Nicaragua’s cut is the deepest

It’s been discussed – mostly derisively – since the 1900s, but discussions on the viability of a Nicaragua Canal to rival the Panama Canal have taken a more earnest turn in recent months. Promising an alternative all-water route to cross from the Atlantic to the Pacific, the Nicaragua Canal periodically makes the headlines only to slip into the shadows once the hype has died down.

This year’s outing promises to be different. Why? Because the funding is allegedly now there, a route has been published and the Chinese are involved. Oh and construction work is expected to start in December.

Stretching 278km (173 miles) from Punta Gorda on the Caribbean through Lake Nicaragua to the mouth of the river Brito on the Pacific, the Nicaragua Canal will have a depth of 27.6m and a width that varies between 230m and 520m. The planned project consists of six sub-projects, including the channel itself, construction of two deep-water ports, a free-trade area, tourism projects in San Lorenzo and an airport in the city of Rivas.

With its canal aspirations, Nicaragua hopes to cash in on the mega ships, which are too large to transit even the expanded Panama Canal, which is due to open a third transit channel in 2015. Of course, the Nicaraguan government may still be smarting from their missed opportunity back in the 1900s. Back then, the US undertook studies of both Panama and Nicaragua to ascertain the best place to build an all-water route, but while Nicaragua was popular upon politicians, Panama ultimately got the gig.

Concerns remain

This latest Nicaragua incarnation began in June 2013 when HK Nicaragua Canal Development Investment (HKND) was awarded exclusive rights to build and operate the canal under a 50-year lease. The route was unveiled earlier this week. But scepticism and opposition hang over the project.

One hurdle that this ambitious project has not yet overcome is protection of the environment. Social and environmental studies have still to be done, and could stop the project dead in its tracks. While officials say the selected route will avoid areas of “great biodiversity, indigenous territories and environmentally protected lands”, environmentalists are not convinced. Lake Nicaragua is Central America’s largest lake and a vital source of fresh water; the proposed route plants a shipping channel right through the lake. Those studies are expected later this year in time for the December start date.

The timescale is also ambitious. HKND expects the canal to be completed in just five years, with the official opening planned a year later in 2020. It took 10 years to complete the Panama Canal, and only after a number of failed attempts. The Panama Canal is less than a third of the length of the planned Nicaragua canal.

There is a question over capacity as well. While Nicaragua can cater for the larger ships that cannot pass through the Panama Canal it needs to attract some of the Panama’s traditional traffic to remain viable. What then will happen with tolls through Panama; might a bidding war ensue? With a construction cost of $40bn – nearly four times the annual GDP of the Central American country – it would prove to be a very expensive mistake if the traffic did not materialise as anticipated.

Businessman Wang Jing, owner of HKND, is a relative unknown, which is also fanning the fears of cynics. While he insists that he has the money and the technical know-how to complete the canal he has not given details of investors backing the project, despite requests.

Legal confusion

There are also legal concerns, with claims that signing over a strip of the country to Mr Wang’s development company could be a violation of sovereignty. Under the concession, Mr Wang will own the canal in its entirety to start with, with 1% being returned to Nicaragua each year.

With so many unknowns it is hardly surprising that shipping organisations remain on the fence. Speaking with Newsweek, Simon Bennett, director of external relations at the International Chamber of Shipping, says the organisation is taking a wait-and-see attitude toward the canal.

“Obviously, at a simple level it would provide competition to the Panama Canal that currently enjoys a quasi-monopoly. But that would all depend on whether or not a canal in Nicaragua will ever actually come to pass,” he says.

“One issue with the Panama Canal is that at certain peak times of the year, demands for use of the canal outstrip the available slots, particularly for trades that are carrying less high-value goods,” Mr Bennett says.

Government officials claim that employment for Nicaraguans will double on the back of construction and subsequent operations, which is a huge incentive for the project to succeed, given that half of Nicaragua’s 6m residents live in poverty. The potential income from transit tolls is not to be sniffed at either, given that the Panama Canal enjoys annual revenues of $2bn, around $760m of which goes to Panama’s treasury.

Whether this Canal will truly come to light remains to be seen, but these latest plans take it a step closer to moving off the drawing board and into reality. That said, ship operators easily have another two to three years before they need to seriously start thinking about the trade implications of this alternative cut.

More information

For more information about the Nicaragua Canal project go to HKND’s site.