Consulting firm exit raises Nicaragua Canal feasibility questions

Nicaragua’s government has long claimed that an economic feasibility study by blue-chip U.S. consultancy McKinsey & Co. is crucial to enticing Western investors to its $40 to $50 billion canal project. However, it has been confirmed that McKinsey has not worked on the Nicaragua Canal project since 2014, raising new questions about the Nicaraguan government’s public statements as well as the project’s chances of attracting Western investors.

A feasibility study concluded last year would not incorporate the effects of the canal route changes decided since then, nor would it encompass the huge shifts in global economies, trade flows and commodity prices that have emerged in 2015 - all of which are pivotal to any investment decision on a transoceanic shipping canal.

The HKND Group, led by China businessman Wang Jing, was awarded the concession to develop and operate the Nicaragua Canal in June 2013. HKND subsequently hired McKinsey to conduct an economic feasibility study and continues to list the consultancy as a ‘project partner’ on its website.

The marketing coup from the McKinsey contract was highlighted by Dr. Paul Oquist, the private secretary of national policy for Nicaragua President Daniel Ortega, during an in-depth interview in October 2014. Oquist is also the executive director of the Nicaragua Grand Canal Commission.

Asked about the prospects for securing funding for the canal beyond China, Oquist answered in October 2014, “The first step is for McKinsey & Co. to file the financial and economic feasibility report. That will be sent to the financial community. McKinsey is ‘top of the line’ in terms of prestige in the financial economic consulting business. That is a big benefit, because the credibility of McKinsey & Co. with Wall Street investment banks, those in The City of London and Frankfurt, and with private equity firms and institutional investors becomes very important. The answer to your question (on international funding) is to be found in the reactions of these different groups of investors to the McKinsey financial and economic feasibility study.”

According to Oquist, the ability to obtain funding from outside China via the completion of the McKinsey study was important to the canal project because “we need the ‘body language’ that everyone’s in the deal.” In other words, it would be more challenging to Nicaragua from a diplomatic and geopolitical perspective if the project was a wholly ‘China Inc.’ affair.

Oquist said during the October 2014 interview that the McKinsey study was scheduled to be completed within weeks. Reuters reported in December 2014 that the McKinsey report would be delayed until April 2015 due to a change in the canal route. Oquist again specifically mentioned the still-unreleased McKinsey report very recently, during a September Council of the Americas-sponsored forum in Washington, D.C.

A confidential source who claimed to have inside knowledge of McKinsey’s work with HKND told a very different story about the economic feasibility study. McKinsey did initially consult on the project, made repeated requests for payment, and ultimately received payment from HKND around June 2014, the source said. Shortly after being paid, McKinsey informed HKND in writing that it would discontinue working on the project, said the confidential source.

Asked about the confidential source’s claims about McKinsey’s business relationship with HKND and the timing of that relationship, McKinsey spokesman Ed Kolodziej responded, “It’s our firm’s long-standing policy not to comment on who our clients are or the work we did for them.”

When HKND was asked about the confidential source’s claims regarding the McKinsey work, HKND confirmed that it is no longer working with McKinsey. “HKND retained McKinsey to do economic analysis for the Nicaragua Canal and McKinsey completed the contracted work last year (2014). Currently, there is no ongoing work with McKinsey. Further co-operation is possible when opportunities arise,” said HKND spokesperson Virginia Zhang.

Asked whether HKND was pursuing a supplemental economic feasibility study following the conclusion of its work with McKinsey in 2014, Zhang said, “The economic analysis for the Nicaragua Canal has been completed by McKinsey last year.” Asked whether the McKinsey study would be publicly released, Zhang said, “This economic analysis for the project is a commercial secret and is not available for the press.”

Over a dozen attempts to contact Oquist by phone were made, speaking to several assistants at his office during the past week, and sending multiple emails to Oquist’s business and personal addresses, specifically asking him whether there had been a miscommunication between the Nicaraguan government and HKND, given that public statements by Oquist have implied that the consulting contract with McKinsey had continued. Oquist has yet to reply.

When Oquist addressed the Council of the Americas-sponsored forum in September, he conceded that the project has been further delayed by the need to do additional environmental mitigation studies. He said that the latest schedule called for construction bidding proposals to go out in early 2016.

However, this revised timetable assumes the project can actually be funded. There has still been no announcement on how $40-50 billion - roughly equivalent to the entire annual GDP of Panama - can be raised to pay for the Nicaragua project amidst today’s slowdown in China and the ‘risk off’ financing environment for developing countries. According to the Bloomberg Billionaires Index, HKND founder Wang had an estimated net worth of $10.2 billion in June, but this had plunged by 84 percent to $1.1 billion in October - the steepest collapse in net worth of any of the world’s billionaires.

A version of this story originally appeared on IHS Fairplay, a sister product of JOC.com within IHS.