The Nicaragua Canal Project

Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

Plans for a canal crossing in Nicaragua first emerged in the 19th century. As a shipping channel, the essential purpose of the construction of the Nicaragua canal is to provide a maritime shortcut between the Atlantic Ocean and the Pacific Ocean. In the 21st century, new ambitions emerged to construct such a canal in view of introducing a direct competitor to the Panama Canal. However, the chance remains low that the canal will ever be built.

1. Historical Perspectives

The idea of constructing a Nicaragua canal can be traced back to the 16th century, but no concrete construction plans were developed for another three centuries due to a lack of technological knowledge, means, and concrete market demand. Nicaragua represented one of the options considered. In the 19th century, the United States became interested to build a transoceanic canal, and in 1890 dredging works started at the San Juan River in Nicaragua. However, the work was suspended in 1893. In 1899, the American government established an Isthmian Canal Commission to investigate two routes, one via Nicaragua and the other via Panama. The Commission report came out in 1901 and favored the Nicaragua route.

However, the US Senate voted for the Panama route, in large part because of a sharp decrease of the asking price for the real estate and assets owned by the French New Panama Canal Company. Further, the completion of a trans-isthmian rail connection in Panama between 1904 and 1914 reinforced the appeal of Panama. In the late 1920s, just a decade after the Panama Canal was completed, US interest in the Nicaragua Canal resurged as capacity concerns over the Panama Canal would incite the consideration of a second interoceanic waterway. However, the plans to construct the Nicaragua Canal were shelved in 1931 due to a combination of factors. The Great Depression eased the fears for future capacity shortages at the Panama Canal and shifted investment priorities outside the United States. Furthermore, the enormous construction costs and fears over nearby active volcanoes (fuelled by some deadly eruptions in the late 1920s) were important deterring factors.

From the late 19th century to the 21st century, the Nicaragua Canal option resurfaced from time to time, with various stakeholders expressing interest in constructing or financing the project. However, these interests never went further than surveys and feasibility studies that traced possible routes (see above map).

2. The 21st Century Nicaragua Canal Project

In 2013, the Nicaragua Canal option again came at the forefront with the announcement that a 100-year concession has been signed with a Chinese company registered in Hong Kong (HKBD Group). In late 2014, a route was officially retained. The route is divided into two segments connecting Lake Nicaragua. The West Canal from the Pacific crosses the Isthmus of Rivas at Brito, a segment of about 26 km. One lock system is expected to be built midway along this segment. Then, Lake Nicaragua is used for 107 km. The East Canal connects Lake Nicaragua to the Caribbean Sea over 127 km and will also require the construction of a lock. On both sides of the expected canals, new ports were planned.

The Nicaragua Canal would have a minimum water depth of 26.9–29.0 m, thus able to accommodate vessels with a draft of 24–26 m, which are too large to pass through the expanded Panama Canal. With these water depth conditions, the canal can easily accommodate all existing and planned container ships, 320,000 DWT VLCC (very large crude oil carriers), 400,000 DWT bulk carriers, and other mega vessels. The Nicaragua Canal would thus surpass by far the capacities of both the Panama Canal and the Suez Canal in terms of nautical characteristics.

a. Constructions costs

The expansion of the Panama Canal underlines the technical feasibility of the Nicaragua project, but also its engineering complexity and costs. Due to the length of the canal, several physical obstacles (e.g. Isthmus of Rivas) necessitate the construction of locks and the requirement to accommodate large ships in both directions at once. Construction costs would be excessive with some estimates place this at more than 40 billion dollars, but delays and cost overruns almost always plague megaprojects. This represents a very high sunk cost before any revenue can be generated. In comparison, the expansion of the Panama Canal had a price tag of about 6 billion dollars.

Thus, securing long-term financing is a challenge because of high costs and limited knowledge about potential returns on investments. It is worth underlining that there are no diplomatic relations between China and Nicaragua, implying that financing could not come from government sources.

b. Geophysical and environmental risks

The proposed canal passes in an area of volcanic and seismic activity, one of the reasons why Panama was initially retained for a transoceanic canal. There is thus a risk of potential damage to infrastructure and even closure. The project would also go through wetlands and conservation areas, implying negative impacts on ecosystems. The canal route crosses Lake Nicaragua, the country’s largest freshwater lake. Canal dredging and shipping activities may have a serious impact on the lake’s water quality and ecological environment. Shipping activities on the canal would seriously affect biodiversity and the protection of endangered species. The Nicaragua canal shipping activities would bring serious negative effects to the surrounding tropical rain forest, forest wetlands, natural and biosphere reserves, and other ecological systems. Shipping ballast water could also cause marine biological invasion. The canal project would also destroy local archaeological sites, disrupt the lives of indigenous people, and cause damage to other social environments.

c. Political and governance risks

Nicaragua has a history of political instability, and its governance system is thus prone to risks. According to Transparency International, its corruption perception index for 2013 was 29/100, which is very low (ranked 130 out of 176 countries). Nicaragua is thus perceived to be a highly corrupted country where the rule of law is not effectively enforced. Additionally, Nicaragua has no diplomatic relations with China, which is a potentially large risk to Chinese investors. The Chinese government has repeatedly and officially warned Chinese companies not to get involved in this risky project in any way. At the same time, Panama has cut ties with Taiwan in June 2017 and is forging stronger relations with China. Panama’s policy reversal with respect to Taiwan may be linked to China’s massive investment in the area around the Panama Canal. The stronger economic and diplomatic exchanges between China and Panama undermine the plans for the realization of the Nicaragua Canal.

Major transoceanic canal projects, such as the cases of Panama and Suez, have required the setting of an independent governance structure managing the infrastructures and the operations. They are self-financed and highly independent of political interventions. It is uncertain if such a governance structure can be established in Nicaragua, increasing risks to investors and potential users.

d. Market potential and competition

The Nicaragua Canal project is designed to accommodate the long term expectations of substantial growth in global maritime trade, particularly in Latin America. Recent years have underlined that global trade is experiencing lower growth rates, particularly concerning its main drivers; North America, Europe, Japan, and China. It remains uncertain to what extent this shift will be compensated by a growth in trade concerning Latin American countries, including their relations with new trade partners such as China and India.

There are already strong competitors for the Nicaragua Canal project, which cannot take the “first mover” advantage. The high construction costs would put pressure on the Nicaragua Canal to impose high tolls for capital recovery. The expansion of the Panama Canal in 2016 brought additional capacity, but comparatively to Nicaragua, it faces fewer pressures to impose high tolls (less capital investment). If necessary, Panama would also respond with a second expansion phase, placing additional competitive pressures. Compared with Panama, Nicaragua offers limited-time advantages concerning maritime deviation, one day depending on the route. Furthermore, the North American and Mexican landbridges also offer niche alternatives, in addition to the several dry canal projects pursued by several Central American countries.

By 2016 the project stalled, and limited information has been released since then concerning its status. In all appearances, it has been abandoned. The Nicaragua Canal project remains a technically feasible option that may not be suitable in the current commercial context but could eventually take shape. However, this is usually a stepwise process requiring the presence of port infrastructures on both facades as well as a highway and rail corridor.


Related Topics

References

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