
A Chinese Man, a $50 Billion Plan and a Canal to Reshape Nicaragua - victoro
http://www.npr.org/blogs/parallels/2014/08/14/340402716/nicaragua-banks-on-its-own-canal-to-boost-economy
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chrramirez
I'm from Nicaragua. This project is managed as a private business. No one
knows nothing except for the president and his family. What the article says
are some of thousands speculations. Telemaco and his kinds only repeat what
they are instructed to say. Pure bullshit that only dump people believe. Here,
most people believe that with this project Nicaragua will become a first world
country. But also, here most people are not that bright.

I think that this project is not really about a canal. That's a mouse trap.
It's about a possible oil in the atlantic coast what Ortega and Co. are
seeking. The treaty that was signed between HKND and Nicaragua gives the right
to HKND to appropriate "any land" it may require for the project. Few days
later of the singing, a British oil explorer announced a "very possible"
presence of oil in the atlantic coast of Nicaragua.

~~~
sml0820
A Chinese man, who makes a living building various forms of infrastructure, is
willing to put $300 million of his own money of $50 billion required into
building infrastructure in Nicaragua. Meanwhile Nicaragua is willing to accept
$50 billion of infrastructure investment. Sounds like wishful thinking from
both sides.

As far as Oil, building a canal is not the way to reap rewards from oil. Here
is a more relevant quote "U.S. firm, Noble Energy has given up on an
exploratory oil well in Nicaragua, dubbed “Paradise 1,” after spending $90
million at the site. The firm concluded that there was not oil in sufficient
quantities to justify further investment in the site." November 15th, 2013

~~~
sml0820
Also, to further clarify from an investor perspective:

Let's say the canal is able to generate twice the income (revenue minus costs)
that panama canal currently generates indefinitely, which comes to 2.8 billion
every year forever.

Let's assume the cost of capital for this project is 10% (a standard amount
depending upon the investors).

With a 50 billion dollar initial investment the Net Present Value of the
project is -22 Billion. In other words, in an ideal scenario the investors are
better off lighting 21 billion dollars on fire right now than investing in the
project...run.

~~~
Retric
Using 10% for cost of capital for a construction project is ridiculous. Direct
loan costs often run at around 6% but can be as low as 4%.

Considering the number of Ghost city's built in China he might have access to
even cheaper capital.

~~~
sml0820
This comment could not be further from the truth, as I feel you do not have
strong basis in understanding what the weighted cost of capital refers to.

Here is an example calculation of an infrastructure project:

[http://investment.infrastructure.gov.au/publications/reports...](http://investment.infrastructure.gov.au/publications/reports/pdf/north_south_rail/annexure_8.pdf)

Also, your ghost city comment is irrelevant, which I already addressed in a
prior comment.

And as a final point, even with a 6% WACC in an ideal scenario, which I
addressed, the NPV is still -3.33 billion.

~~~
Retric
The most important equation in that was this:

    
    
      Dr * (1 – EQ) + Er * EQ 
      Where: Dr = the appropriate return for debt funding invested 
      Er = the appropriate rate for equity funding invested 
      EQ = the proportion of funding invested as equity 
    

While it does not take into account risk it separates out private equity vs
loans. If you get a loan at 6% for 90% of a project's costs and that project
returns 6.5% then your private equity return is 6.5% + 9 * .5% = 11%.

Thus, if you can get a vary low interest loan say 2% your private return can
be high even if the project barely breaks 2%. Why might he be able to get a
loan for 2%, well China might look at having an alternative to the panama
cannal in another country as worth a vary low interest loan.

Or far more likely IMO the project might be building more than just a canal as
infrastructure projects often make other local investments vary valuable. AKA
build a subway and now every apartment within walking distance is suddenly
worth significantly more.

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andreasklinger
I am a bit confused by the article - because this is not mentioned at all - I
am no history buff so happy to be corrected here:

But haven't there been wars to avoid that Nicaragua gets an own canal (afair
even supported by the USA and later by the CIA. Eg their Civil War or before
that the US occupation [1])

Back then mainly to avoid having such important routes in the hands of pro-
communist states, later to keep their financial interest in Panama in check.

Wasn't the last state the the USA got the exclusive right to build such canal
- basically just to allow nobody to do it.

How come that this isn't mentioned at all in the article?

(As said before all cited from vague history memory. Happy to get a
correction/update on that.)

[1]
[https://en.wikipedia.org/wiki/United_States_occupation_of_Ni...](https://en.wikipedia.org/wiki/United_States_occupation_of_Nicaragua)

~~~
pmorici
They hint at US opposition in the article but they don't come out with all the
history behind it...

"Some opponents of the canal worry that the financing will actually come from
the Chinese government itself, which Richard Feinberg, a fellow at the
Brookings Institution, describes as "the Chinese planting their flag right in
the heart of the Western Hemisphere.""

NPR is a news outlet funded in part by the US government it isn't particularly
surprising that they aren't going to delve into history that makes the US look
bad.

~~~
jmadsen
I don't believe that's accurate:

[http://en.wikipedia.org/wiki/NPR#Funding](http://en.wikipedia.org/wiki/NPR#Funding)

Perhaps you were thinking of Voice of America, or the way it used to be funded
30-40 years ago?

~~~
pmorici
Yes, VOA is even worse. But I think the point stands that NPR has a history of
close links to the US government.

~~~
jmadsen
Sure - and the Dutch have a "history" of slave-trading.

The question is the current reality, and is it affecting their content.

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jccooper
Dunno. That's an awfully high capital cost to compete with the Panama Canal--
which will have a lot lower cost to expand its capacity to match a
competitor's features (mostly extra size) if they turn out to be in high
demand. The current Panama Canal expansion project is a $5B operation. No
doubt another expansion (the "gargantuan locks project" or something) would
cost more, but certainly not in the $50B ballpark.

Panama seems to make $1B/yr on the canal, even restricted as it is, so I can
see where they're coming from if you believe in a strong and growing unmet
demand (for very large ships). But with the existing competition you really
have to believe in a level of traffic that will saturate the Panama Canal in
any reasonable expanded configuration. And probably the Suez as well.

And I'd be very worried about the Northwest Passage.

~~~
Htsthbjig
It has nothing to do with economics. It is about strategy.

US is the US of America because of the Panama channel, without it transporting
something from coast to coast is so expensive.

That is the reason they basically invaded Colombia and make independent Panama
(from Colombia, it made it dependent of the US).

Now, while in theory Panama is now independent from the US, in practice it is
not.

If the US wants to create sanctions to those that treat the petrodollar or US
hegemony, like Russia(now) or China(tomorrow), and make their commerce with
West Africa-Europe and Brazil way more expensive, they could simply close the
Panama channel to those countries.

This is unacceptable for China. So China (and Russia) wants an alternative.

It is also a good way to spend their huge stockpile of US dollars China has
that loses value with each Quantitative easing.

~~~
rtpg
>If the US wants to create sanctions to those that treat the petrodollar or US
hegemony, like Russia(now) or China(tomorrow)...

I think saying that Russia is an economic threat to US hegemony is a bit
misplaced. In international trade, Russia has as much trade volume as Spain
(which is around 1/5 of the trade volume of China/EU/US).

In the one area it does dominate (Natural Gas), basically all of it goes to
the EU anyways. So at best Russia could help create a petroeuro (because
Russia certainly doesn't have the international trade necessary to cancel out
energy price volatility,so using the rouble would be very dangerous)

Besides, Russian use of the Panama canal is practically nil (they don't show
up in the top 25 countries using it, in country of origin or destination).
They have enough land routes to most of the big economies already.

~~~
chatmasta
China has trade volume, Russia has a military. Together, they form a powerful
adversary.

~~~
philwelch
Canada has a large, defensible landmass, vast oil reserves, and cutting edge
technology. North Korea has a huge army and nuclear weapons. Together, they
form a powerful adversary.

~~~
Natsu
Can't be too careful, they are the only country that ever managed to burn down
the White House...

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brianbreslin
So I had read that this guy the point person from China had a dubious history
of floating giant infrastructure projects that never materialized. The
Nicaraguans I've spoken too think the project is all BS. However once you pay
off enough locals, consider it more likely.

Big issue is that this will take 120 miles to cut, will they be able to recoup
their investment if their fees to traverse are lower than panama, because they
have to be to compete. Time crossing this canal has to be slower than panama's
48 mile long canal. So assume 2.5x travel time, you have to charge lower fees
because of the travel costs associated with the extra distance etc. time =
fuel

Edit : See this recent article about wang jing
[http://www.reuters.com/article/2014/05/04/us-china-canal-
ins...](http://www.reuters.com/article/2014/05/04/us-china-canal-insight-
idUSBREA4309E20140504)

~~~
prawn
How is there an increased distance of overall travel time? Does it matter
significantly if the ship is travelling across the ocean or through a canal?
From China to Europe is likely quicker from a more northerly canal, I'd guess
by looking at maps.

~~~
brianbreslin
Nicaragua canal would be 120 miles long vs 48 miles of panama. But canal
travel is much much slower than open ocean travel. Panama takes 8 hours to
traverse the canal, imagine one 3x as long would take almost 3x as long to
cross. So 24 hours.

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pmorici
""what happens if the diggers dig too deep and disturb the active volcanoes,"
says Bol"

Is digging disturbing volcanoes really a serious concern?

~~~
benologist
Nicaragua still has active and erupting volcanos and a lot of earthquakes.

~~~
pmorici
I don't doubt it but could human scale construction trigger an eruption that
would destroy the country?

~~~
benologist
Poor / developing countries don't have the infrastructure or standards to
avoid disasters so I'm sure 'we' could indirectly cause a fire or a landslide
or something that overwhelms their emergency services. Nicaragua's capital has
been _destroyed_ twice in the last century by situations like that.

~~~
gus_massa
Yes. But can you activate a volcano with a (big) digger? Or this danger is
only FUD.

~~~
bjelkeman-again
I have studied geology and believe that to be FUD.

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Yardlink
Whenever there are ambitious plans for a poor country, people think of all
kinds of reasons not to - the environment! the culture! the local economy!
people's family homes! But they forget "these people are already screwed!".
This canal is a risk with a bigger upside than doing nothing.

~~~
hackuser
> Whenever there are ambitious plans for a poor country ...

... outsiders impose their ideas on the locals, deciding what is good for
them. This project should be entirely up to the people of Nicaragua,
especially those who will lose land or livelihood.

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pron
The necessary background: [http://www.newyorker.com/magazine/2014/03/10/the-
comandantes...](http://www.newyorker.com/magazine/2014/03/10/the-comandantes-
canal)

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kinnth
Is the environmental risk really serious or is the poverty going to cause
people to damage the environment anyway? Perhaps the money would bring more
resources to protect the wildlife?

~~~
brianbreslin
The main source for the country is lake Nicaragua (which has bull sharks btw!)
and they would be dredging this too. This would cause massive amounts of silt
to cloud the water which would kill a lot of the fish/fauna. Not to mention
there are going to be a lot of corners cut on this since it's Latin America
and bribes will get paid (I'm Panamanian, I know how this stuff works).

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tauslu
For those who wonder how Panama Canal opened up (how hard it is to open a
canal at that geography due to diseases, soil, water), you may want read The
Path between the Seas

[http://www.amazon.com/exec/obidos/ASIN/0671244094/bobsutton-...](http://www.amazon.com/exec/obidos/ASIN/0671244094/bobsutton-20)

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based2
[http://en.wikipedia.org/wiki/Suez_Canal#Construction_by_Suez...](http://en.wikipedia.org/wiki/Suez_Canal#Construction_by_Suez_Canal_Company)

[http://en.wikipedia.org/wiki/Panama_Canal#Later_developments](http://en.wikipedia.org/wiki/Panama_Canal#Later_developments)

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morkfromork
The ports at either end of the Panama Canal are controlled by a subsidiary of
Hutchison Whampoa Limited a Hong Kong based company. Wonder if there's a
connection to this project.

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brianbreslin
Wouldn't this also have disastrous effect on the atlantic fisheries of the
gulf of mexico/Caribbean ?

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brotchie
Disappointed you can't make a Palindrome out of it :(

~~~
danyim
Did you hear the recent NPR segment on the Panama canal too?

