Feasibility Of Nicaragua's Canal Is Questionable

Nicaragua's ambition to build an inter-oceanic canal seems to be moving forward with the concession of the project having been awarded to a Chinese consortium and subsequently approved in congress. However, we believe this project is unlikely to come to fruition. Considerable political, economic and environmental factors challenge its feasibility. In addition, Nicaragua's fragile economy and insufficient transport and energy infrastructure make this project seem a misguided use of resources.

The century-old idea to build a canal connecting the Pacific and the Atlantic coasts through Nicaragua is most recently estimated to cost US$40bn (almost four times the GDP of the country). The highly ambitious project includes a conventional canal, a rail line ('dry canal'), two airports and an oil pipeline that will take approximately 11 years to build. The canal would involve digging around 200km of waterway to a depth of 60 metres in many places (as reported by Engineering News Record). This project seems out of proportion when considering that currently, the road connecting the Pacific and Atlantic oceans is not even paved.

Carving up the Map
Possible Route of Inter-Oceanic Canal

Despite the government's interest to support this project, with the expectation that it would boost much needed economic growth, create jobs and attract foreign investment, its financial viability is questionable. The concession has been awarded to a Chinese consortium based in Hong Kong and owned by Xinwei, a telecommunications firm. HKND, the newly created consortium, has no track record of infrastructure developments. The Chinese consortium will finance the initial studies and eventually raise the capital required for the construction of the canal. However, we believe that investors are unlikely to be convinced by the profitability of this venture. The consortium will operate the canal for 50 years, with the potential to extend the concession for another 50, following which it will revert to government ownership.

Future demand for the canal is uncertain, especially after the expansion of the Panama Canal and its geographical proximity to Nicaragua. In addition, the new canal's competitiveness is threatened by high maintenance costs as it would be more than three times longer than the Panama Canal. Panama's long and careful consideration of its canal's expansion contrasts with Nicaragua's rush, having approved this project in congress in less than one week - and under a completely tax-free regime.

There are also environmental concerns as Nicaragua's canal would require an estimated 1.7bn gallons of water to operate. The country's water resources are not abundant and currently they are primarily used for human consumption. No environmental impact assessments have been carried out to date as a number of routes are being considered. Further, there are sensitive diplomatic issues with Costa Rica for the bordering San Juan River across which a dam is hoped to be built ( see 'Costa Rica - Nicaragua Dispute Continues, Venezuela and Iran Weigh In As Rival Canal Plan Revived', 15 November 2010).

Although the Chinese government will not finance this project, the involvement of a Chinese consortium reinforces the growing presence of China in Central America. Taking part in a project of this magnitude compares with the role of the US in the construction of the Panama Canal at the beginning of the 20th century in order to consolidate its influence in the region.

This article is tagged to:
Sector: Freight Transport, Shipping
Geography: Nicaragua, Nicaragua, Nicaragua, Nicaragua

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