Doubts raised over Nicaraguan canal project as trade patterns shift

The proposed Nicaragua Canal may struggle to find private investors for financing as the project developer will find the case for a second waterway connecting the Pacific and the Atlantic a hard sell given current global trade patterns.

Hong Kong-based HKND Group, which was awarded a 50-year concession by the Nicaraguan government to build and operate the canal in 2013, started construction on the mammoth project last month that it said would cost US$50 billion and be completed by 2019.

Pang Kwok Wai, HKND deputy general manager of construction, told the South China Morning Post that the company expects a 12-year payback period and will source much of the capital needed from a stock exchange listing. He declined to elaborate.

HKND has yet to release an economic feasibility study it commissioned from McKinsey. An apparently flawed analysis on the HKND website, looking at projected trade growth between 2012 and 2020, bases much of the demand for a second interoceanic canal on trade between Asia and the Americas, export of US shale gas, and China's demand for South American commodities. However, shipping experts question the rationale of such projections.

Andy Lane, partner at Container Transport International Consultancy, struggles to understand why the multibillion-dollar splurge would be a good bet for potential investors.

"Let's assume US$25 billion is spent on the canal itself - the other half on hotels, roads, airports and free-trade zones that HKND also plans to build along the canal. Assuming global trade grows at 6 to 7 per cent per annum during the concession period, and also assuming that the Nicaragua Canal will in 10 years' time take more than 60 per cent of the expanded market share and the rest by the Panama Canal, the annual internal rate of return after 25 years would be less than 2 per cent," said Lane. He added that these assumptions were skewed in favour of the new canal and were highly unlikely in the real-world scenario.

"You can easily gain a lot more than 2 per cent by buying US government bonds," he said.