Nicaragua Canal: Better Late than Never?

By April 2, 2015 Uncategorized No Comments

Finally, the Start

After five centuries and seventy abortive attempts by a host of players, work finally began on the Nicaragua Canal in December 2014. Although this involves building access roads and elementary infrastructure only, it represents a critical milestone for an ultra-delayed project.

Chinese telecom tycoon Wang Jing’s Hong Kong Nicaragua Canal Development Investment (HKND) won an uncontested bid from the Nicaraguan government in 2013 to build the canal by 2019 and operate it for 100 years thereafter.

Nicaragua is Central America’s poorest country with $11billion GDP. Also known as the Nicaragua Grand Canal or the Nicaragua Interoceanic Canal, this project promises to turn around the economy of Nicaragua.

Valued at $50billion, the canal is the first real challenge to Panama Canal’s century old monopoly of connecting the Atlantic and the Pacific. Plus, the Nicaragua Canal will support much larger vessels that the expanded Panama Canal. But there is another side.

There is not enough demand for two parallel canals at present. Even Maersk Line that operates the world’s largest container ships and stands to benefit is not sure of the canal’s utility. Then, the canal may pose serious hazards for Lake Nicaragua, Central America’s largest freshwater lake that provides drinking and irrigation water for most Nicaraguans.

Nicaragua Canal Route (Source: http://www.scientificamerican.com/article/nicaragua-constructs-enormous-canal-blind-to-its-environmental-cost/)

Nicaragua Canal Route
(Source: http://www.scientificamerican.com/article/nicaragua-constructs-enormous-canal-blind-to-its-environmental-cost/)

Many believe, the canal is more a geopolitical venture than a commercial one intended to promote Chinese interests in the region. And this is something the United States is not ready to overlook.
Details, Pros, & Cons

Over three times longer than the Panama Canal, the Nicaragua Canal is 278km long, 28m deep, and 83m wide with a 5km protection zone on either side. It stretches from Punta Gorda River on the country’s Caribbean Coast to the Port of Brito on its Pacific shore via a 105km stretch through Lake Nicaragua.

With two ports and a free trade zone around Brito, the canal will spur the region’s maritime trade. With an international airport and a holiday resort, it will create 50,000 jobs during construction and 200,000 jobs later. The Nicaraguan Government expects the canal to double the country’s economy and liberate 400,000 from poverty by 2018.

Plus, the canal can play transit route to 20,000TEU vessels (23,000TEU by some estimates). Panama Canal’s present capacity is 5,000TEU vessels and will rise to 13,000TEU after expansion in 2016.

Despite the promise, the success of the Nicaragua Canal is not guaranteed. Most ports in the region do not have the capacity to berth 20,000TEU vessels. It will take years to add such capacity. Maersk Line’s Triple-E container ships are the largest in the world with 18,000+ TEU. But even Maersk is doubtful of the canal’s utility.

Panama Canal’s $5.25billion expansion will be complete by 2016 and enable the sailing of 13,000TEU ships. Ports and the shipping industry are already gearing for this change. Plus, the Panama Canal has a century of experience in dealing with all the related finer issues.

Operational viability of the project is a huge concern for the proposed route goes through a volcano, earthquake, and hurricane infested zone. Floods can easily disrupt traffic.

Next, the project comes at an immense environmental cost. Dredging Lake Nicaragua, a key freshwater lake in Central America, from present average depth of 15m to 27m will create 4.5 billion-m3 sediments and depreciate the quality of lake water and surrounding wetlands.

Maintaining high water levels in the canal locks can promote droughts. Plying ships will transfer invasive species between the Pacific and the Atlantic. The project threatens one million acres of rich, bio-diverse rainforest and obstructs the movement of animals in forests.

Many analysts believe, the project promotes Chinese geopolitical interests in the U.S.’s backyard. Following observations reinforce this conclusion:
• Opaque Bidding Process: HKND was the only bidder and no key project details were released
• Over Generous Terms for HKND viz.:
– authority to acquire land
– sharing only $10mn a year with the Nicaragua Government for the initial period after completion
– operate the canal for 100 years after completion
• Financial Un-viability: the canal needs to generate $5billion annually for viability. Even the Panama Canal makes only $2billion. Either the tolls will be prohibitively high or the Chinese will bear the losses from low tolls

Comparison Chart

Comparison Chart

There are no direct links between the Chinese Government and the project. The state-owned China Railway Construction Corporation is involved in the project but so are numerous international sub-contractors. London-based Environmental Resource Management for example is handling social and environment impact assessments.

Finally
Geopolitical or commercial, the Nicaragua Canal may prove to be the long term sailing route for the largest takers and container ships that do not fit in the expanded Panama Canal.