Hong Kong company defies the doomsayers on Nicaragua Canal project

Hong Kong company defies the doomsayers on Nicaragua Canal project

Developer says the controversial project is economically healthy and viable, but concerns by ecologists, human rights activists and economists continue to grow.

Imagine a canal designed for vessels the size of Hong Kong’s skyscrapers: 276km long, 230 to 520 metres wide and 26.9 to 30.2 metres deep. This canal will be three times longer and two times deeper than the Panama Canal, which started operating back in 1914. It will include two ports, an airport, two artificial lakes, two locks, several roads, a free trade zone and tourist resorts.

It’s a mammoth project that has already made dozens of headlines and sparked several protests even before crews have started digging the waterway itself.

We are talking about the Nicaragua Canal, an infrastructure that if it goes ahead could give China a major foothold in Central America, which has long been dominated by the United States.

Those living in Hong Kong probably know little about Nicaragua, located between the Pacific Ocean and the Caribbean Sea, but the two regions might become closer in the coming years – the company that has proposed building what is arguably the world’s biggest construction project is based in the city.

The Hong Kong Nicaragua Canal Development Investment Group was in 2013 awarded a 50-year concession – with the option to extend it for another 50 years – by the Nicaraguan government to build and operate the canal. It said that the project would be completed by 2019 at a cost of US$50 billion, but such a target is unlikely to be met as major construction works have not yet started.

 The project has faced strong opposition from residents, ecologists, human rights activists and economists, as social and environmental concerns continue to grow. On top of that, doubts about the financial viability of the project have surfaced in recent months after the company’s chairman, Wang Jing, reportedly lost about 80 per cent of his fortune following the Chinese stock market crash. His net worth of US$10.2 billion plunged to US$1.1 billion, Bloomberg reported in October.

Some experts say the project – a dream of many for centuries – will never get off the ground.

But the company’s executive vice-president, Pang Kwok Wai, who has been in charge of overall works for the canal, rejected the worst-case scenarios and guaranteed that the project was in shape to go ahead.

“Those are only speculative opinions and we disagree strongly with them,” Pang told the Sunday Morning Post, in a written interview.

“The project’s financing does not depend on the state of the stock market in China or on Wang Jing’s own financial position,” he said. “The project will be funded from the huge pool of international funding that is dedicated to this sort of infrastructure project … Funding will be a combination of equity, debt, export credit, derivatives, construction finance, project finance.”

He noted that the consultancy firm McKinsey & Company carried out a study on the project’s financial feasibility and confirmed its strength. “The project is financially and economically healthy, profitable and viable,” Pang said. “To date we have demonstrated that the financial resources necessary for each step of the project have been available and this will be the case as we move through each step of development.”

We are confident that the canal can be put into revenue… within five years

Pang said that some Hong Kong companies had expressed interest in the canal but he could not reveal their identity due to non-disclosure agreements.

“We get every day companies from all over the world expressing their interest in designing, building or financing the canal of Nicaragua,” Pang said, adding that the interest of investors “has been remarkably strong”.

Despite saying the project would not rely on Wang’s – apparently declining – fortune, when asked how much money the group had invested so far, Pang answered: “The actual expenditure of the HKND Group on the canal project has reached three billion yuan, all of which comes from the personal wealth of the chairman, Mr Wang Jing.”

The money, he said, had been spent, among other things, on staff costs; running offices in Hong Kong, Nicaragua’s capital Managua and Beijing; financial, social and environmental studies; archaeological works; and preliminary design for canal excavation and locks.

After the beginning of the major works, “we are confident that the canal can be put into revenue… within five years”, Pang said.

 But many experts and observers question the company’s optimism.

“There is still no clear indication there is sufficient financial backing to move ahead with canal construction,” noted Margaret Meyers, director of the China and Latin America programme at Inter-American Dialogue, a policy institute in Washington.

“Whether there is sufficient demand for a second canal in Central America is also debatable,” she said, noting that the project was likely to exceed initial cost estimates.

Andy Lane, an expert in the container shipping industry and partner at Container Transport International Consultancy, raised similar doubts.

It is difficult to see who in the private finance sectors would wish to take such risks

“In today’s environment of low fuel costs and excess ship capacity then we see several Asia to United States east coast services returning via South Africa. Canals not only compete with each other, where also Suez is in play, but also with other completely unrelated routings,” the Singapore-based expert observed.

Lane predicted a trend for smaller ships – those deployed on the route from Asia to the east coast of the US in the next five to 10 years would all fit through the Panama Canal, he said. He also noted that advanced robotics and changes in manufacturing could create a huge decline in the transportation of finished goods over the next decade.

“It is therefore somewhat risky to invest a vast sum which will require several decades to achieve a pay back and provide lowish yields between investment and pay back,” Lane said. “We have yet to learn of who will finance this, and unless it is a government, it is difficult to see who in the private finance sectors would wish to take such risks.”

 An aspect often criticised by opponents is precisely the lack of transparency surrounding the project’s financing.

“Transparency is relative, how transparent is transparent,” Pang argued. “We always disclose business details to potential investors under mutual non-disclosure agreements… We will announce the progress on project financing in due form after obtaining consent of the investors,” he said, noting that the canal was a commercial project.

“HKND is a wholly privately owned and independent enterprise without political overtones.”

Despite claiming the interest of international companies, Chinese companies seem to be amassing most of the project’s contracts. On the HKND Group’s website, two companies from Wuhan, in Hubei province, are responsible for designing the canal.

Having Chinese companies leading this project adds enormously to its prospects of success

“Having Chinese companies leading this project adds enormously to its prospects of success. This is our strength,” Wang said in an interview with the BBC in March last year.

Scepticism has gone hand in hand with this project since the very beginning. According to the Hong Kong’s Companies Registry, the HKND Group was set up on August 20, 2012, the year when the company’s only director, Wang, visited Nicaragua for the first time at the invitation of President Daniel Ortega.

The fact that Wang, a 43-year-old telecommunications entrepreneur, had no experience in infrastructure raised the eyebrows of many. But the controversy didn’t stop there.

Indigenous communities and other residents, who fear they will lose their homes in the project and that proper compensations won’t be given, have staged several protests. Environmentalists have also raised concerns over the impact of the canal, mostly on the region’s fresh water supply.

Access roads for the project started being built in December 2014. Pang told the Postthat in August or September construction of the temporary western port and of the Brito port would begin. The actual construction of the fuel facility and of the first ship berth was planned for the first half of 2017.

Only after these works can canal excavation start. The company said last year that construction of locks and big excavations would begin at the end of 2016 – Pang has not indicated a new date.

“We are confident that the Canal can be operational within five years after commencement of major works,” Pang told the Post. But he avoided saying when boats would actually start crossing the canal.

The British company Environmental Resources Management conducted a study commissioned by the HKND group, which noted that such a schedule was challenging and that the project was “fraught with risks and uncertainties”.

The study, completed in May last year, said the project did offer potential benefits to the environment and people of Nicaragua, but only if its business case was robust, if the finance to complete construction was secure, and if international standards were followed in the construction and operation of the canal.

Otherwise, it would do more harm than good. “Nicaragua may be worse off than doing nothing,” it said.

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