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Nicaragua Canal project

Hurdles in way of new shipping route


Plans for a brand-new canal across Nicaragua, creating a rival route to the Panama Canal, have caused a stir among the global shipping community. President Daniel Ortega has granted a concession to a Chinese company to build the canal, which would give a huge boost to the economy of Nicaragua. But what of the environmental impact? What of the rivalry with Panama? And, above all, where is the money going to come from?

The government of President Daniel Ortega has high hopes for its plan to build a new ship canal linking the Caribbean Sea with the Pacific Ocean.

The route has been chosen and the Nicaraguan government has lined up a Chinese contractor to carry out the mega-project. But questions remain about how the work is to be funded as well as its likely impact on the lakes and rivers of Nicaragua – and how it could affect Panama.

The Nicaragua Canal – also known as the Nicaragua Grand Canal or the Nicaragua Interoceanic Grand Canal – is said to be the largest infrastructure project of its kind in the world. The cost of building the new canal has been estimated at US$ 40 to 50 billion.

The proposed canal would be 278 km in length – three and a half times as long as the Panama Canal – and would run from Punta Gorda on the Caribbean coast to the mouth of the River Brito on the Pacific. The route of the canal would take it through Lake Nicaragua, accounting for 105 km of the total journey.

A provisional timing of December 2014 has been set for the commencement of construction work, which will take at least six years and possibly as much as 10 years.

The canal would feature two huge locks. There are also plans for seaports and ship terminals, an oil pipeline, a railroad, free trade zones, an airport and a tourism complex.

Why build it?
Proponents of the Nicaragua Canal argue that if international trade continues its rapid rate of growth in the coming decades, the Panama Canal will reach full capacity and a second route will be imperative.

In addition, the new canal would be broad enough to accommodate the next generation of super-wide containerships.

According to HKND – the Chinese company which has been awarded the contract to build the new canal – there will be a need for additional capacity beyond that provided by the newly enlarged Panama Canal to cope with the future demands of shipping on routes between the Atlantic and the Pacific. HKND believes there would be a strong demand for the Nicaragua Canal because of growing international trade and a move towards even larger vessels that would be unable to transit the Panama Canal but could be accommodated by the new waterway. For example, the newest containerships of Maersk Line are too big for the uprated Panama Canal and the company has rerouted its services between Asia and the East Coast United States via the Suez Canal.

Economic boost
If and when completed, the new canal is expected to transform the economy of Nicaragua.

During the construction phase the project would directly employ over 50,000 workers. Once in operation it would generate 200,000 jobs, about 10 per cent of the current Nicaraguan workforce.

Ecology worries
Environmentalists have expressed concerns about the planned construction of the Nicaragua Canal.

Some of the questions being asked are the likely impact on the ecology of Central America’s largest lake and on the biodiversity of Nicaragua’s forests. They also question how the required energy is to be generated.

The results of a commissioned environmental study will be revealed in the coming months along with the McKinsey assessment.

An idea from long ago

Construction of a shipping route through Nicaragua was first proposed in the early colonial era.

The idea is to use the San Juan River as an access route to Lake Nicaragua, thus creating a link between the Caribbean Sea (and the Atlantic Ocean) with the Pacific Ocean.

The proposed canal would be 278 km (173 miles) in length – much longer than the 77 km (48 mile) Panama Canal.

Chinese contractor
The task of building the canal has been entrusted to a Chinese private company, the Hong Kong Nicaragua Canal Development Investment Co Ltd (HKND Group).

In addition to the canal, the project includes ports and terminals, an oil pipeline, a railroad, free trade zones and an airport.

A 50-year concession to build the canal was granted to HKND by the Nicaraguan government after the relevant Bill had been approved by the National Assembly in June 2013. The concession can be extended for a further 50 years once the canal is in operation.

HKND is understood to have invested up to US$100 million in feasibility studies by leading firms of consultants such as Environmental Resources Management (ERM) and McKinsey & Company. The results of these studies and the preferred route for the canal have not yet been published.
McKinsey & Company has been retained to draft a feasibility study.

A question of money
The huge cost of building a major new canal in Central America is a potential barrier for proponents of the Nicaragua project.

There is still a question-mark over who is going to provide the estimated US$ 40 to 50 billion – possibly a lot more – needed to fulfil this long-term Nicaraguan ambition. The leading investor is believed to be Wang Jing, a billionaire entrepreneur with interests in mining, infrastructure and telecommunications.

The challenge facing investors is to raise the long-term financing required for a project that would earn no revenue for six to 10 years during construction. If this cannot be achieved through equity financing, then it will hinge on the willingness of Chinese government-backed organisations such as state banks and state-owned enterprises to finance the canal project.

Work starts December

Work on the new canal is set to begin in December with construction of a port on the Pacific coast of Nicaragua. The port and infrastructure plan includes two deepwater ports, an airport, an artificial lake, two sets of locks, a tourist complex, a free trade zone, roads, and cement and steel works.

Over 1,000 specialists in various fields are working on the project, which is due to commence in late 2014 and to be completed around 2019.