Dry Spell for Central American Canals

It's been a tough few months for infrastructure projects in Central America. LatAm INVESTOR takes a closer look at what's behind the problems with some of the region's biggest investments...

Canal Fever

At one point last year it seemed that Central America was destined to be covered by canals. First up was the Panama Canal extension, which was well underway, then a new China-backed deal to build a rival canal in Nicaragua. Meanwhile Guatemala and Honduras seemed keen to revive plans for a ‘dry canal’ – otherwise known as a railway – across their territories. So many plans were in the offing that some analysts even warned of a danger of overcapacity for the trans-hemisphere route. But a disastrous couple of months for canal builders mean those worries now seem a distant memory.

The first shock to the canal building plans came from Nicaragua, when the government announced the project would be delayed by a year. Officially the extra year is to allow for detailed environmental and feasibility studies but there is no shortage of rumours pointing to other factors. Some question the financial solidity of the Chinese backers, who have no canal building experience, others say that objections from neighbouring countries may be responsible.

Meanwhile over in Guatemala, the plans for a dry canal remain just that, with serious work yet to begin on the project.

Down Tools

But the final, and perhaps most serious nail in the coffin, came from Panama. For the last few years the Spanish/Italian consortium of Grupo Unidos por el Canal (GUPC) has been working on widening the canal. But in January they suddenly announced that they would halt work on the project unless they were given extra money to cover ‘unexpected costs’. The consortium, which counts Spain’s Sacyr and Italy’s Impreglio as its two majority partners, wants $1.6 billion – on top of the agreed $3billion fee – to carry on the project.

Panama's economy has boomed in recent years

The news of the problem is a blow because while the Nicaraguan and Guatemala-Honduras plan faced considerable challenges, the Panama work was well underway. At present the canal earns about $2.5billion a year in direct fees and indirectly contributes 10% GDP. Widening the canal would have been a major boost to Panama’s economy. It would also have been a big boost to the world economy, as around 5% of global shipping already passes through the canal.

Who Knew?

But not everyone would have been surprised by the consortium’s announcement. Thanks to the Wikileaks revelations we know that in 2009 the US Ambassador noted that a rival consortium strongly doubted the ability of GUPC to deliver the project for such a low price. In the leaked cable the Ambassador suggested that the consortium may have placed a low price for the bid, only to ask for more money at a later date. Right now that looks a pretty prescient call. However, the consortium has robustly defended its claim for extra cash, claiming that unexpected geological difficulties have arisen.

Some sort of negotiated outcome is likely. The canal is too important to both Panama and the consortium for the stalemate to continue. However, it now seems certain that 2014 won’t be the breakthrough year for Central American canals after all.