Thứ Sáu, ngày 18 tháng 7 năm 2014

A Tale of Two Kaesong Industrial Zones: Not All Foreign Investment is Created ...

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17 July 2014


Promoting foreign direct investment and enhancing commercial engagement is often touted as a potential catalyst for enticing isolated, authoritarian regimes to enact reforms and constructively engage with the international community. Promoting this sort of constructive commercial engagement with North Korea, however, is far easier said than done. China is often highlighted as the paramount success story for this sort of constructive engagement. Since opening up to foreign investment over three decades ago, China has enjoyed rapid improvements in living standards for the vast majority of its citizens and its leaders have shown far greater willingness to engage with the international community—although many analysts lament Beijing’s lack of progress on human rights issues.


Most foreign investors in North Korea find the business environment to be enormously challenging. Many complain about widespread and routine bribery. The weakness of formal institutions means that disputes between foreign investors and their local partners must be resolved using informal networks and personal connections. Poor infrastructure, political risk and a strong stigma associated with investment in North Korea are frequently cited as major challenges to doing business. For many, these challenges serve as major disincentives to investment.


For its part, South Korea has also made attempts to encourage investment in North Korea in hopes of creating space for dialogue, improving living standards, catalyzing reform and deterring military provocations from Pyongyang. The most prominent example of this effort is the Kaesong Industrial Complex (KIC), an 800-acre industrial park six miles north of the demilitarized zone. Although the KIC operates at only a fraction of its planned capacity, it is now home to over 120 South Korean factories that employ upwards of 50,000 North Korean laborers, and generates approximately US$100 million in wages per year. However, progress achieved with regard to KIC can be quickly negated during periods of heightened tension between Seoul and Pyongyang as was seen when the complex was shut down for six months in 2013.


Even as the KIC reopened after last year’s shutdown, critics of the venture questioned its political value, noting that cooperation in Kaesong did not prevent Pyongyang from twice attacking South Korean targets in 2010. Moreover, the South Korean government has found it increasingly difficult to attract new investors to the KIC, reporting last November that two firms, after the six-month shutdown, had ceased operations there amid questions about KIC’s long-term financial viability.


Pyongyang remains dissatisfied with many aspects of the KIC arrangement as well. According to South Korean officials, Pyongyang wants to use Kaesong to develop heavy industry and learn cutting-edge technology. “But that could be a violation of UN Security Council sanctions on the regime,” one official told the Joong Ang Ilbo last month.


Despite the challenges associated with the KIC, Pyongyang has ramped up its efforts to attract foreign investment by enacting new laws to protect foreign investors and developing plans to establish numerous special economic zones. On October 17, 2013, Korea Central Television (KCTV) even announced plans for a new Kaesong Hi-Tech Industrial Park to be built by investors from Hong Kong and Singapore.


On the surface, it would appear that construction of a new industrial zone in Kaesong signals Pyongyang’s ability to draw in a more diverse group of investors and possibly attract the much-desired high-tech investments that remain off limits in the original KIC.


However, upon closer inspection, the announcement may actually reveal the depth of Pyongyang’s desperation to attract foreign investment, as a key player behind the project is a secretive and controversial Hong Kong-based syndicate known as the 88 Queensway Group that seems to specialize in doing business with pariah states and isolated regimes with little to show for their efforts.


Queensway’s History of Dubious Deals with Isolated Regimes


The 88 Queensway Group is largely the creation of two Hong Kong-based investors: Madam Lo Fong Hung, the daughter of a People’s Liberation Army general and the wife of a well-connected Chinese banker, and Sam Pa, a secretive businessman with many aliases and decades of experience in Africa.[1] In 2003, Sam Pa and Madam Lo incorporated a series of companies that operated out of offices on the Tenth Floor of Two Pacific Place, 88 Queensway in Hong Kong. Initially marketed as a for-profit one-stop shop for resource-for-infrastructure deals, the 88 Queensway Group thrives in environments with highly-centralized governments that are diplomatically isolated and financially desperate, where it can appeal to the narrow interests of a tiny ruling clique whose bargaining position is rather weak compared to states with stronger links to the international community.


Unlike the developers of the original KIC, political reform in the target country is not high on Queensway’s agenda. On the contrary, Queensway’s operations in Zimbabwe have shown a willingness to help preserve the political status quo. In April 2014, the US Department of Treasury placed sanctions on Sam Pa following revelations that, in return for diamonds he would smuggle out of the country, he provided financing and equipment for Zimbabwe’s Central Intelligence Organisation (CIO) in support of President Robert Mugabe’s successful reelection bid in 2013. Nor does the 88 Queensway Group appear to be deterred by the potential stigma associated with doing business with a pariah regime. Representing China International Fund, Queensway’s flagship company, Sam Pa penned a deal with Moscow to build a $1.27 billion bridge connecting mainland Russia with Crimea barely a month after Putin’s annexation of eastern Ukraine.


Having brokered deals in places such as South Sudan and Central African Republic in recent years, Queensway has demonstrated it has the appetite for political risk that is needed to take the plunge into Pyongyang. The routine need to bribe officials is not a deal-breaker for Queensway either.[2] Chinese investigators found that Queensway’s leaders had bribed high-level officials in Nigeria and several other countries. No infrastructure? No problem. Promising to build new roads, railways, and high-rises is a key part of Queensway’s charm.


Queensway’s entry into a country seems to follow a pattern. Initially it approaches Beijing-based diplomats from the target country. For instance, Guinea’s ambassador to China, Mamady Diaré, helped Queensway secure a foothold in Conakry in 2009 and Hong Kong court records show that Queensway made a payment to Mozambique’s envoy in Beijing in 2009 as a loan for an unspecified “project.”[3] After gaining high-level access, Queensway often finds a local partner with strong political clout and influence in a wide range of economic sectors. Once it secures access to lucrative natural resource concessions or high-value public works projects, Queensway typically convenes elaborate ceremonies to commemorate the deal, often inviting high-level government officials from other partner states as well as executives from mainstream multinational firms in order to showcase its access and influence.In the early stages of cooperation, the provision of goods or equipment to the host country government helps cement Queensway’s credibility. For example, Sam Pa procured 100-200 Nissan pick-up trucks for Zimbabwe’s CIO, and China Sonangol (Queensway’s lucrative joint venture with Angola’s state oil company) was recently revealed to be the “mysterious foreign investor” that procured 350 SUVs “presented as a gift” to Madagascar’s president.


However, by and large, Queensway has earned a reputation for promising big and failing to deliver. Its construction projects in Angola, for example, have been characterized by delays, mismanagement, and cancellations. Nevertheless, it has stakes in nearly a dozen lucrative oil blocks in that country. Indeed, its reputation and legal troubles notwithstanding, the 88 Queensway Group has enjoyed considerable success. It now controls a sprawling web of companies—many of which have untraceable ownership structures—with investments in over a dozen countries around the globe. China Sonangol even owns the former J.P. Morgan Chase Building in Manhattan—albeit through an anonymous shell company called CS Wall Street LLC.


Through China Sonangol, Queensway also appears to be playing a key role in the planned Kaesong Hi-Tech Industrial Park and has in several other investments in North Korea over the past decade.


Figure 1. Sam Pa (center right) tours a Queensway project site in Mozambique with Antonio Inacio Junior, Mozambique’s Ambassador to China (far left).



Photo: China Chemical Engineering Second Construction Corporation, August 2012.


KKG Avenue: Queensway’s First Go ‘Round in Pyongyang


The 88 Queensway Group is hardly new to North Korea, having been active in the country for almost eight years. Sam Pa first began developing relationships with North Korean diplomats and military officials based in Beijing sometime around 2006.[4] Hong Kong court records reveal that China Sonangol indeed has relationships with several North Korean government-linked entities in Beijing that continued through at least 2009.[5] Shortly after establishing contact, Queensway representatives began making frequent trips to North Korea. During these visits, China Sonangol lined up a series of projects in North Korea, including the construction of a gigantic riverfront commercial district called “KKG Avenue” in Pyongyang. Sam Pa also procured 300 Nissan Xterra SUVs for Kim Jong Il’s regime, some of which had “KKG” inscribed on their exterior.


Figure 2. Nissan Xterra in Pyongyang with “KKG” Inscription on Exterior



Photo: At Home in the Wasteland, September 2009.


KKG Avenue is located on the bank of the Taedong River, just north of the Tongil Market, one of Pyongyang’s busiest markets. A billboard advertising the KKG Avenue project was erected in 2008 and provides a graphic depiction of the finished commercial complex that boasts an ambitious agenda. The image includes a bridge to Yanggak Island, the location of the Yanggakdo International Hotel where many tourists stay while visiting Pyongyang, and an elegant plaza leading up to the waterfront development. Along the waterfront itself, the billboard advertises a series of high-rise buildings, including 50-story twin towers that flank the entrance of the bridge to Yanggak Island. The billboard lists the Korean name of the corporate entity undertaking the construction project as the Kumgang Economic Development Corporation, but it is often referred to as KKG.


Figure 3. Billboard of KKG Avenue Construction Plans.



Photo: Moravius


Hong Kong court records suggest that money did flow into North Korea for projects related to KKG. A document request attached to a June 2013 Hong Kong court decision lists US$11,143,463 (HK$86,505,484) in payments from July 2008 to November 2009 described as “Budget for North Part” or “Kumgang Budget.”[6] The records also describe almost US$2 million in “consulting fees” paid in relation to KKG during 2008 and 2009.[7] In addition, they suggest that another Hong Kong firm may be involved in KKG Avenue. The document request lists two payments of US$1,409,949 (HK$10,942,056) made to “Dennis Lau” for the KKG project.[8]


Despite these payments, little progress has been made in the six years since the project began. A January 2010 photo taken of the KKG Avenue project site showed that the billboard had begun to fade. Recent satellite images of the project site show that very little work has been done. The bridge has not been built and the lot along the waterfront where the high-rise buildings are supposed to be erected remains vacant and undeveloped. The only sign of any construction in this area is the plot of land just north of the Tongil Market. Yet, even this development runs counter to the plan for KKG Avenue depicted on the billboard, as it stands in the center of an open plaza or wide avenue KKG ostensibly plans to construct.


Figure 4. KKG Avenue in 2009 and 2013.



Images © 2009, 2013 Google Earth with annotation by 38 North.


China Sonangol also pledged to construct an airport (presumably the new Sunan International Airport), a power plant, and an urban transportation system in Pyongyang. In 2007, it arranged for a China National Petroleum Corporation subsidiary to undertake seismic work on two North Korean oil blocks. The status of these projects is unknown.


Partnering with Taesong in Kaesong: Queensway’s Re-Entry in 2013


Sam Pa flew to Pyongyang in April 2013 on a charter flight, according to a South Korean news report. The same report claims that he visited North Korea up to five times during the same time period to discuss the development of an oil field in Seohan Bay.


On October 17, 2013, an Airbus corporate jet owned by China Sonangol was seen back in Pyongyang. That same day, KCNA reported that a consortium of international investors signed on to undertake several large public works projects, including the “Kaesong Hi-Tech Industrial Park” and a “Highway Toll Road from Capital Airport to Pyongyang City.” The consortium of investors included Hong Kong-based P T Architects and Engineers, Singapore-based building design and management firm Jurong Consultants, and OKP Holdings, a Singapore-listed civil engineering firm with extensive links to China Sonangol.[9]


By mid-November 2013, the developers had officially broken ground at the Kaesong Hi-Tech Industrial Park. “The park will have an IT center, hotel, dwelling houses, school and other buildings, as well as a power plant,” KCNA reported. The consortium of international investors had formed a joint venture that operates under one collective moniker: Peace Economic Development Group (PEDG). According to the announcement, this consortium is comprised of investors not only from Hong Kong and Singapore, but also from Australia, the Middle East, and Africa.


On November 13, 2013, KCTV televised an elaborate groundbreaking ceremony for the new industrial zone. Madam Lo Fong Hung was on stage at the ceremony to represent the 88 Queensway Group. Two individuals involved in the management of the project were on hand at the groundbreaking ceremony: PEDG’s General Manager Heh Teck Siong, who is likely from Singapore or Hong Kong, and Jang Su Nam, a “representative” to PEDG.[10] Two African diplomats were also present for the ceremony: Ambassador Abubakarr Multi-Kamara, a Sierra Leonean diplomat stationed in Beijing, and Mamady Diaré, Guinea’s Ambassador to China—the same man who helped Queensway get a foothold into his home country several years prior.


Figure 5. Madam Lo Fong Hung (center) at the Groundbreaking Ceremony in Kaesong.



Photo: KCTV screengrab.


If the goal of the ceremony was to bolster the credibility of the project for both domestic and international audiences, then the African diplomats present at the ceremony hit all the right notes. “Promoting such a project will enhance the confidence building, the economic growth, the trade and other exchanges and improve the overall cooperation with all neighboring countries of the DPRK,” said Ambassador Diaré. Ambassador Multi-Kamara also offered high praise for the project, stating, “I am convinced that the project is of great potential and that the establishment of the park will put an emphasis on promoting economic development in the region and improving the living-standards of the Korean people.”


Despite this optimism about the project, there does not seem to have been much progress since the ceremony last November. A June 2014 report by the Institute for Far Eastern Studies found that construction at the project site has been suspended.


Conclusion


Although the announcement that a consortium of foreign investors planned to build a new high-tech industrial park near the KIC shows that there are indeed foreign suitors willing to invest in North Korea, the case of the 88 Queensway Group in North Korea shows that these options may not be very viable. While details about projects under the 88 Queensway Group continue to emerge, given the reputation of this Hong Kong network, there is reason to doubt that these projects will actually come to fruition. Moreover, given that cooperation has continued despite little progress on Queensway’s major construction projects in the country, a larger question looms as to what the Hong Kong-based syndicate and the North Korean government are gaining from the relationship.


Another key takeaway from this case is that, when evaluating the impact of commercial engagement on political reform, not all foreign investment is created equal. Although some investment can catalyze change, Queensway’s willingness to provide financing and equipment to diplomatically isolated and financially desperate regimes shows that some foreign investors may have a strong interest in maintaining the status quo.


J.R. Mailey is a researcher at the Africa Center for Strategic Studies (ACSS) at National Defense University (NDU) working on natural resources, corruption, and security. Follow him on Twitter @MaileyJR.



[1] Sam Pa is known to use numerous aliases, including Xu Jinghua, Tsui King Wah, Ghiu Ka Leung, Sam King, and Antonio Famtosonghiu Sampo Menezes. Queensway’s representatives have denied that he plays a formal role in the network’s operations, contradicting numerous news reports, statements from Chinese state-owned enterprises (including Sinopec), and accounts of former business associates.


[2] China Sonangol’s website previously confirmed that the company is active in Juba—although no projects in the country were listed and the South Sudan’s dot on the map of the company’s investments erroneously suggested that the newly-independent oil-rich state is located in West Africa. The marker has since been removed. Other sources have confirmed Sam Pa’s presence in the country in 2012.


[3] This payments came to light as a result of a Hong Kong law suit filed by Wu Yang, a former business partner of Madam Lo and Sam Pa. Wu Yang claims he did not receive his share of $186 million in dividends paid in 2008 and 2011. He sued for access to a series of documents pertaining to the 88 Queensway Group’s operations around the world. The document request attached to the June 2013 court decision amounted to the disclosure of an unprecedented amount of details about Queensway’s global operations, including a payment to Antonio Inacio Junior, Mozambique’s Ambassador in Beijing.


[4] Queensway entered North Korea as early as 2005. A January 2009 article in Minjog 21, a South Korean magazine, describes KKG Avenue, a Queensway subsidiary, as “North Korea’s joint venture with a firm in Hong Kong run by a female CEO and China which concluded the Agreement on the Joint Development of Offshore Petroleum with North Korea in December 2005.”


[5] Hong Kong court records from Queensway’s dispute with Wu Yang also show that, in 2008, China Sonangol made a US$1.1 million (HK$8,730,607) payment to “North Korea Five Rings Trading Corporation Beijing Representative Office,” a firm that appears to be linked to North Korean diplomats. North Korea Five Rings Trading Corporation (NKFRTC) [“朝鲜五轮贸易总公司北京代表处”] has used an address in Beijing at Ritan North Road, Chaoyang District, Beijing, the 7th 2 103B [“北京市朝阳区日坛北路7号2幢103B”]. On several websites, the NKFRTC contact person is listed as Zhang Ying Gen [“张英根”]. Zhang accompanied an April 2010 delegation to North Korea that included the president of Erke, the Chinese sportswear company that sponsors the North Korean national soccer team and the president of the “North Korea International Cooperation Sports Club” [“朝鲜国际体育协力社李社长的”]. A press release describing the visit lists Zhang as a representative of the North Korea’s resident representative in China [“朝鲜驻华代表”]. A second entity ostensibly linked to North Korea— “North Korea Wins Battle Trading Corporation Beijing Representative Office” (NKWBTC) [“朝鲜胜战贸易会社北京代表处”]—has used the same address as Five Rings. Like Five Rings, this company appears to have links to North Korean diplomats. Also listed is a US$50,000 (HK$ 390,000) payment described as a “North Korea Consul Exhibition Loan.” On the surface, it appears that Queensway made at least one direct payment to North Korean diplomats.


[6] This budget includes US$3,486,058 (HK$27,068,821) paid in 2008, US$6,602,915 (HK$51,270,843) paid in 2009, and US$1,051,635 (HK$8,165,820) paid in 2010.


[7] “Dennis Lau” may refer to Dennis Lau Ng Chun Man, a Hong Kong-based architecture and engineering firm with offices in Abu Dhabi, Beijing, Macao, Shanghai, and Shenzhen. The document shows that China Sonangol paid US$939,966 (HK$7,294,704) for “Consultancy fee 3rd and 4th payment”; US$469,983 (HK$3,647,352) for “Consultancy fee for 5th payment”; and US$469,983 (HK$3,647,352) for “Consultancy fee for 6th payment.”


[8] The first payment is marked “Dennis Lau-Consultancy…fee 4th for KKG Avenue Pyongyang” and the second is marked “Dennis Lau KKG Avenue 9th to 11th payment.” It is not clear whether or not these payments overlap with the consultancy fees listed above.


[9] China Sonangol was first introduced to OKP Holdings by Leong Ying Wah Jimmy, the son-in-law of Or Kim Peow, the civil engineering firm’s founder and namesake. At the time, Leong served as CEO and executive director of China Sonangol but has since stepped down. In April 2009, China Sonangol began to acquire shares of OKP. A few months later, OKP formed a joint venture with China Sonangol’s sister company, China International Fund (CIF). China Sonangol later acquired a 14 percent stake in OKP Holdings.


[10] A November 2013 Yonhap News article confirmed that Jang Su Nam was the North Korean figure at the groundbreaking. According to a source familiar with Jang, he is affiliated with Taesong Group, a lucrative North Korean conglomerate with close links to Office No. 39.


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A Tale of Two Kaesong Industrial Zones: Not All Foreign Investment is Created ...

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