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Sep 27, 2014 | 12:59 GMT

11 mins read

Nicaragua's Canal Dreams Are Still Alive

Nicaragua Canal Display
Summary

Nicaragua's century-old dream of building its own cross-country canal may finally be within reach. HKND, the Hong Kong-based firm responsible for building the canal, plans to start construction on the project in December. However, a number of obstacles, including a possible lack of funding and potential pushback from the Nicaraguan community call into question both the start date and the completion of the canal itself.

If construction does begin, it will likely encounter numerous delays and cost overruns that will almost certainly prevent the canal from coming online by 2020 as planners have announced. Yet, if the Grand Canal is completed, it would offer an alternative route for shipping traffic, but also be in competition with existing routes, leaving the long-term economic viability of the canal uncertain. The project, led by Chinese investors and operators, follows Beijing's long-term interests of expanding control over sea-lanes and establishing alternative, non-Western controlled trade routes.

Over a century ago, Nicaragua lost its initial competition with Panama to be chosen as the location for a canal that would connect the Atlantic and Pacific oceans, dramatically changing global sea-lanes and supply chains. Though at first the United States favored Nicaragua for the canal site in the 1890s, the failure of French operations in Panama and a political shift within the United States created an opportunity for Washington to buy out French operators. In addition to being an economically competitive option, the Panama Canal garnered more political support within the United States — though both canal proposals had backing, the Panama Canal was supported by an intensive media campaign. The political pressure eventually swayed Washington's decision, leaving Nicaragua without a canal.

The loss did not stop Nicaragua from pursuing the idea of building its own coast-to-coast transportation route. A series of potential partners continued to look into a number of different Nicaraguan routes as alternatives to the Panama Canal, but none of these proposals were realized, mainly due to a series of obstacles, from security threats to political instability. Some of the more recent forays have included a Japanese consultancy for feasibility studies in 1989, as well as an American, Asian and European-backed "dry canal" connecting the country's Pacific and Atlantic coasts via rail in the 1990's. Despite continued (if sporadic) interest from international investors, Managua has yet to attain its canal.

But Nicaragua's luck could be about to change. In July 2012, the government of Nicaragua established the Nicaraguan Grand Interoceanic Canal Authority and in June 2013, the National Assembly granted HKND a 50-year concession, allowing the firm exclusive rights to plan, design, construct and operate the canal. An ambitious schedule set the project's completion for 2019, with the commencement of operations in 2020. HKND and partners optimistically plan to start construction in December 2014.

Nicaragua Canal

Nicaragua Canal

The chosen route begins on the Pacific coast at the Brito River, crossing Lake Nicaragua before traversing the isthmus to the Caribbean coast at the Punta Gorda River. The planned canal will be a total of 278 kilometers (around 173 miles), 105 of which will run directly through Lake Nicaragua. The channel will be constructed to accommodate large ships, with a width of 230-520 meters and a depth of 27-30 meters. Plans also include two sets of locks, a dam and an artificial lake. River crossings along the route will require substantial dredging, both during the initial construction and for ongoing maintenance, a costly but necessary aspect of the operation.

Although HKND plans to have the new canal completed by 2019, this is an unrealistic goal. Many companies, including the prestigious U.S.-based consulting firm McKinsey and Co. and China's second largest construction company, China Railway Construction Corp. Ltd., were reportedly contracted to participate in feasibility assessments. While the full appraisals of the Grand Canal route have not been released, feasibility studies conducted on previous canal proposals indicated that construction would take closer to 10 years, rather than the projected five. Publicly available information on the details of the canal's funding and construction remains limited.

Roadblocks to Success

If the canal is completed, Managua has ratified an agreement with HKND Group that would give the company exclusive rights to all aspects of the canal project as well as its associated port projects and additional infrastructure for 50 years once completed. Under the agreement Nicaragua would receive $10 million annually for the first 10 years of operation. Additionally, shares of the canal will pass periodically over to Nicaragua, eventually making it the majority shareholder by the end of the first 50 years. In the shorter term, the construction of the canal has the potential to boost the Nicaraguan economy, creating an estimated 50,000 jobs during construction and 200,000 potential jobs during operation. However, many potential obstacles exist that will likely delay or even block the successful completion of the Grand Canal project and it is unclear how many of these jobs would go to native Nicaraguans.

Funding and Environmental Concerns

HKND Group estimates put the cost of the project at around $50 billion. Though large, this budget may still be very optimistic. Independent estimates of the Grand Canal have reached as high as $100 billion and large infrastructure projects are often prone to delays and cost overruns. Even if HKND and partners are able to avoid exceeding the $50 billion price estimate, it is not clear where that money will come from.

Nicaragua itself has limited industrial capabilities in terms of construction and supplies. Though the HKND Group has indicated that Chinese state-owned enterprises specializing in construction, such as XCMG Group and Gezhouba Group, plan to participate in the project, the exact degree of Chinese investment has not yet been solidified. Russia has also expressed an interest in providing technical equipment and possibly investing in the project, though once again no set figure has been announced. Additionally, a conglomerate of Dutch businessmen is reportedly interested in the project, but nothing concrete has been discussed or agreed upon. There is scant indication that any of these potential sources of funding have been confirmed or delivered to the project, although Wang Jing, the chairman of HKND said in interviews that agreements have been reached. This lack of detail brings the estimated December start date further into question.

One of the main objection groups to the project argue that the canal poses a threat to Lake Nicaragua, a primary source of drinking water in the region. The possibility of the lake's contamination due to a shipping accident or saltwater intrusion once the lake is connected to the ocean remains a significant concern. Additionally, the canal's location within an active volcanic and seismic zone could impact the technical feasibility of the project, particularly the dam. The environmental impact of the extensive dredging operations is also a concern. The feasibility studies' findings will be crucial for assessing the environmental damage the canal could cause and the geographical difficulties it might encounter.

Public Opposition

The construction of the canal will likely displace rural populations and could lead to the expropriation of privately owned land without compensation. There is no evidence that Nicaragua or the HKND Group have designated any funds for compensating those whose homes or property lie on the proposed canal route, although in recent reports on the protests the Nicaraguan Grand Interoceanic Canal Authority claimed that fair compensation would be awarded. Initial signs of resistance to the canal project can already be seen; peaceful protests in recent weeks have shown the public's resistance to Chinese surveyors in the area. Popular complaints have focused on the government's lack of communication with the public and continuing demands that property rights be recognized. These protests will likely continue if any additional progress is made toward beginning construction — especially if the property rights issue is not resolved — and could lead to rising social unrest and even violence.

The government of Nicaraguan President Daniel Ortega fully supports the Grand Canal project. Ortega maintains a fairly high level of support from the population, and the political opposition has little room to stand in his way. This power dynamic should, in theory, make it easier to at least push the canal project through its initial stages, assuming adequate funding materializes. However, continued unrest could limit Ortega's ability to unilaterally support the canal over time, especially if it threatens his popularity among Nicaraguans.

Long-Term Feasibility

Even if the Grand Canal is eventually completed, the question of its long-term economic feasibility remains. The Nicaraguan canal would be competing with the Panama Canal, the Suez Canal and North American land bridges in the United States and Mexico for trade and traffic between Asia and the east coast of the United States.

The Panama Canal is the most direct competitor of the Nicaraguan canal, given its geographic proximity. If constructed as planned, Nicaragua's Grand Canal will be able to accommodate larger ships than the Panama Canal, which would allow container ships to potentially better take advantage of economies of scale and provide a shorter route for bulk ships traveling between North America's eastern coast and Asia. Competition with these alternative routes, including the Suez Canal or sailing around the Cape of Good Hope, however, will depend on a variety of factors beyond distance that impact the total shipping costs, such as tolls and fees, required timeliness of delivery, fuel costs and ship size. The Nicaraguan Canal has the potential to compete with alternative routes but will also face the disadvantage of not already being an established route like its competitors.

While a canal through Nicaragua has been touted as one that would have enormous impact on global trade, with the Panama and Suez Canals also expanding, this is not necessarily the case. An additional transit route could relieve congestion in existing waterways, but competition will be tight and the Grand Canal's economic success will rely heavily on global economic growth and rising trade volumes in the future, which is by no means a certainty. Additionally, long-term forecasts predict that worldwide economic growth will center on Asia and Africa, for which the Nicaraguan route would not be as relevant. This is in contrast with the Panama Canal's first 100 years of operation, which was buoyed by U.S. growth.

China's Interest

It is easy to dismiss the Grand Canal as yet another proposal that will never come to fruition, since concrete information on the project remains scarce and its long-term viability continues to be uncertain. But, rather than lose steam, this recent attempt at building a Nicaraguan canal appears to be maintaining its momentum, at least for now. This is in part due to the participation of China, which has its own motivations for propelling the canal project forward.

China's private sector has played an increasing role in the country's outbound investment policies. Though there is little information available on Wang Jing, the owner of HKND Group and a Chinese billionaire, his past business experience has largely been in the telecommunications sector — not in large infrastructure projects. Wang and his company appear to have strong political connections in the Chinese government, and his recent investment in Russia-controlled Crimea indicates some alignment with Beijing's goal to increase maritime trade through a projected maritime Silk Road and presence in the Black Sea region. While not necessarily the case here, Beijing has set a precedent of secretly backing private investment deals initially undertaken by Chinese corporations in the past.

So far, Chinese involvement in the Grand Canal project has been limited to the corporate realm and does not necessarily correspond to all of Beijing's foreign policy priorities. For instance, the Chinese Ministry of Commerce issued a warning in 2012 regarding Nicaraguan canal projects, citing high investment risk and a lack of diplomatic ties with Managua. Beijing is unlikely to show strong outward support in the beginning phases, allowing it a level of detachment from what is perceived as a risky investment. Still, Beijing has allowed HKND Group to push forward with the company's agenda, enlist state-owned companies and campaign for state support.

If the difficulties of the Grand Canal project prove to be manageable, the canal could play into Beijing's long-term interests in a number of ways. A Chinese-controlled canal in the Western Hemisphere would expand Beijing's influence over global sea-lanes and provide an alternative to trade routes controlled by the West. This would be particularly useful to Beijing given the expected continued interest in Chinese investment in Latin America in the future, though even an increased level of trade in the region would still be too low support the canal on its own.

Chinese investment in the Grand Canal also aligns with Beijing's broader trend of investing in ports and other infrastructure projects around the world to secure its supply chains and enable resource development, particularly in Southeast Asia and Africa. Despite its growing investments in Latin America over the last 15 years, China has not managed to cultivate a strong port presence there. The successful completion of the two proposed ports attached to the Grand Canal project would boost China's physical presence in the region. Other construction projects attached to the canal plan, including free trade zones and industrial projects, would create additional opportunities for expanding China's presence in Latin America through business and the physical presence of workers. Furthermore, the creation of a new canal connecting the Atlantic to the Pacific will not bring about a revolutionary shift in geography (as the Panama Canal did). The Grand Canal route would have to compete with existing alternative trade routes, like the Suez Canal and the Panama Canal, already in the process of making their own improvements and expansions. The Nicaraguan Canal, however, could provide a perceived increase in security, or at least reduced oversight, especially for China, as HKND would control operations of the new trade route.

Given Nicaragua's long history of false starts and subsequent failures, it is possible that the Grand Canal project will simply be the next in a long line of disappointments. And yet signs of progress continue to be seen, raising the possibility that this project could be the attempt that is ultimately successful. But, as long as the Grand Canal project is shrouded in secrecy, uncertainty will remain.

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