Nicaragua Plots a Rival for the Panama Canal

Wang Jing, chairman of he HK Nicaragua Canal Development Investment Co. Ltd. (HKND Group), speaks during a discussion group with students from the National Engineering University in Managua, on July 7, 2014. REUTERS/Oswaldo Rivas

There are a lot of doubts about whether a proposed canal in Nicaragua will ever be built, but the route of the waterway that would link the Atlantic and Pacific oceans and potentially radicalize the world’s trading routes has been settled on.

The proposed route of the 173-mile-long canal cuts a path through Nicaragua at a cost of $40 billion, which is nearly four times the annual GDP of the Central American country. The Chinese company contracted to build the canal is expected to start construction in December. HK Nicaragua Canal Development Investment Co. Ltd. (HKND Group), which is in charge of the building the canal, has said it will be completed in five years

The construction of Nicaragua's canal represents a second chance to reap the rewards a major shipping channel can bestow on a country after losing out on the opportunity to build one more than a century ago. With statements from government officials that employment will double for the country’s citizens from the construction and effect of the canal and Nicaraguan President Daniel Ortega's stated vision of lifting hundreds and thousands of Nicaraguans out of poverty, the project holds great potential for bringing prosperity. The Panama Canal has revenues of $2 billion, according to The Economist, and around $760 million of that goes to Panama's treasury. 

Simon Bennett, director of external relations at the International Chamber of Shipping and the International Shipping Federations, says his organization is taking a wait-and-see attitude toward the canal.

"Obviously, at a simple level it would provide competition to the Panama Canal that currently enjoys a quasi-monopoly. But that would all depend on whether or not a canal in Nicaragua will ever actually come to pass," Bennett says. How much the canal would charge for tolls is another question, although a hypothetical one for now. 

The Nicaragua canal could, however, bolster and develop niche markets. 

"One issue with the Panama Canal is that at certain peak times of the year, demands for use of the canal outstrip the available slots, particularly for trades that are carrying less high-value goods," Bennett says. Using ships carrying bananas heading for the United States as an example, Bennett says they're often outbid by large container ships that are scheduled and can pay the higher costs. The Nicaragua canal, by creating alternative shipping routes, could provide an advantage for such smaller markets.

The plan to construct the canal was approved in June 2013, when HKND Group was granted exclusive rights to build and operate the canal under a 50-year lease. On Monday, Nicaragua’s National Assembly approved the route. The wider canal in Nicaragua would allow for larger shipping containers than the Panama Canal (which is in less than one third the total length of its northern counterpart), but officials insist there’s no rivalry. Dubbed "the biggest engineering project in human history," the canal would start at the mouth of the Brito River on the Pacific Coast, flowing to the Punta Gorda River on the east.

But the route approval is just one of many steps in the process, and there remains a lot of skepticism about the project. "It's going to solve all of their problems," says Shannon O'Neil, senior fellow for Latin American Studies at the Council on Foreign Relations, with just a hint of sarcasm.

"There's a real question of the feasibility on [building a canal] in Nicaragua," O'Neil tells Newsweek. "It's fine to approve the path, but there's lots of issues over the lakes it has to go through and the silting up of them, and the environment." 

"There's a question over the needed extra capacity. If Nicaragua is going to build theirs, are they going to take half the traffic that goes through the Panama Canal? Will the Panama Canal lower its rates? How will we see the competition there?" O'Neil says.

Competition to both Latin American canals also comes from the opening up of the Arctic caused by global warming, which will cut up to two weeks off shipping time from Asia to Europe and lower costs, O'Neil says.  

Despite the Nicaraguan government’s claim that canal construction will avoid delicate environmental areas and indigenous territories, environmentalists have resisted the project. What effect the canal will have on Lake Nicaragua, the largest lake in Central America, is of particular concern as it’s a key source of fresh water. The proposed route means a shipping channel will run through the lake. Nature magazine has warned of environmental disaster and has expressed concern that HKND Group, headed by Chinese tycoon Wang Jing, has no obligation to reveal the results of its environmental surveys to the public.

The high cost of the canal is also a cause for concern. Commenting on the projected cost of the canal, nearly four times the size of Nicaragua's GDP, O'Neil said: "If you're going to dream, dream big!"

Correction: This article originally stated that the Panama canal was less than three times the length of the proposed Nicaragua route. This is true, but perhaps the more relevant comparison is that it is less than one third of its length. The article was changed to reflect this.

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