilian company rejected it three years ago. But the Nicaraguan government did not: last year, it put out for tenders on a design study for a highway to Monkey Point. Ortega was not talking off the top of this head; Hugo Chávez, he is not.

Second, the whole thing is a message aimed at HKND: get serious about building something, or lose your concessions, constitutional amendment notwithstanding. But this message is not new. I have my doubts about whether the Gran Canal will ever be built. The Ma-Ortega meeting is probably not a sign that Daniel Ortega shares them. Although he should.

When in doubt, a Nicaragua Canal update

 Not terribly much to report. The much ballyhooed access road is indeed under construction, so dirt is flying. But as a project the road is nothing, and as far as we can tell here at TPTM the money so far is coming from Venezuela via the Petrocaribe program. HKND, the company behind the project, says that the environmental impact statements will be coming out at the end of May. Apparently the company ran the statement past a group of academics at Florida International University last month, and those academics had some “doubts.”

The other big news, from yesterday, is that the head of the Panama Canal Authority, Jorge Quijano (pictured here) claimed the following: “I just came from China and builders told me that no state company is interested in financing the project.” But Mr. Quijano is self-interested. I have no doubt that he is telling the truth about what Chinese construction executives told him ... but I have rather more doubt that said executives really know Beijing’s thoughts on the matter. Heck, I doubt that Beijing knows Beijing’s thoughts on the matter. 

Weirdly, when asked about the matter, the spokesperson for Nicaragua’s official canal commission claimed, after some harrumphing, “That is, even this week we got German investors, and in the next few days I will travelling to the United States and the whole world is interested in investing in Nicaragua.”

No word on who these German investors were.

For what it is worth, Quijano thinks that a fourth set of locks big enough to accomodate the newest container ships could be built within 15 years for $17 billion. If that estimate is correct, I can’t see how in the name of God anyone can expect HKND to build the Nicaragua Canal in only five.

In short, our official position remains unchanged: as cool as it would be, this project is not going to happen unless the Chinese government gets involved directly.

Is Venezuela financing the Nicaragua Canal?

 It looks as if Managua may be losing patience with HKND over the delays in starting the canal. According to source from within Albanisa, the company that handles Venezuelan aid and investment to Nicaragua, “We are hoping they [the Chinese] will release the money to compensate landowners in the canal route, but so far they have only made excuses and want the government to provide the funds.” The source went on to allege that Albanisa has been financing HKND’s operations thus far. “My understanding is that the government already told HKND that they should stop using Albanisa funds and now invest their own money.”

That is triply interesting. Albanisa is 49%-owned by Nicaragua’s state oil company (Petronic) and 51% owned by PDVSA. Petronic buys oil from PDVSA at market rates, financed via Petrocaribe. Petronic then resells the oil and hands over the resulting revenue to Albanisa. 50% of the money goes back to PDVSA, while the remainder is split between a social fund administered by the Bolivarian Alliance and Albanisa itself. In other words, Albanisa and the social fund are financed by cheap loans from Venezuela. (The details can be found here, an English interview with the then-head of Petronic.)

Albanisa then uses that revenue to finance investment projects. (Details here.) The flow is around $400 million per year; as of June 2014 the company had received a total of $3.1 billion. Given that all the activity so far has consisted of some rather desultory roads around Brito, it is certainly plausible that Albanisa is financing everything. 

The story has three implications. (1) Venezuela has been keeping the project moving forward, at least indirectly; (2) HKND is having real trouble finding investors; and (3) Managua is having second thoughts.

I would have thought that HKND would be able to get going on the free trade zone; after all, they will need it. But it seems as though they are having trouble getting even the funds to start that. Maybe Beijing does not think this is such a good idea after all.

Self-indulgently sad about an Nicaragua Canal article

 It is a fine article, but I am wounded for all the obvious self-indulgent reasons. Hey, I get calls, but still, Mr. Plumer. Carlos and I quite literally wrote the book on the economic history of Isthmian canals.

The article gets one historical detail wrong: fear of volcanoes did not scuttle U.S. plans for a Nicaragua Canal. It is true that volcanoes were used as one of the talking points to approve the Panama route, but it was not determinative. Goddammit, I get no respect from these young folks. 

It also only avers that the Canal might be a financial boondoggle. I have numbers, available upon request. (They have already been passed on, so feel free.)

And it fails to present evidence that the Canal is likely a Trojan Horse for other projects, which is a big detail to miss in an explainer. Nor is there anything about the concession itself, save a mention that it is for 50 years. (HKND will in fact have a unilateral option for 100.)

I get to post this picture from ‘09, though, so not all bad. And the article really does a good job of covering most of the issues, so go read.

I am not succeeding in convincing myself about the value of the Nicaragua Canal

 Somehow I doubt that China will replace its imports from Europe and the Middle East with imports from the east coast of the Americas. I also doubt that in any realistic scenario export channels to the east coast of the United States (where Nicaragua and Suez really are substitutes) would be disrupted  enough to make it worth the cost. 

But who knows? Like I said, the only way this thing gets built is if China backs it with sovereign wealth. Maybe they will risk it.

The Nicaragua Canal as insurance against major war

 In line with our post speculating about reasons for the Chinese government to back a Nicaragua Canals, comes a thesis by an Argentine air force colonel that tries to quantify the costs to world trade from interdicting various naval choke points. Since he lacked actual point-to-point trade volumes, he was forced to estimate volumes based on data from country-to-country trade flows. I am not clear what sorts of biases that introduces. He also assumed a cost per ton-mile of 0.2¢, which is rather low. (See page 18.)

That said, his estimate of the annual cost from closing the straits of Malacca, Sunda and Lombok (e.g., a complete blockade of all traffic through Indonesian waters) comes to about $10.5 billion. Shutting down the Bab-el Mandeb (the strait between Djibouti and Yemen) would cost about $13.4 billion. It is not clear what percentage of that would fall on Chinese consumers, producers or shippers. 

Let’s pull a number out of the sky and say that half the cost would fall on China one-way-or-another. Is a $50 billion canal in Nicaragua worth it as insurance? 30-year U.S. treasuries are yielding about 2.6%. Assuming that the canal comes in at cost and hits its projections it should be able to earn that through 2045. In that sense, maybe building it would have no opportunity cost, assuming that the money would have been otherwise plonked into American federal debt. The Gran Canal is still a terrible business proposition, but it would make cheap insurance against a possible $5.2 billion loss if Indonesia goes up in flames or some terrible conflict erupts across the Indian Ocean.

Only ... there is still no sign of official Chinese backing for the Canal Rojo!

All of these recent posts are attempts to make a convincing argument that my assessment is wrong and the Chinese government really will go all-in and build the thing with official money.

Am I succeeding?

Three reasons to build the Red Canal

 I do not think the Canal Rojo will be built. It makes no commercial sense. Most independent observers concur. Here, for example, is an article from the South China Morning Post, in which Andy Lane arrives at the same conclusion using different data. Mr. Lane has another good analysis here which doesn’t quite pan the project, but certainly leads towards skepticism.

All that said, I would like it to be built! Simply because it would be cool. But that will only happen if the government of the People’s Republic of China wants it to happen.*

So why might the government of the People’s Republic of China want it to happen?

Well, consider what China might gain from a Nicaragua Canal. Right now, it is nearly a wash between using Panama and using Suez from the East Coast of the U.S. to southern Chinese ports. Using Suez, however, also means going through the South China Sea. Most scenarios in which the South China Sea was closed to shipping would likely also involve fighting around the First Island Chain ... but not all. (An Indonesian collapse? A war with India?) And there are multiple scenarios in which Suez might be closed. A Nicaraguan Canal would provide an insurance route for cargoes to and from the east coasts of North America and Brazil. 

The problem? An expanded Panama Canal would do the same thing at lower cost. Remember: there is no way on God’s green earth that China could use the Nicaragua Canal in a situation in which Panama was closed to it. In addition, there would be political benefits to financing a second Panama Canal expansion over building a Nicaragua Canal. Financing a fourth set of Panamanian locks would set off some huffing among the usual suspects here in America, but serious observers (e.g., most plausible U.S. administrations) would be reassured by the fact that a Panama expansion would fall under the rubric of the Neutrality Treaty. Which means a greatly reduced chance of antagonizing Washington. Moreover, another Panama Canal expansion would be uncontentious in Panama ... the same cannot be said of the Gran Canal project in Nicaragua. In other words, all the security gains at less financial cost and less political risk.

In fact, Chinese companies in August of last year broached the possibility of financing a new Panamanian expansion. 

There is a second possible reason to build a Nicaragua Canal. Note that Lane does not think that the new canal will lead to price competition with Panama. His logic, however, assumes that the Nicaragua Canal is run as a business. Perhaps China does not plan to run the Canal Rojo as a money-making operation at all. Rather, it could  run it as a piece of necessary public infrastructure, operating at cost. In that scenario, a price war with the Panama Canal leading to HKND’s  bankruptcy would be a feature, not a bug. 

The problem with the second reason? Well, for China to want to do that, it would need to believe that the rates charged by the Panama Canal are a significant drag on commerce. There is not a lot of evidence for that proposition. Would reducing canal tariffs really cause Chinese consumers to buy much more raw material from the east coast of South America or prompt Chinese producers to sell many more goods to the east coast of North America? I have my doubts.

Moreover, how would China insure that its commerce captured the lion’s share of the gains from the Nicaragua Canal? As Carlos Yu and I showed in our book, when the United States tried to give preference to its own ships in the Panama Canal in 1912, British pressure forced the country to change tack. The only reason that the benefits of the Panama Canal went overwhelmingly to the United States during its first 25 years was that the Panama Canal overwhelmingly carried domestic traffic. Maybe China will be able to get away with favoring its commerce over other nations, but I doubt that too. Or maybe geography implies that most of the ships using a low-cost Nicaragua Canal will be carrying Chinese commerce. Maybe ... it would be a hell of a $50 billion bet. 

That leaves you with a third possibility: the project would be the 2020s equivalent of the 1960s landing on the Moon. China would be metaphorically planting its flag on the American continent. Sure, the U.S. Navy would remain in complete control of the sea lanes and the People’s Republic would have no sovereignty. But the opening of the Canal Rojo would trumpet the end of America’s informal empire more than anything ...

... other than the actual end of America’s informal empire. Which will not (inasmuch as it survives) be altered in a any substantive way by this project. As stated above, the U.S. Navy will still control the Western Hemisphere. Moreover, I do not see how building this project would win China diplomatic gains in Latin America worth the $50 billion cost. Perhaps I underestimate the power of symbolism?

In short, the Chinese state would obtain at least three advantages from the construction of a money-losing Nicaragua Canal:** 

1. Insurance against disruptions in Suez, the Indian Ocean, the straits of Malacca, or the South China Sea (although this insurance could be obtained more cheaply using Panama);
2. The chance to drive transit rates down to their operating cost;
3. Prestige.

Are those advantages enough for the Chinese government to lend billions of billions of dollars to an entreprise that will likely go bankrupt? 

A way to make the Nicaragua Canal profitable

 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? 

The Nicaragua Canal still makes no business sense, now with numbers

 The Nicaragua Canal project is a little crazy. I’ve been canoodling around with some numbers and I just can’t make it work.

The project is estimated to cost $50 billion. According to HKND, the Red Canal will have an average bottom width of 280 meters. (Page 5.) That is only enough for one-way traffic. (Page 8.) Given the amount of time that it will take ships to pass through the two three-chambered locks, that means about 14 transits per day. (Page 72.) That is reasonable. 14 transits per day means 103 minutes for a ship to transit one set of locks. (Only one ship can through the locks at once, but there can be a ship in both the Brito and Camilo locks at the same time.) The new Panama Canal lock chambers are designed to take about ten minutes to fill or empty; call it an hour then for each transit, plus 40 minutes to enter and leave.  

OK, then. In 2020, HKND expects 3,576 transits, rising to 4,138 by 2030. (Also page 72.) That’s about a third of the roughly 12,000 recorded by the Panama Canal. So it is certainly a plausible number.

In 2012, the Panama Canal collected approximately $160,000 in tolls per transit, or $5.67 per ton. (Eight dollars for container ships, around five for reefers, and roughly four for tankers and dry bulk.) The new Nicaragua Canal is intended to handle ships of up to 18,000 TEU; ships on the current Panama Canal is limited to around 5,000. (The expansion will take that up to 13,000.)

If you ever wondered what a Panamax container ship looked like going through the Miraflores locks, well there’s one right behind me in the picture up there. That’s a ship, not a warehouse. Yes, the current locks are a tight fit.

Now imagine one three times the size.

So let’s calculate a ridiculous upper bound for the Nicaragua Canal. Assume that all the container vessels are at the maximum size for the new passageway. At the current rates charged by the Panama Canal, that’s $1.4 million per container transit. Then assume that all other vessels (save tankers) are equivalently oversized. That gets you about $500,000 per dry bulk transit and $1.1 million for vehicle carriers. We’ll further assume that all the “other” vessels in the HKND report are vehicle carriers. For crude oil, imagine that everything is a ULCC with almost 7× the capacity of a Panamax tanker. Ditto the LNG ships. Refined products, on the other hand, are currently shipped in Panamax-sized vessels, so even in this silly projection we’ll leave them the same. 

And opex? Well, huh. I’ll take current Panama Canal costs and divide ‘em by the ratio of projected Nicaragua Canal traffic to current Panama Canal traffic. That does not, of course, make sense, but it is a lower bound. (And one that comes to $75,000 for each of the Nicaragua Canal’s projected 3700 permanent employees; a ridiculous number by any standard.)

What do we get? A real internal rate of return through 2030 of negative 1.8%. If you take it out to 2040, then you can eke out 4.1%. A steely investor willing to bet against global war, the Singularity, and the chance that climate change will open the Northwest Passage could get 5.6% through 2050.

If this thing gets built, it will not be to generate profits for shareholders. Rather, it will be because the Chinese government sees some sort of security benefit. But other than, I dunno, access to the natural gas that the United States is not going to export in large amounts I could not tell you what that might be. 

Twists and turns in the Nicaragua Canal saga

 In this case, I mean that quite literally. The planned route of the Canal Rojo appears to have taken a small twist in response to either local opposition or ecological concerns, take your pick. The announcement came last Saturday in an almost offhand manner, with no details.

Here is a close-up of the original route, as stated by HKND. El Tule is the town that protested vociferously. The blue-striped area is a Ramsar-designated wetland. (Ramsar is a U.N. convention that protects wetlands; negotiations finished in 1971 and the convention came into force in 1975.) The brown-striped areas are where HKND intends to dump material from the canal excavation. 

On January 15th, a Ramsar delegation arrived to study the effect of the Canal on the San Miguelito wetlands, which would seem an odd thing to do if the Canal was now expected to bypass them. (Here is a link to the July 2014 presentation by ERM, which confirms the above route ... and says that HKND intends to consult with Ramsar over compensation for the wetlands, not over how to avoid them.) Below is a map from Nicaragua Dispatch showing the new dog-leg in the route, although I am not sure where they got it from. 

It all seems a little ad hoc for a $50 billion project that has supposedly already started.

The most detailed map of the Gran Zanja yet

 Below is the most detailed map that we have yet been able to find of the route of the Gran Zanja.

 

I have to admit, an adolescent part of me hopes that I am wrong about the project. Because it really would be freaking cool if it were built. 

Boz misses the true imperialism of the Chinese deal in Nicaragua

 This would be a comment on this post at Bloggings by Boz, but goddammit there’s no way to comment over there! What up with that, Boz?

Anyway, Boz writes:  “For the Chinese investors behind this canal, one of the biggest fears may be the final line of Tim Johnson's article yesterday: ‘Said Liberal congressman Pedro Joaquin Chamorro, “The canal concession will be overturned by future democratic governments.”’”

Would it will be so easy. For as we pointed out here, Nicaragua has signed away its sovereign immunity in the concession agreements. I doubt that the more extreme renunciation will stand in foreign courts ... but the Chinese won’t even need that to hold future Nicaragua over a barrel.

I suppose that the United States probably could arrange things to help the Nicaraguans escape the deal. Maybe. Perhaps. Uh huh. 

Meanwhile, y’all can listen to me bloviate about why I don’t think the Nicaragua Canal will happen on the BBC World Service. 

The Nicaragua Canal is still unlikely

 This blog was confident that the Nicaragua Canal would not be built because it makes no business sense. That is still our position. That said, it is increasingly likely that construction is about to start on ... something. We would still bet against that something being the Gran Zanja.

First, the financing. Where will it come from? HKND used to strenuously deny that there would be any Chinese official involvement with the project. But the business plan still does not make sense and private sources are unlikely to come through. Now, however, HKND is saying that the Chinese state is willing to put up the money. “Mr. Wang is looking at this issue intensely and working with Chinese state businesses that will have a small amount of participation in this project and will finance a great part of this project. And then we have to go out into the international markets once we are ready to.”  

If Beijing has decided that the People’s Republic has decided that a Nicaragua Canal, then one of the biggest arguments why it will never happen goes away.

But we do not know if the Chinese government has made that decision! For what it is worth, the Costa Rican government directly asked Chinese representatives about the PRC’s official position. How did the Chinese respond? “They have told us on two occasions that as of today there is no endorsement. We do not know if in the future China will be interested in participating. That is a sovereign decision, but we believe that the proper stringencies will be complied with.” 

Second, construction is due to begin on December 22nd. But don’t get too excited. The first works will consist of “auxiliary roads and port construction, not the ditch.” Other announcements have omitted the port construction; it looks like the work might be just sixty miles of macadamized roads. Even HKND admits that the December 22nd date is symbolic.  

We will know when the effort gets seriously underway. HKND officials met with representatives of the Nicaraguan farm sector. Michael Healy, the head of the farmowners’ federation, reported that “they are talking about demand for 37.5 tons of rice, 25 tons of vegetables and 12½ tons of beef, pork and chicken, per day.” [Italics ours.] The request led the agriculturalists to suspect that HKND intended to bring about 50,000 of their own workers, because “The Chinese didn’t ask for a single pound of beans or corn, which it seems are not part of the Chinese diet.” 

It is worth noting that while Nicaragua can probably provide the meat, it would need to import most of the rice and a lot of the vegetables. 

In short, a serious effort will see massive imports of food and construction materials, as well as mass hiring of Nicaraguans and the arrival of thousands (if not tens of thousands) of Chinese workers. It won’t start on a dime. 

Third, there is a lot of opposition in Nicaragua, not least because the new law says that landowners will be compensated at the cadastral value of their land, not the market value. The Changjiang Institute has been conducting surveys around Rivas, and the Chinese surveyors have needed police and military protection. And you can add to the opposition to mass expropriations three other things: (a) opposition to the potential arrival of thousands of Chinese workers; (b) opposition to the Panama-Canal-Zone-like 500-meter security zone on either side of the canal; and (c) general opposition to the renunciation of Nicaraguan security. It is not clear that the domestic politics of the project will hold up.

We return to our initial conclusion: the Nicaragua Canal is about the side projects. Look at this presentation. The side projects are much more developed than the Canal. (The map above shows the port complex on the Pacific, which will in effect be a Chinese charter city.) HKND is enveloped in a web of weird related companies that seem perfectly designed to channel profits to Nicaraguan politicians but not so much for raising $50 billion. 

In short, while it is possible that Beijing might throw its weight behind the Gran Zanja (also sometimes evocatively called the Canal Rojo) we remain skeptical.

The shadiness of the Nicaragua Canal deal is not why I doubt it will happen

Andres Oppenheimer of the Miami Herald (who wrote what was my favorite book on contemporary Mexico, until overtaken by events) is also skeptical that the Nicaragua Canal will be built. His worries come not from the contract, but from the shadiness of the deal, rushed through the National Assembly.

First, he argues, Wang Jing, the owner of HKND, has no construction experience. Second, Ortega’s son, Laureano, has “chaperoned” Wang around the country. Third, there was no public bidding. He could have added that Wang’s telecoms company, Xinwei, recently landed a $300 million contract to build a 4G network in Nicaragua (without propper bidding) and is building (with Great Wall Industries) a communications satellite for a 2015 launch.

It is a little shady ... but I would not doubt the deal because of that. Xinwei is reputable enough to raise the capital and hire the expertise for a commercially-viable project, even if they might not have been the prime contractor under a more open process. Moreover, as Oppenheimer points out, a lot of reputable Western firms and individuals are pinning their names to the project.

So I am not worried that the Canal might be smokescreen because of Xinwei’s odd relationship with the Sandinistas and President Ortega.

Rather, I am worried that the Canal is smokescreen because it makes little economic sense while the contract allows HKND to build all sorts of other lucrative stuff under 19th-century concession terms. An American company that has been trying to build a transcontinental railroad since 1995 shares my worries: it is going to be locked out of the project.

For what it’s worth, Nicaraguan public opinion is very favorable. And the truth is, unless your property happens to be expropriated, it is unlikely that the project will make Nicaragua worse off. Sure, the FTZ’s will bring less benefit than hoped, and the railroad will generate few spillovers and little public revenue, but it is better than nothing. After all, the American dry canal project has gone basically nowhere for almost two decades and President Ortega is popular. So why not? If I were nica, I’d also support rolling the dice on the project, even knowing that it much more likely to end as a big real-estate deal and quasi-charter city rather than a Nicaragua Canal.

Lastly, a brief revisit of the Panama Canal issue. Below is a map from the Panama Canal Authority showing where a fourth set of locks (i.e., the expansion after the current expansion) would go. Here is the design proposal for a new bridge over the Panama Canal, which specifically states (on page 9) that the bridge must be tall enough to handle the bigger ships from an as-yet-unbuilt fourth locks project. In fact, in 2008 the U.S. embassy in Panama reported that Roberto Solange, then the Panama Canal Authority’s VP of marketing, wanted to run a feasibility study on a fourth set even before the third was finished.

In short, the threat of a second Panama Canal expansion is very real ... and should dissuade rational investors from a full-scale Nicaragua Canal. As opposed to a smaller railroad-port project.

Does HKND really want to build the Nicaragua Canal? Probably not.

There is some evidence that HKND does not intend to build the canal across Nicaragua. At the very least, they are prepared to walk away from that commitment at the drop of a hat. (The “Casa de los Pueblos” in the below photo is where HKND and President Ortega signed the framework agreement on June 14.)

I just again read over the framework agreement, and it separates the entire project into nine subprojects:

1.  Airport;
2.  Associated infrastructure;
3.  Caribbean Free Trade Zone;
4.  Caribbean port;
5. “Dry Canal,” e.g. railroad;
6.  Pacific Free Trade Zone;
7.  Pacific port;
8.  Pipeline;
9. “Wet Canal,” e.g., the canal.

But clause 15.1 allows the Sponsor (i.e., HKND) to walk away from any of the subprojects at its own discretion.

If in respect to a sub-project, at any time prior to closing the finance for said sub-project, the relevant Sponsor determines by its sole discretion that such sub-project is not viable (for commercial, technical, legal, political or other reasons) or that the sub-project should not be completed or operated, in such case, the Sponsor has the right to terminate the concession for such sub-project and all rights, benefits and obligations under this Agreement with respect to such sub-project.

The chart on page 21 of the agreement makes it clear that there is no special penalty for declaring a sub-project inviable and walking away.

In other words, HKND could develop, say, the railroad and free trade zones, or the airport and pipeline, or just the railroad, or just the free trade zones, or whatever ... with all the amazing protections and concessions that I discussed in this post.

You could see a de facto pair of HKND-run charter city ports (depending on the specific FTZ legislation; all we know right now is that they will be tax-exempt and operation outside Nicaragua’s tariff wall) with a railroad and pipeline connecting them. That might make commercial sense as a project; I can especially imagine the pipeline getting use for Venezuelan and Brazilian shipments.

But I do not think that HKND really intends to build a canal. Oh, I am sure that they might try if the financing showed up ... but I don’t think that they will try very hard.

Neocolonialism in Nicaragua?

So I got my hands on the memorandum of understanding, the deed of cooperation, and the framework agreement for the proposed Nicaragua Canal. All I can say is ... wow. It is somewhat, uh, lopsided.

Thus my political doubts about the proposal. This is such a stunningly bad deal for Nicaragua that I have trouble imagining it lasting. But then again, Mr. Ortega has run the place tolerably well and is riding high in the polls. His party has total control over the National Assembly and the next election is not until 2016. So maybe he can get it through, although something about this statue in downtown Managua gives me doubts.

On to the deed of cooperation! First thing, it establishes free trade zones at both ends under the control of the concessionaire. It is supposed include an international airport, or if that doesn’t happen, control over an expansion of an existing one.

Second, the concessionaire gets “title to all real and personal property to be transferred by the Authority on behalf of Nicaragua free and clear of all liens or other encumbrances.”

So far, this is not bad, although it might sound it. This is just standard for big private infrastructure contracts, including the promise of the “relocation and resettlement of any people and/or communities currently situated in areas to be utilized by or in connection with the Project.”

Third, the concession period is 100 years.

Whoa, what? The news reports say 50. True. But right there, on page 5:

Nicaragua shall grant ProjectCo the right to use and receive any and all economic benefits arising from the Canal and the Associated Infrastructure (including without limitation the exclusive right to collect tolls, tariffs and fees from the shipping and freight utilizing the Canal and any party utilizing the Associated Infrastructure) for the period starting upon the date hereof and ending on the date which is fifty (50) years after the commencement of operation of the Canal, which initial term shall be automatically and without any additional consideration from or costs to the NewCos or the Sponsor extended thereafter for an additional fifty (50) year period in the event that ProjectCo provides a written notice to the Authority at least six months prior to the expiration of the initial concessional period.

ProjectCo is a special purpose vehicle (formed under the laws of any country) to operate the Canal. The Sponsor is the HKND Group. The Authority is a semi-autonomous arm of the Nicaraguan state established by Law 800. NewCos refers to both ProjectCo and the holding company that will own the shares, e.g. HoldCo.

Let us continue. Anything else?

The Authority and Nicaragua shall grant protections and safeguards to each of the Sponsor, HoldCo and ProjectCo against any changes in law (including, without limitation, tax, corporate and real estate laws of the Republic of Nicaragua) law enforcement, environmental standards, consents, decrees, policy and regulations and any court order, decrees or judgments.

And:

The Sponsor and each NewCo shall each enjoy exemption from Nicaraguan corporate and income taxes and exemption for themselves, their affiliates and financing sources and the Project from all charges, fees, withholdings and assessments and any other taxes and duties.

But how can HKND be sure that a future Nicaragua government won’t change the rules? Well, they are planning for the year 2113, so maybe they will just send in a robot army. But that seems like a long-shot. So instead they promise to give HKND the protection of Nicaragua’s bilateral investment treaties. See the above clause where the NewCos could incorporate where they like? That means they get to pick the best one of Nicaragua’s treaties, which you can find here.

And that brings in the power of ICSID. Already Nicaragua would be risking Chinese retaliation. (Qianru Song and Rodrigo Wagner have argued that China worries little about expropriation because it stands ready to use harsh economic sanctions against violators.) But now it would risk huge legal knots from every country that had signed the New York or Washington conventions.

So far, we have that the Nicaraguan government gives HKND full property rights over the Canal for 100 years, including title to all property, plus a form of extraterritorial privilege in the free trade zones. Plus full tax exemptions and recourse to international law to make sure that nothing but nothing changes between now and 2113 ... actually, a bit longer, since that 100-year clock starts ticking when the Nicaragua Canal starts operation, estimated by proponents as eleven years after construction starts.

(So call it 2124, when the robotic ships will be carrying ... what? Raw materials for 3-D printers now that the war between Russia and Nunavut has shut down the Northwest Passage? I kid, but the point is that there is something fundamentally ridiculous about a 100-year concession.)

What does Nicaragua get in return? Well, it gets $10 million per year from the start of operations. They are also get a 1% initial stake in the business, but any dividends are deducted from that $10 million. A second 1% stake is to be used by the Sponsor for “philanthropic purposes in order to support social and economic development in Nicaragua and/or in the name of the citizens of the Republic of Nicaragua throughout the world.”

Nicaragua’s stake is set to grow by 10% every decade. So in year 11 of operation, it jumps from 1% to 10%. In year 21, it grows to 20%. And so on, until year 101, where it peaks at 99%, with the rest going to those “philanthropic purposes.”

The framework agreement adds a few wrinkles to the deed of cooperation. It has a few provisions that could be interpreted as giving HKND the right to set up its own security service. It also insures that arbitrations will occur in London, and that is important because London has some of the most powerful laws to use against international entities. (Arbitral decisions are first enforced in the country where the tribunal was held.) And it makes it clear that HKND can bring in whatever workers it needs to construct and operate the canal.

Finally, the framework agreement contains the most forceful renunciation of sovereign immunity that I have ever seen:

[The Republic of Nicaragua] waives to the maximum extent possible whatever sovereign immunity that it might possess, whether before an arbitral tribunal or procedure, judgment, jurisdiction, adjudication or enforcement action, including the waiver of any sovereign immunity for itself (including, should it be applicable, its ministries, departments, agencies and independent organizations carrying out governmental functions) and whatever of its properties, whether its own or any other agency, regardless of the commercial or non-commercial nature, function or purpose of such property. These assets shall include any bank account belonging to the Party [e.g., Nicaragua] whether under the name of a diplomatic mission or something else.

This all seems very familiar. I mean, there is no reference to a zone ... uh, except the free trade zones, and that’s different, right? ... and I don’t think that Nicaragua will be adopting the yuan or changing its constitution to allow Chinese intervention ... but wow.

For what it’s worth, that $10 million is more than the $5.4 million (in 2012 dollars) that Panama received from the U.S. under the Hay-Bunau Varilla Treaty. But this is set up to insure that Nicaragua will enjoy very little benefit from the canal until its second decade of operation, and even then the returns will be slight unless it turns out to be phenominally profitable.

Putting aside the problems with the business case (you can read HKND’s version here), I am not sure how you sell this contract to the Nicaraguan people. But perhaps President Ortega is popular enough and has a big enough majority that he does not have to.

Finally, two useful links. Here is a good news backgrounder by El País. Here is an invaluable run-down of the Chinese actors and the legislative background at Margaret Myers’ always invaluable China and Latin America blog.

Paddle the Nicaragua Canal!

Courtesy of Damien Cave’s twitter feed, I found this 2006 article from Matthew Power. He took a canoe down the San Juan River, the most-mooted route of the new Nicaragua Canal project.

I want to go! Although I will probably take the motorboat. I just had a bit of a tussle with climbing in the rain, following a boxing match gone wrong. As a 40-something father, I think I might be done with the macho tip. Maybe. I hope.

(Not counting future trips to crime-ridden parts of Mexico or war zones in Colombia or a return to the old Jalalabad PRT territory. Those would be for purely intellectual reasons.)

Anyway, go read the article! It is a very good travel piece, and if it doesn’t make you want to go, then nothing will. Of course, considering as I believe my own argument, there is no rush: the river will be there and be green for a while to come.

UPDATE: Yes, an update before I even hit “publish”! It appears as though the HKND group has ruled out a San Juan River route. Smart! I still do not think it will happen, but the probability of success just ticked up a tiny bit.

My opinion about Nicaragua’s canal project

As quoted in the New York Times: “It’s not going to happen, that was my first reaction.”

Why not? Where to begin? Quoting myself, again: “Even if they did get the $40 billion, the increases in traffic are increasingly speculative.”

Short version: Nicaragua will be competing with the expanded Panama Canal, climate change (opening the Northwest Passage), and the fact that Panama has built its new locks to make expanding again relatively easy. Even if you believe that the Nicaragua Canal is feasible, it makes little sense to go up against that sort of competition.

Let me explain with some pictures. Behind me you can see the new Panama Canal channel under construction. The photo is looking north.

This is a view from the other direction. The berm will be knocked down and the entire area opened to water. Note the width. It is wide. Much wider than you need for one new set of locks.

The below picture looks north at the new locks under construction from what will be the approach channel. To the right of the concrete construction will be the water-saving basins. To the left is a lot of empty space.

The reason for the empty space is allow for a fourth set of even-larger locks to be constructed as a mirror image of the third. (For completeness, the below picture shows what the view looked like in the opposite direction from the above picture. Where I am standing will be underwater next year.)

Moreover, Panama decided not to build the third locks bigger. They could have. But the Canal Authority decided that building something that could handle most Suezmax ships would be good enough. In addition, most U.S. ports need work to handle the new size (called NPX or post-Panamax) ... and many analysts think that cargo ships have already gone past their optimal size.

And while we do not yet have the plans for the new canal, we do have the plans that a Nicaraguan commission published in 2006. Those plans called for locks with dimensions of (in feet) 1,529 × 210 ×112. That is deeper but not that much larger than the new Panama locks, which come in at 1,400 × 180 × 60.

The builders of a Nicaraguan Canal therefore would be taking three bets: first, that the increased size would attract a lot more traffic; second, that the Panamanians would not match them with a fourth set of larger locks; and third, that if either of the previous bets went wrong there would still be enough traffic for both canals.

Given all that, I would not invest $40 billion in such a venture.

I have other reasons to doubt the project, but they are political. The above captures my skepticism about the business case. Thoughts?

The Nicaraguan exception?

 One story that doesn’t get enough attention has been the collapse of public order in Central America. Why has that happened? Well, there are several possible hypotheses, including the U.S. decision to begin deporting violent felons at the end of their sentences ... but the clear problem is drug trafficking.

Why would drug trafficking suddenly become much worse? The above maps present a suggestion. In 2003, “suspect air activity” was a jumble, mostly over Colombia. As of three years later, in 2006, a lot of “suspect maritime activity” still went directly to Mexico. Over time, that changed. By 2010, Honduras had captured most of the air traffic, while sea traffic migrated to Guatemala, Costa Rica, and Panama. In essence, interdiction efforts by the Mexican government worked, sort of: fully-loaded 727s no longer landed in Sinaloa, and for all the hype over long-distance submarines, boats also stopped coming. Instead, planes diverted to Honduras, and maritime traffic to Panama and Costa Rica (mostly to supply local markets) or Guatemala (where the stuff was then moved overland to Mexico).

Activity in 2011 (see left) shows the pattern even more clearly, but with an interesting gap. Planes fly over Venezuela and land in Honduras, with a few stragglers heading on to Hispaniola or the USVI. Ships head into violence-torn Guatemala and Honduras, where whole tracts are outside the remit of the state.

Also in 2011, lots of maritime traffic heads directly into Costa Rica and Panama. (See right.) 

But where doesn’t it go? Nicaragua. For all his faults, and there are many, Danny Ortega seems to have kept his country from being overrun by drug traffickers. The maps are revealing. (Click on the maps to enlarge.)

Flip the question. Why are ships headed into Costa Rica and Panama? The two countries don’t seem to be a source of transshipments elsewhere. There is nothing flying out, and there is little reason to go to either country if you want to move drugs overland into Mexico, given how easy it is to get to Guatemala and Honduras. But there is a lot of sea traffic into both countries directly from Colombia. If drugs from Guatemala and Honduras could easily pass through Nicaragua, then there wouldn’t be much traffic into the Costa Rica-Panama pair. Back in 2006 neither place showed much direct traffic; the implication being either that a Nicaraguan supply source was cut off, for which there is no evidence, or that as the cocaine markets in those countries grew over the last five years the suppliers were unable to send much through Nicaragua.
 
The question is why Nicaragua is aloof. Is Danny Ortega less corrupt than Laura Chinchilla of Costa Rica? That seems unlikely in the extreme. His fellow Bolivarians (and patrons) in Venezuela have no problem with overflights from cocaine-producing regions. Is the Nicaraguan state stronger than the ones in Guatemala and Honduras? That seems possible, but anybody who’s been to Nicaragua will report that generalized public order is little greater than in the countries to its north (in fact, at first glance, it seems rather worse) and quite a bit less than in Costa Rica or Panama. Nonetheless, Nicaragua not only is bypassed by the drug traffic, it seems exempt from the inexorable rise in violent crime that’s plagued the rest of the Isthmus.  The homicide rate in Nicaragua has been bouncing around 13 per 100,000 for several years, up from the early part of the decade, but little different from the 1990s.  It is, in short, a mystery.

Is it just luck, or is Managua doing someting right? Here is a suggestion that it is the country’s socialist legacy what’s to credit. The idea is that community policing and greater community-police connections (established by the Sandinistas during the 1980s) have kept crime low. Here is a suggestion that it might be because Nicaragua sent immigrants to Florida instead of California, where they putatively became less exposed to organized crime. As someone with a lot of family (and time spent) in South Florida, I doubt this. The same article also suggests that it may simply be that the Zetas haven’t gotten to Nicaragua yet. That is possible: some in Nicaragua have the same fear. But it seems unsatisfying, what with trafficking and violence increasing to both the north and the south.

Nicaragua’s non-participation in the drug trade is striking, as is its (relative!) non-violence. But in order to predict whether it will last, we need to know more Any ideas?

A real anti-imperial triumph

  It seems as though the Argentine ambassador in France will no longer need to pay embassy expenses out of his own pocket.  A French judge lifted the freeze imposed on April 3rd.  More importantly, a German judge released the funds that German companies owed Argentine tax authorities.  Interestingly, Judge Wölber did not base his decision on sovereign immunity.  Rather, he ruled that since the tax payments were owed by the companies’ Argentine operations, German courts had no authority.  It remains to be seen if this precedent will be followed by other European courts, but the Argentine government is optimistic.

Interestingly, U.S. courts have taken the same position.  In 1999, the New York-based Leucadia National Corporation sued Nicaragua over $26 million in defaulted debt that it had purchased for $1.14 million.  A New York court granted the company $87 million.  (No, I don’t know why.)  It tried to collect by attaching Nicaragua’s share of the ticket and landing fees paid by U.S.-based airlines that flew to that country.  U.S. courts, however, refused to uphold the judgment.  But don’t cry for Leucadia.  Eventually the World Bank paid off the debt at 4.5¢ on the dollar, including accrued interest.  By my calculations, Leucadia received about $7.8 million, for a nice return of 584%. 

I am increasingly unsympathetic to Argentina.  But I am also relatively unsympathetic to the vulture funds that try to use the judicial system to impose sanctions on defaulting governments.  I may change that position if we start seeing more ploys like President Correa’s brilliant gamble, but that’s still a hypothetical fear, not a real one. 

P.S.  It seems like I was wrong about Ecuador.  I’ll discuss why, but only if there’s interest.  No reason to admit error if nobody cares ...

Around the Revolution

  “You know, I’ve always wondered what South America would look like if no one gave a damn about coca or Communism.  It’s always impressed me the way you boys have carved this place up.”

“I’ll take that as a compliment, coming from a Brit.” 

Now that the U.S. election is over and James Bond is officially a friend of Evo Morales, it's time to take a trip around the Bolivarian Revolution.  How is the red banner faring around the continent? 

In Venezuela, the Revolution just won what is either an impressive victory or a debilitating blow in the gubernatorial elections.  On the one hand, Socialist party candidates garnered a total of 53.5% of the vote.  They also took control of most state governments.  On the other hand, urban votes shifted dramatically towards the opposition.  More ominously for Sr. Chávez himself, the biggest Socialist vote margins piled up in three states whose incumbent Socialist governors opposed the President’s constitutional reforms in last year’s referendum.  (Monagas, Anzoátegui and, Lara.)  That bodes ill. 

As does the fact that Venezuelan oil is now heading for $40 a barrel.  (You heard it here first!)  Venezuela’s budget is a mess, and a gigantic hole has just been blown through it.  Unless Chávez intends to try to emulate Plutarco Calles (or, more contemporaneously, Vladimir Putin) and become a behind-the-scenes jefe máximo de la revolución, he will be on his way out in 2012. 

Crossing the Caribbean to Nicaragua, we come to the interesting administration of President Daniel Ortega.  One difference between Nicaragua and Venezuela is that Venezuela has a very well developed system for insuring that elections are free and fair, while Nicaragua does not.  There are reports that President Ortega, it seems, has taken advantage of that lacuna to steal municipal elections.  Several Sandinistas have defected, and violent demonstrations have gripped several cities, including the capital.  Things could easily get worse.  The Russian Federation, I should add, is a non-player here, despite its government’s pretensions.  Venezuela is not a non-player, but given Hugo’s trouble at home, I don’t see him upping aid to Managua.  He’s already called off a $4 billion refinery project.  Anyway, I’m not sure that Ortega is at the stage where aid could help:  fraud charges cross a line, and it will be hard for him to buy support back.

Jinking to the north, Honduras has just joined the Alternativa Bolivariana, and the first shipment of 50 tractors from Venezuela has arrived, along with four million energy-saving light bulbs.  El Universal reports that Caracas stands ready to lend Tegucigalpa about $132 million more, along with $82 million in subsidized oil for agricultural use.  (It isn’t clear whether that subsidy is a standard Petrocaribe credit, or an actual grant of free petrol.)  A nice economic gain for President Zelaya, with the additional benefit of sending a shot across the bow of the new American president-elect.  “Pay attention to me or else!” it says. 

The problem, of course, is that there doesn’t seem to be a whole lot to the “or else” part.  Or else Hugo Chávez will give your people much-needed aid?  Okay.  Latin Americans, like other foreigners, may have some trouble adjusting to a non-hysterical foreign policy coming from Washington. 

Jumping across the Pacific, we come to Ecuador, where President Correa recently shepherded through a new constitution.  Ecuador is currently testing how easy it will be to default on its foreign debts.  As regular readers know, there are cases when I think sovereign default is a great idea.  In this case, I think it is pretty dumb.  First, Ecuador would open itself up to lawsuits.  If successful, and given the structure of the loan contracts they probably would be, then Ecuador could find its export revenues attached, or worse.  With oil prices tanking, interference by the Obama Administration wouldn’t be likely.  Second, Ecuador can pay.  It can probably roll over its outstanding debt.  Now, perhaps all the terrible things that the government claims in its audit are true, and the loans really were odious ... but I’m having trouble believing it.  The claims are just too hyperbolic.  Third, even though the Ecuadorean government can pay, it would have a great case in a rescheduling negotiation, what with some of its bonds trading as low as 24¢ on the dollar.  So why run the risk of default when renegotiation is an option?

But President Correa will do what he will do; I just wish I understood what he is trying to accomplish.  Right now, he’s managed to irritate the Brazilian government by threatening to default on a loan from Brazil’s development bank, and he may be about to blunder into a very unnecessary and potentially expensive default on American creditors.  To be fair, the brinksmanship to date has worked.  The country is not in a technical default despite its recent postponed payment, and I suspect that fortunes may have been made by the debt’s recent dip to 14¢.  But my gut feeling is that default would not be wise at the present moment.  How many foreign assets does Petroecuador hold?

If I am missing something, I would very much like to know what.

One country that is not a member of the Bolivarian axis but which has a government that is sometimes considered to be allied to it is Argentina.  Argentina has just run into a bit of trouble that might be relevant for Ecuador’s energetic head of state:  the (in)famous Judge Thomas Griesa of New York has frozen $2 billion in recently-nationalized pension assets.  Argentina could lose those assets on appeal; they would then be used to pay the American “holdouts” from that country’s debt renegotiation and repudiation.  Ecuador could be headed for a similar problem, and that is assuming that the debtors fail to get ICSID involved. 

(I have no opinion on the Aerolineas Argentinas nationalization.  After all, the firm is headed towards liquidation, and its owners don’t have much of a leg to stand on demanding more compensation.  That said, it isn’t clear to me why Argentina needs a national flag carrier.  Unless there is some reason why the airline’s failure will cause some sort of catastrophic economic knock-on — and I am open to arguments of that type in the case of the Big Three in the U.S. — it seems like a dumb idea to take a dying airline under government ownership regardless of who gets compensated by how much.)

Which finally takes us to Bolivia.  The country is back from the political brink.  A draft of a new constitution has been agreed upon, and goes before the voters on January 25th.  More interesting is the Bolivian government’s aggressive stance towards the U.S.:  expelling the ambassador, the DEA, and the Peace Corps.  Where will that lead?  Some cogent analysis here.  What do you think?

And that has been your latest installment of “Around the Revolution.”  Stay tuned, and hasta la victoria siempre. 

Canals and Costa Rica

Peter asks about past Nicaragua canal plans; Randy asks about the environment and Costa Rica.

Nicaragua was in fact considered for a trans-Isthmian canal.  Only one project got past vaporware:  between 1887 and 1893, the Maritime Canal Company excavated 1½ miles of canal and built 11½ miles of railroad in pursuit of the project.  Their planned route to the Atlantic followed the dashed line above.  Meanwhile, their plan to avoid the rapids and shallows of the San Juan River east of its junction with the San Carlos River was brilliant in its simplicity, if not in its feasibility:  build a giant dam at Ochoa and flood everything all the way to Lake Nicaragua.

It turned out that the land slopes pretty shallowly to the south of the river, which meant two things.  One, Costa Rica needed to be paid off.  Two, giant embankments needed to be constructed, which drove up the cost.  The Maritime Company went bankrupt.  When the U.S. government started to seriously scout routes in 1901, it identified the Nicaragua route as feasible, but significantly more expensive.  It estimated that a Nicaragua route would cost $189 million versus $144 million for a canal through Panama.

How much is that in real money, you ask?  (Well, maybe you didn't, but you should.)  In 2007 dollars, the Nicaragua route was estimated at $4.0 billion, while they figured the Panama route would cost only $3.1 billion.  But that doesn't tell you how much effort they planned to put into the project, because the world was much poorer back then.  Equivalently-scaled projects today, relative to the size of the economy, would cost $117.7 billion and $89.4 billion respectively. 

A $28 billion difference ain't nothing to sneeze at.  While there were many political twists and turns (including a lot of politicians with a vested interest in the Panama route), at the end of the day that was the reason Panama got a canal and Nicaragua did not.

In 1931, the U.S. once again considered a second canal through Nicaragua.  These plans were rather less environmentally destructive.  (See the solid line on the map.)  There would still be a dam and some flooding, but very little compared to the 1887 plan.  Most of the rapids would be bypassed by short stretches of canal.  This plan, of course, didn't come cheap:  $722 million in 1931 dollars, or $8.4 billion in real money, or $130.3 billion as a percentage of national income. 

Considering that the Panama Canal had run over-budget by at least a factor of 2.5, those estimates seem a bit low.  Then again, a bad recession was in the process of turning into the Great Depression, and people were willing to work for smiles.  So you never know. 

Anyway, the plan never happened.  Although the Panama Canal had been a huge economic success, there wasn't much of a case for expansion.  The military case was equally dicey. 

Costa Rica was also dead-set against it.  In fact, the Central American Court of Justice died in 1917 precisely when Costa Rica protested over Nicaraguan canal plans, arguing that an 1888 arbitration reward (decided, ironically, by President Grover Cleveland) gave it a veto over canal plans.  Nicaragua told the court to f*** off (meaning that the United States told the court to f*** off, since the U.S. effectively ran Nicaragua at the time) and that was the end of that.

But I haven't yet answered Randy's question about Costa Rica.  The new canal plans, you see, don't involve the San Juan River at all. 

The Nicaraguans evaluated six possible routes, and selected the one shown above.  They rejected the San Juan route because of the cost of the dams and the ecological damage they would cause.   They rejected two routes that would plug into the Escondido River for the same reasons.  Finally, they rejected two cross-country routes to Punta Gorda (more-or-less) because they were simply infeasible given the terrain.

In other words, because technology has changed, the environmental and political objections are less than they once were. 

Still, with an estimated cost (in 2006) of $20-25 billion and a worldwide recession gathering force, I don't see this thing happening anytime soon.  I wouldn't discount it forever, of course.  Traffic between Brazil and China will only grow, and despite the trans-South American road and rail links now under construction a second Isthmian canal might become something reasonable.  In addition, if oil prices rise further (something I'd bet against, but I've been wrong), then our friend Hugo might decide that this is just the investment to bank his spare change in.  After all, the Banco Central de Venezuela is sitting on $39 billion in reserves, and it would make his dream of exporting to China instead of the U.S. much more feasible ... but no, I don't think he's that irresponsible. 

Thoughts?

Nicaragua dreaming

Somehow I just don't think that this is going to happen.  I mean, it's nice that Managua recognized South Ossetia and Abkhazia, but Russia just doesn't have the money right now.  No, if you're going to reward your faraway friend (although I'm at a loss as to why Moscow would want to) this seems like the way to do it.

And much as Nicaragua is a full-up member of the Alternativa Bolivariana, Venezuela doesn't have the money to toss away on such a megaproject right now.  Astoundingly enough, Caracas is going to have to cut back spending if oil goes below $90, a level of fiscal irresponsibility to rival Washington. 

Still, for a guy who proposes transcontinental railways and really likes to build stuff, I'm surprised that a Nicaraguan canal hasn't caught his eye. 

Bolivarians and Bolivians

Another thing that I didn't quite realize until I got to Venezuela is just how important the international dimension of the Bolivarian Revolution is to President Chávez. 

The above photo is of a speeding red jeep, of the sort that Chávez has distributed to various functionaries, with “Viva Bolivia libre” painted on the back window.  We were up in the “Country Club” neighborhood, a wealthy part of town where the government planned to build public housing until Chavista supporters started buying homes in the area.  Those plans, mysteriously, now seem to be on hold.

It was a Saturday, the day before Bolivia's recall referendum.  Chávez is deeply vested in Evo's success, and so he organized mass demonstrations in support of Evo Morales here in Caracas.  Parts of the city were a sea of red, gold, and green, and Evo supporters could be seen everywhere.  It formed a decent counterpoint to the opposition demonstration held on the same day. 

Bolivia is a member of the Alternativa Bolivariana para las Américas (aka, ALBA), along with Nicaragua, Dominica, and Cuba.  Honduras is on the verge of joining.  It isn't entirely clear what ALBA does (there's not a lot of institutional heft to it) but the Venezuelan government has vested a lot of rhetoric.  It also seems to have invested no small amount of money.  A back-of-envelope calculation from data in this Miami Herald article implies that subsidies to Cuba alone are worth around one billion dollars a year.  Information in this Reuters piece implies an even higher cost:  34 million barrels a year, worth around $4 billion, in exchange for Cuban doctors.  Chávez has given aid to Bolivia and Nicaragua under ALBA, purchased billions and billions of Argentine debt in support of the Kirchners, and finances oil purchases in the circum-Caribbean.

There are two mysteries to Chavista internationalism.  First, what's its extent?  How many resources has Caracas put into spreading Bolivarianism?  Second, what does President Chávez get out of it?  Neither one has a clear answer, but I'll take a very superficial stab at it.

First question:  how much does Venezuela devote to international affairs?  That's a surprisingly hard question to answer.  In fact, I can't answer it, except to say that it's both a lot of cash in absolute terms and probably not all that much in terms of Venezuela's nominal GDP.  ($236 billion in 2007.) 

The easiest program to pin down is Petrocaribe.  It offers cheap loans to circum-Caribbean nations to finance oil imports.  As the price of oil grows, the buying nations get to finance a larger percentage of their imports.  (60%, as long as oil stays above $100.)  The loans are made for 25 years at 1%. 

The actual value of these subsidies is hard to find.  The Venezuelan government announced that Petrocaribe members saved $14 per barrel on 59 million barrels over the last three years, for a total of $826 million, but God only knows how that was calculated.  If you assume that (1) Venezuela meets its Petrocaribe commitment of 185,000 bbd, (2) the average cost of oil is $110, and (3) Petrocaribe members can borrow on the open markets at 7%, then the value of the program comes to $223 million per year. 

What about direct financial aid from Venezuela?  That's even harder to find.  The Venezuelan budget website doesn't seem to be working.  Venezuela buys plenty of Argentine bonds (more on that in another post), and Caracas lends plenty of funds to various Latin American states through a panoply of aid and investment programs, but there's no central registry. 

Nor is it clear how such financial aid would be booked in the balances-of-payments published by the receiving nations.  I heard a lot of rumors that the Venezuelan embassy in Bolivia has a budget of $500 million per year.  That would be an astounding figure, considering that the entire Bolivian government barely manages to spend $1.5 billion, but it's impossible to verify.  The Bolivian balance-of-payments registered less than $300 million in official transfers in 2007.  Most forms of unbooked aid should eventually show up in the erros & omissions category of the balance-of-payments, but that category is small and shows no trend.  (Bolivia, unlike Venezuela, has very easy-to-use statistical websites.)  Bolivian officials admit to about $50 million in unofficial Venezuelan support, channeled directly to local officials.      

If the Bolivarian Republic provided services that aren't booked in the trade data, like, say, a small army of Cuban doctors, then that wouldn't show up in the receiving-country's statistics.  Venezuela could also, say, overpay for its imports from favored nations, or finance development projects, none of which would be booked.  In other words, estimating the value of Venezuelan aid would take a lot more time than I have available.

Amazingly, Venezuela also gives help to the U.S. and U.K., providing cheap heating oil to poor Americans in the northeast and subsidizing bus fares for poor Londoners, at least until recently.  The cost of those programs, however, isn't very high. 

And then, of course, there is the $300 million that Caracas may have provided the FARC.    Doug Muir, I should point out, predicted that Chávez would "meddle" in just this way.  (Can anyone find that link?)  The recent near-war combined with the FARC's troubles, however, seems to have the kibosh on that. 

An American intelligence official told Congress that Venezuela has spent $33 billion to influence his neighbors, but he gave few details.  I don't trust the number, but it is within the realm of possibility, if you include purchases of Argentine bonds. 

In short, it's clear that Venezuela spends a fairly substantial amount on aiding other Latin American governments.  (Or, in the case of Colombia, trying to subvert them.)  So what does Caracas get out of its involvement? 

The most concrete gain would be the effective annexation of most of the Caribbean.  Venezuela claims Aves Island, in the center of the basin, and if Caracas can persuade the rest of the world that Aves is both permanently inhabited and Venezuelan, then it could use it to establish an Exclusive Economic Zone across most of the seabed.  Here's a map taken from a Barbadian blog, Notes from the Margin:

On April 1st, 2007, the Stabroek News of Surinam reported that Dominica had finally caved in on the Aves Island issue.  Now, that sounds like a pretty concrete gain ... only a high-placed Trinidadian official in Caracas pointed out to me that the U.S. and France had already recognized Venezuela's claim.  (To be fair, both countries hold that possession of Aves Island would not allow Venezuela to claim a Caribbean EEZ.)  In point of fact, Dominica has not revoked its claim, and the Dominican opposition is fighting the construction of a Venezuelan-financed fuel refinery, fearing the expansion of Venezuelan influence.

Mr. Chávez has discussed building a pipeline across Nicaragua, in order to export oil to China.  After all, it currently takes four days to transport Venezuela crude to the United States, and four weeks to get it to the People's Republic.  On the other hand, it takes special refineries to process Venezuela crude, and it still wouldn't make sense to sell to China instead of America even with a Nicaraguan pipeline.  So nothing has happened there, and all Caracas seems to have gotten is Mr. Ortega's rhetorical support at Ibero-American summits.

What about Bolivia, whose referendum kicked off this post?  Venezuela has signed a defense accord, of sorts, and Bolivia is a full-on supporter of ALBA and Venezuela's other unity initiatives.  But the country isn't about to become a Venezuelan colony, and Chávez isn't going to get Bolivia (or any of the other beneficiaries of his largess) to subsume its sovereignty in some sort of great Bolivarian Federation.

At home, the benefits are equally hard to see.  On the margin, Chávez gets some props from his association with Fidel Castro, but is that worth one (or four) billion dollars?  His supporters don't vote for him because he helps keep exposure deaths down in the Bronx or prevent diarrhea in Bluefields.

In short, his initiatives aren't providing much concrete benefit to Chávez or his constituents.  Nor do they seem to be laying the groundwork for a serious attempt to unify parts of Latin America under Venezuelan leadership.  I'd understand either one.  But if I'm correct, and neither goal applies, then he must be spending all this money out of ... pure charity, pure ego, or both.   

That's a bit unsatisfying, of course.  I may be blinkered by my own realism.  I must be missing something.  Any ideas or better analysis out there?