Explained: Peru’s trouble over ‘exclusivity clause’ for mega Chancay port built by China

The Chancay mega-port in Peru, is a monumental project. Spearheaded by Chinese state-owned enterprise, Cosco Shipping, this was expected to revolutionise maritime trade across South America. Now, months before the Chancay port is set to open four of its 11 berths, there’s trouble.

Peru’s move to annul an exclusivity clause has brought the project on the cusp of an international legal arbitration.

We explain the strategic importance of the Chinese mega-port in Peru, and why there is a problem over the exclusivity clause.

Chancay Port: A strategic gem

The Chancay mega-port is situated 70 kilometres north of Peru’s capital, Lima. This $1.3 billion investment is a significant chapter in China’s ambitious Belt and Road Initiative. The port, expected to be functional around the end of this year, will serve as a crucial maritime link between South America and Asia.

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The port would reduce the transit time from South America to Shanghai from 45 to 30 days. It’s designed to be a bustling hub for cargo traffic, attracting traffic not just from Peru, but also from neighbouring Chile, Ecuador, and Colombia.

This mega-port is expected to compete directly with other major South American ports by offering a faster alternative to the lengthy voyages around Cape Horn or through the congested Panama Canal.

The deepwater port, one of South America’s largest ones, is capable of berthing some of the world’s largest cargo ships.

Additionally, the project serves to bolster China’s influence in South America . Chinese companies have invested in ports, built 5G networks, roads, bridges, and space monitoring stations across the continent. Beijing’s growing influence in Peru has been a point of contention for the US.

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While Washington has criticised Peru for allowing a state-owned Chinese company to construct such a massive infrastructure project in their country. Countering that allegation, Peruvian authorities have said that US companies are not willing to make investments of the scale that Beijing makes in the region.

Troubled waters for Peru

The project now faces a serious hurdle. The Peruvian government has found itself at odds with Cosco Shipping.

The root of the dispute lies in an exclusivity clause that permits Cosco alone to operate all services within the port. This clause, according to Peru’s National Port Authority, was mistakenly granted due to an “administrative error”. The Authority is now looking to annul the exclusive right granted to Cosco in 2021, stating that under Peruvian competition law, such an exclusive right can not be granted.

That move from Lima came in late March.

“Evidently, this would alter any business plan,” Bloomberg quoted Francisco Roman, a former senior attorney for DP World in Peru, as saying. DP World exclusively operates the largest container terminal in the country.

Roman said exclusive deals are not uncommon in Peru. The country allows port operators to recover their investments by charging for the use of infrastructure. However, Chancay is legally different from other Peruvian ports, he said. This is because the mega port was built from scratch as a private entity, rather than a public port being given as a concession to private operators.

Economy Minister Jose Arista said in an interview with local radio station RPP said, “Our thinking is that (the proposition) will soon be up for a second vote in Congress, which will calm the mood.” In Peru, measures must be voted on twice to become law. Lawmakers passed the motion in a first vote, but the second vote is still pending.

The uncertain future of upcoming phases of the port

This decision to challenge the exclusivity granted to Cosco Shipping has drawn sharp criticism from the Chinese firm. Cosco argues that the annulment of the exclusivity would affect the “security and legal stability of investment”. Cosco contends that the exclusivity clause was a “relevant factor” in their decision to commit over $1.3 billion in the construction of the port’s first phase, as reported by Financial Times.

The company, in a statement, also said that it “has been evaluating the impact which this measure is producing on the development of the project”. That puts a big question mark over Cosco’s commitment to future phases of the scheme. According to Reuters, the future phases of the project are expected to cost $3.6 billion.

Cosco could file for an international arbitration process over the dispute regarding exclusivity rights. Lima is looking to avoid this scenario.

Efforts for an amicable resolution

In a bid to avoid the costly and lengthy process of international arbitration, both the Peruvian government and Cosco have expressed a preference for negotiating a solution that would allow the port’s development to proceed while rectifying the legal oversight.

Cosco, in a letter, has proposed a six-month negotiation period aimed at reaching an amicable solution. It signals the Chinese company’s intent to maintain a cooperative relationship with Peru despite the current frictions.

Earlier in April, Cosco Shipping confirmed that its investment in the Chancay port was ongoing. The company still expects to inaugurate the first part of the port in November for the Asia-Pacific Economic Cooperation (APEC) leaders’ summit.

Arista has said he is “sure” that Lima and Cosco would not have to go through arbitration proceedings. “We will reach an agreement before,” he said.

With inputs from agencies