Contents Construction Financing in Korea

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Construction Financing in Korea

Korea Research Institute for Human Settlements Jae-Yoon Yoo

12th Asia Construct Conference 23-24th November 2006

1. Introduction

2. Investment Opportunities

3. Institutional Frameworks for PPP/PFI Projects

4. Case Study: Cheonan-Nonsan Highway Project

5. Conclusions

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3

1. Introduction

1. Macroeconomic Overview 2. Overview of Construction

Industry

3. Sources of funds

4 Introduction

1. Macroeconomic Overview

Foreign

Exchange Rate

Korean

Economy

Construction Industry

Interest Rate Foreign Mkt

Oil Price

Domestic Mkt

Investment

&

Consumption

Real Estate Mkt

Key Factors to Korean Economy & Construction Industry

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Introduction

-7.4

8. 7 7.8 3. 7

6.5 3.0 4. 5 3.8 4. 8 4.3

-10 -8 -6 -4 -2 0 2 4 6 8 10

1998 1999 2000 2001 2002 2003 2004 2005 2006P 2007P

(% )

Real GDP growth rate

6

2. Overview of Construction Industry

Classification

Private Sector Public Sector PPI & Foreign

Institutes Total

2004 2005 2004 2005 2004 2005 2004 2005

residential

building ^31,924 ^38,947

2,988

3,714 59 2 34,971 42,663

non- residential

building

13,809 14,168 2,863

3,556 787 495 17,459 18,219

civil

engineering ^5,382 ^6,257

16,213

15,181 3,206 2,225 24,801 23,663

specialized

construction ³⁹⁴ ⁵⁰⁶ ¹⁴⁵ ¹²⁰ ³ ¹⁰ ⁵⁴² ⁶³⁶

Total 51,510 59,879 22,210 22,571 4,054 2,732 77,774 85,182

Value of Construction Constracts (Unit: KRW million)

Introduction

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Introduction 7

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 96 97 98 99 2000 2001 2002 2003 2004 2005 2006 2007

Construction Business cycle reference

index

the peak (1st quarter 2003)

construction investment change rate

The bottom (4^th quater 2006 or 1st quater 2007)

the construction business cycle

8

3. Sources of funds Sources of Debt

Introduction

Sources Portion (%)

Bank Non-Bank Depository

Construction Guarantee, Housing Guarantee Others

31.6 4.9 45.3

4.8

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제3장 국내 및 해외 기반시설 국고지원

1. 국내 기반시설 국고지원 사례 2. 해외 기반시설 국고지원 사례

2. Investment Opportunities

10

Government budget distribution for infrastructure investment

Investment Opportunities

제3장 국내 및 해외 기반시설 국고지원

1. 국내 기반시설 국고지원 사례 2. 해외 기반시설 국고지원 사례

4. Institutional Frameworks for PPP/PFI Projects

1. PPI Policy Directives

2. Project Implementation Procedures 3. PPI Incentives

12 Institutional Frameworks for PPP/PFI Projects

z

To encourage private sector creativity and efficiency

- giving extra weight for creativity in evaluation - incentives for reducing construction period and costs - giving extra weight for creativity in evaluation - incentives for reducing construction period and costs 1. PPI Policy Directives

z

Project implementation procedure that is in line with international standards was established

z

Risk is allocated with the government on risks involved with rate of return, minimum revenue guarantee, foreign exchange rate risk, etc

z

Equal and fair playing field to both domestic and foreign investors is

provided

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2. Project Implementation Procedures

Institutional Frameworks for PPP/PFI Projects

Main Contents of the Act on PPI and the Annual Plan for PPI

zThe Act diversifies types of facilities and implementation methods

zSocial and welfare facilities have been added in addition to the previous transportation facilities such as roads, railways, and ports

zThe BTL method is added to the BTO method

zThe Act also diversifies investor profile to include financial investors

zIt encourages participation from financial institutions, individual investors, special operating companies in addition to the construction companies

zThe Act induces competition to secure fair market conditions

zIt minimizes proposal preparation costs by setting standards for design documents to the level of basic plan

zFor the efficient management of private investment operating system, the act utilizes VFM test, preparing guideline for traffic volume forecast.

zTo create suitable environment for PPI investment, the act minimizes administrative procedures, negotiation period, and costs.

zIt also minimizes unsolicited project implementation procedure and induces submission of proposals from the private sector in various areas.

zIt guarantees revenue suitable to international standards to share risks through minimum revenue guarantee program. It also shares risks from foreign exchange rate fluctuation.

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Institutional Frameworks for PPP/PFI Projects 15

Project Implementation Procedure for Solicited Projects

Step 1

Step 2

Step 3

Step 4

Concessionaire Government

Designation of PPI projects

Examination & evaluation of project proposal

Formulation and public notification of instruction for proposal

Submission of project proposal

Step 5

Step 6

Step 7

Designation of concessionaire through conclusion of concession agreement, etc

Approval of DEDPI

Confirmation of completion of construction Application for

approval

Implementation of co nstruction

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Institutional Frameworks for PPP/PFI Projects

Step 1 Submission of project proposal

Step 2 Review of project proposal

Notification not to implement the proposal

Submission of opinion regarding the proposal

Step 3 Announcement of proposal

content

Step 4 Proposer→potential

concessionaire Step 5

Project Implementation Procedure for Unsolicited Projects

Request for review of the contents of project proposal

Designation of concessionaire

when no other Proposal is submitted

when other proposal is submitted NO

Yes

Review and evaluation of other proposals Designation of potenti

al concessionaire Designation of concess

ionaire

2. PPI Incentives Tax benefits

z

corporate tax

5 % of the private investment amount is acknowledged as investment preparation fee

→ Treated as a loss

- Concessionaires are allowed to issue infrastructure bonds & a separate tax rate of 15% is applied to the interest income from the bonds for 15 years or more

- A zero percent tax rate is applied on value-added tax charge for urban railway construction work

- Acquisition and registration tax on real estate for BOT projects are exempted - Forest appropriation charges are exempt or reduced to 50% by individual facilities - A zero percent tax rate is applied on value-added tax charge for urban railway

construction work

- Acquisition and registration tax on real estate for BOT projects are exempted - Forest appropriation charges are exempt or reduced to 50% by individual facilities

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Institutional Frameworks for PPP/PFI Projects 19

z

When the annual operating revenue does not meet the estimated revenue determined in the concession agreement

→ the loss will be compensated through subsidy or by readjusting user's fee and/or concession period

Minimum Revenue Guarantee and Redemption of Excess Revenue

z

For solicited projects

the guarantee limit is 80% for 6 to 10 years & 70% for 11 to 15 years the guarantee limit is 80% for 6 to 10 years & 70% for 11 to 15 years

z

For unsolicited projects

the guarantee limit is 70% for 6 to 10 years & 60% for 11 to 15 years the guarantee limit is 70% for 6 to 10 years & 60% for 11 to 15 years

Risk allocation for foreign exchange risks

foreign exchange rate compensation

fluctuation of ±20% or less

becomes loss incurred by the concessi onaire or an incentive in case of f oreign exchange gain

increase exceeding 20% adjust user's fee or provide subsidy

decrease exceeding 20% adjust user's fee or redeem the surplu s the competent authority

z

When there is a loss or gain in foreign currency debt

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5. Case Study: Cheonan-Nonsan Highway Project

1. Country and concession environment

2. Insurance, and risk management and sharing in construction

3. Project economics: the estimated NPV/IRR and its implications on the access to and cost of capital

4. Financing structure and sources, and costs of capital

5. The lessons learnt

22 Case Study: Cheonan-Nonsan Highway Project

1. Country and concession environment

z

scarcity of the fiscal resources & the recession in the construction industry

→

To vitalize the PPI projects, the Private Investment Act was established in 1998

→

To vitalize the PPI projects, the Private Investment Act was established in 1998

zrelaxed the procedures and the methods of the project implementations by the private proposals

zstrengthened the scope of the Minimum Revenue Gurantee (MRG) to secure the stability of the project

zenlarged incentives for earlier accomplishment and the cost reduction

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Case Study: Cheonan-Nonsan Highway Project 23

2. Insurance, and risk management and sharing in construction

Î the difference should be collected by the nation Î the difference should be collected by the nation

z

the revenue of the project was highly guaranteed by the fiscal resources

z

if the revenue in the operational stage is under the estimated revenue

z

if the realized revenue is over 110% of the estimated revenue Î (government proposed project)

90% of the estimated revenue subtracted by the realized revenue is supported by fiscal budget

Î (private proposed project)

80% of the estimated revenue at maximum is guaranteed.

Î (government proposed project)

90% of the estimated revenue subtracted by the realized revenue is supported by fiscal budget

Î (private proposed project)

80% of the estimated revenue at maximum is guaranteed.

3. Project economics: the estimated NPV/IRR and its implications on the access to and cost of capital

- The Cheonan-Nonsan Highway - The construction period : 1997~2002 - The total length of the highway : 80.96 km

- The total expenditure of the highway project : 1,158.9 billion won (about 1.45billion dollars)

- Internal Rate of Return (IRR) : estimated to be 9.24%

- The Cheonan-Nonsan Highway - The construction period : 1997~2002 - The total length of the highway : 80.96 km

- The total expenditure of the highway project : 1,158.9 billion won (about 1.45billion dollars)

- Internal Rate of Return (IRR) : estimated to be 9.24%

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Case Study: Cheonan-Nonsan Highway Project

4. Financing structure and sources, and costs of capital

Financing Sources Amount Proportion

Equity Capital 112.8 billion won ($ 118.7 mil.) 9.7%

Subordinated Bonds 303.7 billion won ($ 319.7 mil.) 26.2%

Borrower’s capital 742.3 billion won ($ 781.4 mil.) 64.1%

Total Investment 1,158.9 billion won ($ 1,219.9 mil.) 100.0%

5. The lessons learnt

z

Minimum Revenue Guarantee System contributes to the vitalization of PPI, however, the system brings about in the fiscal outflows

z

behind the excessive MRG operation

← there is the overestimation problem about traffic demand

z

MRG system

→ induce the overestimation of the traffic demand

← rationalize the MRG system & strengthen the competition

z

To mitigate the problems

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27

6. Conclusions

28 Conclusions

z

decreasing budget for SOC & need to invest in SOC

→ PPI has become a very important tool to finance SOC

z

more selective and efficient investments

← more rational and competitive market

← by improving transparency in the process & introducing qualification test through VFM

← more rational and competitive market

← by improving transparency in the process & introducing qualification test through VFM

z

improving project methods

→the medium sized enterprises, financial institutes, and the specialized operation companies participate & the various project types and BTL

→the medium sized enterprises, financial institutes, and the specialized

operation companies participate & the various project types and BTL

project methods are introduced

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13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

KRIHS

Prepared by Division of SOC & Construction Economy

SEOUL KOREA 2006

Information

When : 2 ^ND Week November 2007

Subject to change upon Organizer’s schedule Changes will be noticed

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

Where : Seoul, Korea

Conference room, Grand Hyatt Hotel

Theme : Creating Construction Innovation

It is only our suggestion

Your Suggestions through Discussions will be accepted

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When

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

2ND Week November 2007

S M T W T F S

2007 November

Where

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

It takes an1 hour from Inchon Int’l Airport to

Conference room, Grand Hyatt Hotel KOREA

KOREA About 60Km from airport to location

Center

of

Seoul

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Theme

Our Suggestion:

Creating Construction Innovation

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

We will take ideas from the discussions of All delegates tomorrow

Otherwise,

Calendar

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

OPEN OPEN

2007 2007 2006

2006

JAN

JAN FEBFEB MARMAR APRAPR MAYMAY JUNJUN JULJUL AUGAUG SEPSEP OCTOCT NOVNOV DECDEC

Homepage Open (URL: asiaconst.kiscon.net) Call for Papers

Invitation

& Confirm

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Program

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

Day 1 Day 1

Day 2 Day 2

Celebrating Dinner

Conference Registration / Reception Welcome Address / Opening Address

Country Report Tea Break

Conference Dinner Country Report Eve Eve

Lunch

Fieldtrip and Tour Program Reception

Discussions on AsiaConstruct End

Organization

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

Hosting : KRIHS

Korea Research Institute of Human Settlements A Government Research Institute

Supporting : MOCT

Minister of Construction & Transportation Korea

Organizer : PhD. Yoo, Jae-Yoon, KRIHS Coordinator : Mr. Moon, Hyuk, KRIHS

CAK

Construction Association of Korea

Sponsoring : CERIK

Construction ＆ Economy Research Institute of Korea

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We look forward to seeing you next year!

13 13 ^th ^th ASIA CONSTRUCT ASIA CONSTRUCT

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