NICARAGUA: WEAK INFRASTRUCTURE HAMPERS TRADE

UNCLAS MANAGUA 000327

SIPDIS

SENSITIVE
SIPDIS

PASS TO USTDA KATE MALONEY

E.O. 12958: N/A
TAGS: ELTN EWWT EAIR ECON EIND EINV NU
SUBJECT: NICARAGUA: WEAK INFRASTRUCTURE HAMPERS TRADE

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY.


1. (SBU) Summary. A 2006 World Bank study characterized
Nicaragua's infrastructure as the least developed in Central
America. Nicaragua,s poor national road network compounds
the challenge of bringing products to market and presents
"the greatest obstacles to export led economic growth." At
times, poor road conditions halt trade altogether and
jeopardize tens of millions of dollars of commerce. Sea
ports, in dire need of investment, have reached maximum
capacity but by law cannot raise funds or enter into
public-private partnerships such as concessions or joint
ventures. International air cargo is also reaching capacity,
limited by the ability of the airport to handle more
shipments. The Ministry of Transportation and Infrastructure
(MTI) has consistently shown itself incapable of managing the
sector in a way that supports development. Newly-inaugurated
President Daniel Ortega has focused on the need to stimulate
large infrastructure projects to create jobs and alleviate
poverty. Ortega's seeming unwillingness to tackle ministry
corruption and inefficiency in this sector early on is not
completely unexpected, but belies Sandinista criticism of the
Bolanos government in this regard. It is not clear whether
Ortega is interested in strengthening the ministry or simply
finding a way around it. End Summary.

Introduction
--------------


2. (U) A 2006 World Bank study depicted Nicaragua as having
the least developed transportation infrastructure in Central
America. Sea ports are inadequate for the volume of trade
that Nicaragua is beginning to generate. The fragile road
system, frequently pounded by torrential rains and mudslides,
is largely unpaved. The railroad system closed down fourteen
years ago ) reportedly selling its ties, rails, and rolling
stock to the Cubans. International air transport to and from
Managua has experienced steady growth, but domestic air
transport shows no signs of graduating from its perennial
infancy. In general, the report found that the sad state the
nation,s transportation infrastructure is hardly conducive
to taking advantage of CAFTA-DR and integrating with regional
markets.

Roads: Unpaved and in Disrepair
--------------


3. (U) As in many countries, the vast majority of commercial
export shipping begins the journey overland, but the lack of
adequate port facilities in Nicaragua means that almost 40%
of all goods headed for the United States and other major
markets must first travel an additional leg by land to
neighboring countries where port services are better.


4. (U) Nicaragua,s poor national road network only compounds
the challenge of getting product to market. The country's
road network is comprised of 9,700 miles, yielding a road
density per square kilometer that compares to other Central
American countries. In Nicaragua, however, only 1,455 miles
-- or 15% -- are paved - half the Central American average of
30%. Moreover, more than 1,164 miles of the roads that are
paved are in "poor or deteriorated8 condition. According to
the Ministry of Transportation and Infrastructure (MTI),only
291 miles are in "good or excellent8 condition. It comes as
no surprise, then, that the World Bank study concluded that a
well developed and maintained road network is the &greatest
obstacle to maximizing export led economic growth."


5. (U) The problem manifests itself throughout the country,
but perhaps nowhere more obviously than in the agriculturally
rich departments of Leon and Chinandega. Though close to the
Port of Corinto and outlets in neighboring Honduras and El
Salvador, the roads in these departments are in terrible
condition, hampering the shipment of perishable product to
market. Of the 65 miles of paved roads in each Department,
only 20-25 miles are classified as &good or excellent.8
For this reason, the need to improve roads was a central
consideration in the decision of the Millennium Challenge
Corporation to channel $92.8 toward road reconstruction in
the region.


6. Sometimes the poor condition of the road network halts
trade altogether. In November, impassable roads in the
departments of Matagalpa and Jinotega, key coffee-producing
regions, threatened to keep 20% of Nicaraguan coffee exports
from reaching the United States, jeopardizing the value of
more than $30 million in exports. Eduardo Rizo, president of
the Coffee Producers of Jinotega, publicly explained that
each day,s delay caused coffee beans to degrade, resulting
in lower prices. "Our coffee is practically trapped here,"
Rizo declared during a demonstration by the Nicaraguan Union
of Coffee Producers in Managua. Eventually, funds for
emergency road repair were released, but coffee growers
complained that the repairs were superficial and would not
last through the next rainy season. Matagalpa and Jinotega
are responsible for producing 75% of the nation,s coffee
crop.

Ports: Limited Capacity
--------------


7. (U) The country,s largest port, Puerto Corinto, serves
only the west coast of Nicaragua, moving 40,000 TEUs
(twenty-foot equivalent units) in 2006. Many ships departing
Corinto will stop at Puerto Acajutal in El Salvador to
transship rather than continue north along the Pacific Coast.
Indeed, aggressive plans to develop Puerto Acajutal have
caught Nicaraguans flat footed. If Puerto Corinto does not
expand its facilities and offer better services, more
customers may choose to ship overland to the El Salvadorean
port, bypassing Corinto altogether. The national ports
company, Empresa Portuaria Nacional (EPN),has been so far
unable to respond to this competitive pressure. EPN already
carries considerable debt and, by law, is prevented from
raising funds in the financial markets, entering into joint
ventures with private entities, developing terminals through
concessions, or undertaking other forms of public-private
partnership.


8. (U) For access to the east coast of the United States and
all points east, Nicaragua is dependent upon Puerto Cortez in
Honduras and Puerto Limon in Costa Rica -- thirty eight per
cent of all Nicaraguan sea trade passes through these
outlets. In recent years, delays at the Port of Cortez and
organized theft have raised the risk of shipping through
Honduras or Costa Rica for Nicaraguan exporters. The only
alternative is to ship goods overland to the small inland
Nicaraguan Port of El Rama, located 18 miles inland on the
Escondido River. Cargo floats from Rama to the Atlantic
coast, where it can be transferred to larger vessels that may
well transship cargo in Puerto Cortez.

Air: Managua Centered
--------------


9. (U) International air cargo is a popular choice for
exportors of highly perishable goods such as okra and fish.
Exports via air have steadily increased at a rate of 5% a
year since 2000, to 20.5 million pounds in 2006. Limited
ground storage for cargo and limited cargo processing
facilies at Nicaragua's International Airport have frustrated
air cargo carriers, however, who complain that the airport
grants priority to passengers. Juan Bosco Ortega, UPS
General Manager in Nicaragua, believes that, without major
renovations and expansion of the airport, the air cargo
industry has reached its maximum capacity.


10. (U) In contrast, domestic airlines cut most cargo flights
in 2006 to save on fuel costs, reducing internal air cargo
trade to just 500,000 pounds, a 50% drop from 2005. Neither
of the two domestic airlines, La Costena and Atlantica, plan
to increase cargo flights any time soon, citing financial
problems and a limited fleet. The domestic air market has
struggled since the late 1990's, forcing the departure of two
airline companies, Aerosegovia and NICA. La Costena and
Atlantica, newcomers to Nicaragua, are already showing signs
of trouble with frequent delays or cancellations caused by
mechanical failure in an aging turbo prop fleet.

Ministry Performance: Consistency Is Not Always Good
-------------- --------------


11. (SBU) Over the past decade, the Ministry of Transport and
Infrastructure (MTI) has consistently shown itself incapable
of managing the sector in a way that supports development,
but 2006 may have been a new low. The year ended with a
flurry of corruption allegations, resignations, and
investigations over missing money, mismanagement, and
fraudulent reporting. Under a cloud of corruption, Ricardo
Vega Jackson resigned his post as minister on September 19.
He promptly accused his predecessor, Pedro Solorzano Castillo
(then an advisor to President Bolanos),as the original
source of the corruption in the ministry. In turn, Solorzano
Castillo blamed former President and convicted felon Arnoldo
Aleman of forging enduring corrupt relationships with road
construction companies that routinely pocketed MTI money
before fulfilling their contracts. These accusations and
counter-accusations caused the Accountant General to launch
an investigation into official misconduct, and the National
Assembly to impose a ministry-wide spending freeze, leading
to the immediate withdrawal of tenders on a number of long
awaited road construction projects. The result was complete
paralysis of an already dysfunctional ministry.


12. (SBU) Bickering and mismanagement seems to plague the
ministry. In October 2006, an internal MTI investigation
revealed that the ministry had over reported the number of
roads constructed or rehabilitated between 2002 and 2005.
MTI had claimed that it had built or rehabilitated 470 miles
of road, while the actual figure was closer to 332 miles.
Former Director of Transportation Manuel Salgado (2003-2006)
later claimed that he was ordered to produce these false
reports. In November, MTI,s road maintenance division
(FOMAV) reported that 75 miles of these newly-constructed
roads were "so badly constructed and designed" that they
would have to be rebuilt. Meanwhile, FOMAV,s ability to
maintain even well constructed roads has been called into
question by the World Bank's study. The study concluded that
lack of capacity at FOMAV "place(d) the major investments in
the transportation sector of the past 5 years at risk,
especially in rural areas."

Enter Ortega
--------------


13. (SBU) During the election campaign and weeks that
followed, President Daniel Ortega has publicly stressed the
need to stimulate large infrastructure projects to create
jobs for Nicaragua and alleviate poverty. During an October
pre-election meeting with fregn investors in the tourism
sector, Ortega promised to support the construction of a
Pacific Coast Highway to help develop the industry, after a
ministry-funded study concluded, surprisingly, that there was
no economic justification for doing so. In November, Ortega
praised the proposal to build an $18 billion interoceanic
canal, arguing that the megaproject would generate numerous
jobs for the country and foster economic development. In
December, Ortega and Venezuelan President Hugo Chavez
announced plans for the Venezuelan National Oil Company to
build a multi-million dollar transisthmus oil pipeline in
Nicaragua. Immediately after his inauguration, Ortega
announced agreements with Venezuela and Iran to build roads
and improve ports.

Comment
--------------


14. (SBU) Ortega has not publicly discussed MTI nor its
problems. Instead, he created a new position, that of
Director of Public Projects, to function outside of MTI.
Reportedly Manuel Coronel Kraus, Ortega's former Director of
Public Projects during the 1980s, will take the job. Coronel
has represented Ortega at a number of infrastructure-related
meetings, telling investors that Ortega "likes big projects."
Coronel is noted for his grandiose ideas during the 1980s;
some industry insiders have even characterized him as
"eccentric and kooky." Ortega's seeming early unwillingness
to tackle ministry corruption and inefficency in this sector
is telling, particularly given Sandinista criticism of the
Bolanos government in this regard. At this juncture, we are
not sure whether Ortega is interested in strengthening the
ministry or simply finding a way around it. End Comment.
TRIVELLI