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3 Big Concerns About Nicaraguan Canal Plan

For five hundred years, men have dreamed of a canal from the Atlantic to the Pacific through Nicaragua. In the nineteenth century, it very nearly happened; everyone from Napoleon III to Cornelius Vanderbilt and even J.P. Morgan considered the notion. In the early twentieth century, it came down to Panama vs. Nicaragua. But in the end, Panama won out, and the notion was shelved—until now.

When in early July Nicaragua released the projected route for a $40 billion canal to link the Atlantic and the Pacific, speculation about the project’s viability increased. Already simmering since the project was announced last year, criticism of everything from financing to legality to environmental impact has intensified—particularly since construction is expected to begin by the end of the year and be completed by 2018. That’s ambitious by anyone’s standards.

Here’s a closer look at those top three areas critics are most concerned about.

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1. Financial. While the canal could offer a boon to Nicaraguans, the most likely country to benefit from it is on the other side of the world.

President Daniel Ortega’s government awarded the job to Hong Kong-based HKND Group, led by billionaire Wang Jing, in a no-bid contract. Speculation has run rife about whether financing will come from the tycoon and his business interests or whether the Chinese government itself is involved—something Wang has repeatedly denied, despite appearances to the contrary.

Another factor is whether HKND is up to the task. It has no history in heavy engineering. Wang is known for telecommunications, not this kind of infrastructure, and the Nicaraguan national wireless network he was supposed to build has yet to take shape.

While Nicaragua says the canal will boost economic growth, bringing prosperity to more than 400,000 people, that’s not guaranteed. The project has so many moving parts that some may cause more harm than good and cost the country dearly. That could leave China—or whoever ends up financing the operation—to reap most of any benefits.

Nicaraguan economic growth is projected by some to run about 4.5% a year till 2020—without the canal. With the canal, some project advocates put that figure as high as 15%—no small incentive. But a mass influx of Chinese and other multinationals to work on the project could shut out domestic workers, who are largely untrained for the kind of work needed.

Then there’s the monetary aspect. HKND has a 50-year concession to develop the canal, with the right to extend to 100 years. Nicaragua will only own 10% at first, accruing an additional 1% each year, and will only receive $10 million per year.

John Blank, chief equity strategist at Zacks, said the question for investors is the project’s ROI—something he warned is at least 10 years out. “It’s a more expensive transit across Nicaragua,” he said; a Nicaraguan canal, at 173 miles, would be more than three times longer than Panama’s. In addition, he doesn’t believe a Nicaraguan canal would draw much business away from Panama, since the latter’s cost to shippers is lower.

While the new canal will accommodate Chinamax cargo ships and tankers—the newest and largest—few of these vessels exist yet, since few ports can accommodate their massive size. In fact, even after renovation, the Panama Canal will still be unable to handle Chinamaxes. Blank said the new canal won’t make enough from existing Chinamaxes to pay for itself, despite its planned two deepwater ports.

However, he said the project’s true value to China is not necessarily shipping per se, since high transoceanic traffic is needed to make it profitable. Instead, it will give China a foothold in the western hemisphere, better access to Venezuelan oil and more direct access to Europe for Chinese shipping. These could be more valuable in the long run than canal traffic.

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2. Legal. Lack of transparency is a concern. Numerous studies, along with potential problems, have not been made public. In addition, the legality of the award itself, along with measures taken to free up land for the project, are under question.

In addition, property seizures that include the loss of indigenous peoples’ lands and other incursions could at the very least bring additional court challenges, if not outright civil unrest.

In a report, Gabriel Álvarez, a law professor at the National Autonomous University in Nicaragua, cited no fewer than 32 challenges to the project’s constitutionality. Not only did no other company bid on the job, a law pushed through with little debate gives HKND unlimited control over large areas of land and waives taxes. That’s a threat to Nicaragua’s sovereignty, said Álvarez in the report.

The law also takes away the Nicaraguan central bank’s sovereign immunity regarding the project—not something that sits easy with economists.

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3. Environmental. Critics have voiced numerous worries about potential damage to Lake Nicaragua, through which a substantial part of the canal route will run. The environmental study itself is being done by British consultancy firm Environmental Resources Management (ERM), one of many consultants hired by HKND to study various aspects of the project. But the results of the study—along with many other studies, from financial to legal—have not yet been made public, and there are fears that the Ortega government will steamroll over any problems in its quest to proceed.

Lake Nicaragua is not only the country’s largest source of fresh water for both drinking and irrigation, it also hosts a number of rare and endangered species in small ecosystems within its waters. Both could be endangered by the required dredging for the canal, not to mention the potential for contamination by sediment from the dredging operation and by invasive species carried there by ships. Then there is the potential for oil spills that could take years to clean up.

The canal, deepwater ports, airport and other facilities included in the contract would split or border nature reserves, cutting off migratory routes for land species and threatening other fragile ecosystems, potentially damaging a million acres of rainforest and wetlands.

Two more environmental worries are hurricanes and the possibility of earthquakes or volcanic activity, either of which could be devastating not only to construction but to any ship traffic in a finished canal. In fact, Panama won out over Nicaragua in 1902 because of a volcanic eruption. A Senate vote was poised to approve Nicaragua, but one of Nicaragua’s own stamps featured an erupting volcano. Each senator was sent one of those stamps by a Panama supporter, and shortly thereafter a volcanic eruption devastated St. Pierre in Martinique. The eruption also destroyed Nicaragua’s hopes for a canal; the vote went to Panama.

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