Early this year, a large Korean construction company placed bids for a co-generation power project worth US$700 million in Saudi Arabia involving state-owned oil company Saudi Aramco. But a Japanese consortium won the order, since it promised to provide a long-term, low-fixed-rate foreign currency loan to the project owner. It was reported that even though the Export-Import Bank of Korea (Eximbank) issued a letter of intent about its financial support, the amount was vastly insufficient compared with the Japanese loan. The incident illustrates that these days skill alone doesn't guarantee overseas construction projects to Korean bidders.
In fact, local companies are only engaged in construction itself where profits are difficult to be generated. Low profitability is attributable to competitive pricing.
Korea is losing in price competition due to the competitive advantage of emerging economies, including China. Local companies also lag behind advanced countries such as the US and EU in terms of technological and financial competitiveness. In other worlds, Korean firms are sandwiched between emerging market companies and those from advanced markets.
As a result, Korean construction companies' piece of the pie is dwindling. In the first half of this year, Korea's construction exports increased by just 3.1%, far below the 5-year average growth rate of 9.7%. Among contracts, local builders' mere involvement in construction accounts for 86%.
To address the problem, the government introduced measures to foster local firms' participation in the entire business process, so that they can engage in high-value-added economic activities.
The government decided to launch 9.6 trillion won (US$8.6 billion) of funds through public-private partnerships, and to push forward with a plan to finance the funds by mobilizing its dollar reserves.
On August 28, Hyun Oh-suk, Deputy Prime Minister for Economic Affairs and Minister of Strategy & Finance, announced plans to help local builders win overseas plant and construction orders in the Government Complex of Seoul.
The government will actively promote construction companies' business involvement in overseas projects by encouraging financial institutions to participate as investors. To achieve its goal, a new type of private-equity fund (PEF) will be established to ameliorate risks. It plans to raise US$7.5 billion by laying the groundwork for the investment in a special purpose company (SPC), which will be established by state-run policy lenders, such as Eximbank, for the project. In addition, another US$1.1 billion investment will be raised, for a total of US$8.6 billion.
Seoul will also expand support for a plan in which local builders introduce local banks to project owners overseas in order to win contracts. In addition, it will strengthen loan guarantees and insurance services in a bid to facilitate the participation of financial firms in overseas projects. It will strengthen a guarantee for risk factors, such as exchange rate fluctuations.
By 2017, the government will invest 1.8 trillion won (US$1.618 billion) in Eximbank in an attempt to increase the banks' ability to finance overseas projects. The Korea Trade Insurance Corporation will be annually assigned 120 billion won (US$108 million). In the event that state-run policy lenders have difficulty with obtaining the foreign currency necessary to support projects, Seoul will authorize a currency swap where the Korean won is put in the Exchange Stabilization Fund (ESF) to get foreign currency and to finance projects.