The Port of Chancay at the Centre of Sino-Peruvian Relations

by Sebastien GOULARD

In March 2024, the Peruvian government questioned the agreement made with the Chinese company COSCO regarding the management of the new port terminal in Chancay. This terminal was a significant element of China’s “Belt and Road Initiative” strategy in Latin America. Does this mean that the partnership with China is threatened, or rather, is it evolving?

COSCO and the Port of Chancay

In 2019, the Chinese company COSCO, a global leader in port logistics, acquired 60% of the capital of “Terminales Portuarios Chancay SA” for $225 million. This was the first port controlled by the Hong Kong-based group in Latin America. Partnered with the Peruvian mining company Volcan Compañía Minera, COSCO aimed to increase maritime traffic in the Pacific. The first phase of the project involved building a new terminal with a capacity of 1 million TEUs. Eventually, the port would have a capacity of 5 million TEUs. The Port of Chancay would thus become COSCO’s main logistics hub in Latin America.

In 2021, COSCO received exclusive rights from the Peruvian national port authority to operate the Port of Chancay. However, earlier this year, the same authority declared that it did not have the authority to grant this right and sought to have the decision annulled by a judge. Without this exclusivity, other operators could use the Port of Chancay.

For COSCO and the Peruvian government, the priority is to find an amicable agreement that will benefit all parties without delaying the construction of the Port of Chancay. If negotiations stall, the two parties could present the dispute to an arbitration court, as allowed by the free trade agreement signed by Peru and China in 2009. However, the Peruvian parliament could quickly pass a law to resolve this dispute.

Despite this legal uncertainty, construction of the port continues. By April 2024, 70% of the infrastructure was complete, and the port is expected to be inaugurated next November during the APEC (Asia-Pacific Economic Cooperation) Leaders’ Summit.

To carry out this project, COSCO-Chancay received a $975 million, 15-year loan from a consortium of Chinese banks, including the Bank of Communications and China Minsheng Banking Corp. The financial setup for the project took three years, and an administrative error cannot jeopardize it without affecting Lima’s reputation. The entire project is estimated at $3.5 billion.

A Project Promoting Integration in Latin America

Due to its size, the Port of Chancay is expected to become the main gateway for Latin America to the Pacific and Asian markets. This is why the project is also supported by some of the country’s neighbours, such as Brazil, which could more easily export its agricultural production from its landlocked western regions to China. The construction of the Port of Chancay is therefore accompanied by the development of new road infrastructure, particularly to connect Chancay to the North Pan-American Highway. A 1.8-kilometre tunnel is also being built under the town of Peralvillo.

A Contested Project

The recent questioning of COSCO’s role in this project reflects certain concerns, particularly at the political level, about China’s influence in Chancay. As with many projects financed by China, concerns have been raised regarding defence issues and the potential dual use of the port by China. While these concerns currently seem unrealistic, social and environmental issues remain.

Despite the economic opportunities and jobs that the new port will offer, some of the population opposes this project. Residents fear the project’s impact on their daily activities and worry that the construction of the port and its infrastructure will come at the expense of other essential infrastructure projects, particularly water management, which some have been awaiting for more than 60 years.

The port’s development will also have significant social consequences, as some local fishers will have to give up their jobs. Houses have already been damaged due to vibrations caused by initial works, accelerating the departure of local populations who must leave their homes.

Furthermore, environmental associations are concerned about the impact of the new port on the coastline of this region of Peru. To build the new infrastructure, drainage of part of the wetlands is necessary, which will destroy the habitat of some endemic species.

For COSCO, there is a challenge to appear as a responsible company that cares about the social and environmental outcomes of its construction works. Its website indicates that the Port of Chancay will meet the highest technological and eco-friendly standards. The Chinese group also funds initiatives for local residents, such as educational programmes for local schools and environmental protection actions, particularly with regard to sub-marine preservation.

The COSCO group, like other Chinese groups involved in major infrastructure projects abroad, has already faced social and environmental demands from local populations, and its expertise in addressing these issues is stronger than before. However, these efforts must be redoubled to improve its image and ease the dialogue with residents, as well as to avoid being dragged into national political debates.

The Port of Chancay will be the first private port for public use in Peru, and its development is sure to positively influence relations between Lima and Beijing. It is, therefore, in the interests of all parties that the project be accepted by the population.

This episode between Lima and COSCO has not prevented another Chinese group, Jinzhao, from winning the bid presented by the Peruvian government to build a port terminal in San Juan de Marcona on the southern coast of the country, about 600 kilometres from Lima. The Chinese group is expected to invest $405 million in a new terminal for mineral exports.