19 10 2015

THE GRAND NICARAGUAN CANAL

A canal passing from the Pacifc Ocean to the Caribbean Sea has been a century long aspiration for Nicaragua, but when the US finally opened a canal in 1914, it was in Panama, not Nicaragua. After many false starts, the idea of a canal through Nicaragua looks suddenly as a possibility. But the question is, how realistic are the plans? And is it actually good for Nicaragua?

The planned canal is a gargantuan project. It is planned to be 275 km long, 230-280 m wide and with a depth of 26.4 m. It would have one lock in each end and most of the canal would follow the level of Lake Nicaragua (Cocibolca), around 32 m above sea level. If carried out, the project would imply the biggest civil earthmoving operation in history, requiring the excavation of approximately 5,000 million cubic meters of material., and the locks would be the biggest in the world. The cost estimate is 50 billion USD or 4-5 times Nicaragua's GDP, or more than double the cost of the “Chunnel” (the tunnel uniting France and England).

2015 10 17 Canal cut through

The first question is, whether this is realistic at all. Firstly, is it profitable? And secondly, can HKND, the private Chinese group which has received the concession, find the 50 billion USD needed? The Panama Canal is close by and has just been expanded so it can take bigger ships, so what would the customer basis be? There is actually a business case for the canal catering for bigger ships, where the most important competitors are not the Panama canal (which would continue to take the smaller ships) but rather the US east-west land-born container traffic and the Suez canal. The proposed canal would be able to take ships around double the size of what the expanded Panama Canal can (measured in tons or number of containers). However, no feasibility study has been presented (and – it is understood – will not be presented, as it is a privately financed project) so it is difficult to assess how realistic the business case is. Then comes the financing. The HKND group is backed by a Chinese telecom billionaire with no track-record in large infrastructure projects (Wang Jing). Speculation is of course rife that the Chinese government may be backing the project, even if China and Nicaragua don't have diplomatic ties (Nicaragua recognizes Taiwan).

So regarding the realism of the project, everybody is guessing. One indicator for the seriousness of the project is of course the investments being made. Sceptics point to the fact that despite of what the Nicaraguan Government said in 2014, the construction has not started yet and apparently will not do so in the near future. But on the other hand, as it would be expected, quite extensive (and costly) preliminary studies have been made, and more are under way, among these a geo-physical study. The HKND group has hired two Chinese design companies, which have made extensive studies in the terrain and have presented a preliminary overall design. The British consultancy firm ERM has completed a comprehensive Environmental and Social Impact Assessment (ESIA), a summary of which is now available on the HKND webpage. HKND has promised that the complete study will be available for download soon.

Based on the 75-page summary, my opinion is that the EISA is actually quite impressive and seems to be well done. It should be stressed that it is not a feasibility study, but, as the title says, an assessment of the environmental and social impact of the project. The overall conclusion of the EISA is that “the Project would result in significant environmental and social impacts, but also has the potential to have positive effects if properly implemented.” To this end, the EISA makes a long list of recommendations.

There are many worries regarding a project of this size in a small developing country. Regarding the environment, the impact on Lake Nicaragua (Cocibolca) is one of the main concerns. The impact is mainly related to silting, salt water intrusion from the locks, the impact during construction and the risk of contamination during operation (spills). A surprising fact, at least to me, is that Cocibolca is already quite contaminated, as witnessed by the presence of heavy metals and pesticide residuals in the sediments, so a worry is that dredging may release these contaminants to the lake (at least until they settle again). The study also states that the main risk to the lake is actually silting, and that the lake is threatened even if no canal is constructed, because of the deforestation in the watershed both in Nicaragua and Costa Rica. Another risk is the extensive use of fertilizers in agriculture in both countries, resulting in an excessive organic load, which eventually may result in eutrophication, with or without the canal. The EISA makes a calculation of the increased salinity of the lake due to the operation of the locks, finding that the chloride concentration in Cocibolca would increase from approximately 64 mg/L to approximately 160 mg/L, with no mitigating measures. According to the EISA, experience from the Gatún lake in Panamá shows that adequate control measures can ensure that the water continues to be of drinking water quality.

The EISA criticizes that the law on the Canal (law 840) states that owners of land that is permanently expropriated would only be compensated at the lower of cadastral and fair market value of the property as of June 2013. The fear of receiving an insufficient compensation for the expropriated properties are one of the main reasons for the protests in many communities along the planned route. HKND has since publicly stated that people will receive a fair, market based price for their properties, but the doubts persist. Expropriations are always controversial, but if we look at recent projects in Nicaragua, the expropriated properties have actually been paid satisfactorily. A recent experience is the big Brazilian hydro-power project on the Nicaraguan East Coast (Tumarín), where the protests died down soon after the power company actually started buying the properties (and paying out the funds - the latest protests were related to the delays in the project and hence the doubt whether the expropriations would actually take place).

The EISA criticizes the lack of information and openness regarding the project, and it makes strong recommendations in this sense. Regarding the indigenous people affected by the project, the project implies the use of indigenous land for part of the canal route, and a Rama-village with 25 households will have to be resettled (the only village where the native language is still spoken). The EISA recommends establishing a free, prior, and informed consent of the Indigenous Peoples for the use of their lands and other natural resources (as established in ILO convention 169).

As mentioned, the EISA is a comprehensive study, and the recommendations are many. The conclusion is that the project has the potential to have positive environmental and social impact, but that it is a condition that the recommendations are followed. The EISA also recommends that more studies should be made (of which several are already being undertaken) and that some technical aspects be reconsidered (particularly regarding the design of the Eastern lock and the location of the port on the East Coast).

Despite the protests against the canal, the Nicaraguans are mainly in favour of it. According to a recent opinion poll, 78% favour the construction canal, 74% are hopeful it will create new economic opportunities, mainly jobs, and 62 % consider it an opportunity for restoring Lake Cocibolca. However, only 69% are convinced it will actually be constructed.

My personal opinion? I am generally not in favour of megaprojects and my main worry is that the project may be too big for Nicaragua to manage, so this beautiful country runs the risk of ending up as an appendix to a canal. The main risk is that the country will not have the strength (and will) to make sure the sensible recommendations made in the EISA are actually implemented. Apart from that, a problematic aspect of the project is that only one bridge over the canal is included (in the West), thus cutting the whole Eastern part of the country in two - at least one more bridge ought to be included (at the Eastern shore of Coicibolca).

On the other hand, of course Nicaragua has the right to construct a canal in its territory, and the overwhelming majority of the Nicaraguans is backing it, as mentioned, despite the negative coverage the project has received in the national and international press.

Litterature:

Simme VELDMAN, Ecorys, et al. : Increasing Container Ship Size and Canal Choice, 2014 (paper presented at IAME 2014 Conference Norfolk VA USA)

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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