What Are the Implications of a Proposed Nicaragua Canal?

By Nicolás Ardito Barletta, Mario Arana, Joaquín Jácome Diez, Carlos Fernando Chamorro
Latin America Advisor, August 22, 2012

This Q&A was originally published in the Inter-American Dialogue's daily Latin America Advisor.

Q: Two Dutch companies said in late July that they had won a $720,000 contract from Nicaragua's government for a feasibility study of a transportation project to rival the Panama Canal, which is currently undergoing an expansion that will open a third lane capable of accommodating megaships in 2014. What would be the economic risks and gains of building a canal across Nicaragua, an idea that has been debated for centuries? Would such a canal be a threat to the Panama Canal? What industries would stand to benefit from a new canal linking the Pacific and Atlantic? Would such a project threaten the Panama Canal? How will the Panama Canal expansion affect the local economy? 

A: Nicolás Ardito Barletta, former president of Panama: "Nicaragua's goal to build an interoceanic canal is noteworthy, but I don't see how it could be economically feasible compared to the Panama Canal. The Nicaraguan project may cost some $30 billion and would be built through more mountainous terrain, subject to earthquakes and a longer distance between oceans. The Panama Canal, once fully expanded by 2014-15 will take PostPanamax ships as well as Panamax. The capacity for more traffic (transits plus tonnage) will be increased considerably to handle any projected interoceanic traffic for a long time. It will remain the cost effective, efficient and reliable operation itis today, secure and open to the whole world. The transshipment port operations already built at both entrances to the canal are world class, very efficient and competitive and already represent the largest container transshipment center in Latin America. The growth potential for the next decade is very significant and the ports are already planning for the expansion. The expanded capacity of the Panama Canal is more than sufficient to handle any forseeable expansion of world demand for its services. It already handles 4.2 percent of world maritime commerce and some 33 percent of Asia-Pacific commerce, including the U.S. Eastern Seaboard and Gulf Coast. It has a local culture attuned to a world maritime business and local offices of more than a dozen of the world's largest ship lines. Also, the Panama Canal has providers of ship services, such as bunker fuel. No isthmian option could match the cost effectiveness of the Panama Canal's operation. And the demand growth prospects for interoceanic traffic are not expected surpass the expanded canal's capacity for the foreseeable future. The competitive advantage will remain with Panama. The momentum of Panamanian growth in those activities will be hard to match."

A: Mario Arana, member of the board of directors of the Nicaraguan Foundation for Economic and Social Development, and former Nicaraguan finance minister and central bank president: "It is premature to estimate costs and profits, but for now, we've been talking about a cost of $30 billion. Previously, costs have been estimated at $18 billion. Five possible routes have also been considered, but the San Juan River route in particular had not been studied, and that's what the Dutch companies will do. A previous preliminary study found that a new canal would be profitable and would not be a threat to the Panama Canal. That is because demand exceeds the Panama Canal's capacity, even with its expansion and especially for larger vessels. Panama has water limitations, while Nicaragua does not. Supposedly, investment and development on this scale would stimulate a significant amount of economic activity—all aspects of logistics and services related to the maintenance, operation and construction activity from the beginning of the project. The main threat facing this project is melting near the North Pole, which would allow for easier navigation through the Northwest Passage and invalidate the need for a canal through Nicaragua. It remains to be seen, however, if international interest in a canal through Nicaragua will be awakened and if the relevant actors can make it a reality. There are geopolitical implications to consider and it would require a nationwide effort. But on balance, it could be very healthy for Nicaragua's socioeconomic and institutional development. A canal would give foreign investors a great deal of confidence in Nicaragua and would give it a special place in world trade through its strategic geographical location. The benefits could be numerous, but it would be a great challenge before it can become reality."

A: Joaquín Jácome Diez, senior partner at Jácome & Jácome in Panama City and former trade minister of Panama: "Throughout the years, we have heard about several projects to be constructed in the region to rival the Panama Canal, not only in Nicaragua and Costa Rica, but also in Colombia. To undertake a project of such magnitude requires not only financing but a series of factors that guarantee the shipping community the security, reliability and stability that has taken Panama many years to achieve. In Panama, we believe competition is healthy not only for the canal, but for the entire country, therefore we strive for excellence. Our country is constantly updating its legislation in areas including banking, trade, security and transportation in order to allow the Panama Canal to keep a competitive edge. The canal handles roughly 5 percent of world trade with its 14,000 transits annually. Studies made by the Panama Canal Authority showed that by 2020 the Panama Canal would be functioning at its capacity. Therefore, the country undertook the $5.2 billion expansion project to be finalized by 2014. This will allow PostPanamax vessels to transit the canal, increasing significantly the volume of cargo it handles. All Panamanian port operators and related industries have been expanding and preparing for this moment. The feasibility of another canal in the region would be determined by the demand for transporting cargo and the quality of service and competitiveness provided to the shipping community by our canal and country. In case this new project turned out to be different than the others, we would welcome it to the region and make sure it would not affect our canal."

A: Carlos Fernando Chamorro is director of weekly magazine Confidencialin Nicaragua: "The subject of building a canal across Nicaragua is a pipe dream that has come up during Nicaragua's last three presidential terms. The administration of Enrique Bolaños created a presidential commission that designed profiles of the proposed canal's alternative routes, which were presented to the world during the meeting of defense ministers of the Americas, which was held in Managua in October 2006. During his 2007-2012 term, Daniel Ortega did not follow-up on Bolaños' plans, but he did promise an oil refinery to be built in 2010 with $4 billion in funds from Venezuelan President Hugo Chávez. To date, not even 10 percent of the refinery has been built. Now at the beginning of his current term, Ortega announced his intention to build a canal at a cost of between $30 billion and $40 billion. The contract for the studies to be done by the Dutch companies is only one of many that would be needed to explore the viability of such a project. But first, in my opinion, Ortega should pass a test of institutionality. Can a government like Ortega's, which has weakened the country's institutions, create conditions of legal security in order to attract multimillion-dollar investments that would permit the development of a mega-project in Nicaragua? At this moment, talk of eventual economic and competitive effects of a new canal is a futile and totally speculative exercise. Meanwhile, it would be more productive for Nicaragua to debate smaller projects that would have a big economic impact, for example, how to increase production of corn and other basic products that are stuck at levels of a century ago."