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.

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.