After the canal to nowhere, is Nicaragua on the road to prosperity?

The announcement in 2013 of an immense interoceanic canal cutting through Nicaragua developed by a mysterious Chinese tycoon furrowed many brows. Despite uncertainties over its environmental, social and financial feasibility, representatives of the Sandinista government did not waste a chance to showcase the project at home and abroad.

Those times are over. Officials in the capital Managua have suddenly turned silent about the whole project. US-born Paul Oquist, a long-time spokesman for the Sandinista movement and current minister for public policies and executive secretary of the Commission of the Nicaraguan Grand Interoceanic Canal, could not gain “authorisation” to discuss the canal for this article.

“It’s not us, it’s HKND doing the project,” he said from his office in Managua in March.

Wall of silence

Secretive Hong Kong-based developer HKND has remained without a spokesperson for the project since the 2015 departure of Ronald MacLean-Abaroa, an international governance specialist and former mayor of La Paz in Bolivia. HKND said via email on March 3 that “the project is progressing steadily”, although nothing has left the drawing board and no tender has been called yet.

Even Cosep, Nicaragua’s main private sector authority, replied “no comment” after the organisation’s president José Adán Aguerri pulled the canal project from the association’s mid-term agenda, local newspaper La Prensa reported in December.

The only people who remain vocal about the project are the rural communities located along the proposed canal route, which strongly oppose the project and have repeatedly taken to the streets in the past months. “We are ready to fight until the end,” says Medardo Mairena, a farmer from Punta Gorda.

Before this mounting popular backlash, the official narrative shifted its focus to a more modest though equally historic project: the first paved road connection to the country’s east, which is expected to become a major catalyst for investment in Nicaragua.

“We are trying to bring infrastructure development to the eastern part of the country to pave the way for projects in tourism, agribusiness and other export-oriented sectors and we believe that can generate double-digit growth [on a national level],” says Engelsberth Gómez, head of strategy at national IPA PRONicaragua.

Historical hurdles

Nicaragua’s complicated geography has long been cause of great divisions between the country’s more developed western part and the remote provinces along its Caribbean coast. That division goes all the way back to the Spanish conquistadores, who did not bother to secure the eastern part of the country and left it in the hands of the British for decades. The Sandinista government of president Daniel Ortega, who won a third consecutive mandate in November, and his wife and vice-president Rosario Murillo, are now betting on connecting the eastern city of Bluefields with the rest of the country to unlock new investment in the region and finally foster local development.

With work on the paved road under way and scheduled to be finished at the end of 2017, signs of an improving investment environment are already emerging. US-based Quality Contact Centers announced the establishment of the first BPO centre in Bluefields in December. A few week afterwards, Guatemalan agribusiness firm Cansa announced a $44m investment in the production of palm oil in El Rama, about 70 kilometres east of Bluefields. In the meantime, a $2.7m high-end hotel opened doors in Bluefields, the first of its kind in the city. To the authorities in Managua, these new investments in the east are a route to economic growth and increased FDI on a national level.

Nicaragua’s announced greenfield FDI peaked in 2015 at $891.2m, largely thanks to the investments by telecommunications operators Movistar y América Móvil and Japanese car component manufacture Yazaki, according to figures from greenfield investment monitor fDi Markets. Greenfield FDI fell to $93.5m in 2016 as the canal project lost momentum and general elections in November made investors more hesitant.

On the up

However, Nicaragua has come a long way, and its FDI-to-GDP ratio stood at 7.5% in 2015, higher than any other Central American country expect for Panama, according to World Bank figures. High levels of FDI have pushed economic growth to an average of about 5% in the past five years, a level which again is second only to Panama in Central America.

“You can see that in the street in the form of cars,” says Mr Oquist. “There were no traffic jams just a few years ago, now there are too many cars on the street.”

The country’s stable macroeconomic and social environment stands out in a region often characterised by sluggish growth and security issues and is a major catalyst for investors in light manufacturing and services such as BPO. With another five-year mandate in his pocket, Mr Ortega has given the country renewed political stability, although that comes at a price.

“There is a lot of talk about government centralisation, which is true to a certain extent, but from a business perspective continuity and predictability is all I need,” says Morten Nygart, a Danish entrepreneur developing a pilot solar power plant in Nicaragua.

Port importance

The road to Bluefields also represents a chance for the country to increase the competitiveness of its logistics by developing modern port infrastructure in Bluefields itself and further north in Puerto Cabezas. Nicaragua lacks roads, railways and major ports on the Caribbean coast, which has to import goods via Puerto Cortez in Honduras or Puerto Limon in Costa Rica.

“Add in the expenses for internal transportation, customs control and the use of ports that are not yours, and it means an extra cost of $100 to $200 per container,” says Mr Oquist. “But with a port on the Caribbean side we can generate savings in the order of $1.3bn per year.”

The lack of adequate transport infrastructure, government bureaucracy and an insufficiently educated workforce are the most problematic factors for doing business in Nicaragua, according to the latest World Economic Forum Global Competitiveness Report. Once Bluefields is finally connected, the government will get a chance to promote better port infrastructure on the Caribbean coast and thus give a competitive boost to its growing exports, mostly comprising textiles, car components and commodities such as coffee.

Within this context, the interoceanic canal was supposed to raise the stakes and put Nicaragua centre stage in global trade. However, there is a lingering feeling within the political and business community in Managua that the canal project is not going anywhere, principally because of a lack of funds: the price tag is $50bn. Besides, rural communities are repeatedly protesting a concession law that grants sweeping powers to expropriate land along the canal corridor, even if the canal is never completed.

The whole project is thus slowly becoming a communications nightmare for the Sandinista movement, which has historically drawn much of the support for its revolution from the lower classes and rural communities. The road to Bluefields is a more credible and feasible project, but not necessarily a less important one in terms of its investment potential. Indeed, it represents an opportunity for the Ortega-Murillo government to turn the page on the canal dream once and for all.