South Korea is taking big strides globally with infrastructure financing, as both state-owned agencies and private banks fuel new investment in major ventures.
With projects under way in countries as far flung as Mexico, Australia, China and India, South Korean companies today rank among the top players in large infrastructure investments globally. They have been able to carve out this prominent position largely because of a high level of technical expertise acquired through decades of domestic infrastructure investments promoted by the South Korean government. More recently, however, the expansion has had much to do with the flexing of international muscles by South Korean financial institutions.
This is the case with KEXIM and K-Sure, state-owned export credit agencies (ECAs), that have evolved into two of the most active sources of global infrastructure financing. Since the start of the global financial crisis, they have stepped in to fill the gap in infrastructure funding left behind by retreating commercial banks.
Both KEXIM and K-Sure were created with the primary mission of providing credit insurance and other guarantees for South Korea's manufacturing exporters. But they later extended their activities to other sectors, as the country's investments abroad also began to encompass areas such as construction, oil and gas, and power. K-Sure still sticks reasonably close to its original mission, as it mostly sets up loan guarantees for political and credit risks, while KEXIM provides direct loans to companies. Last year, KEXIM even made its first direct equity investment in a power plant project awarded to a syndicate led by Korea Midland Power.
"Our activities range from direct loans to financial guarantees and, more recently, to equity-related products," say sources within KEXIM. "We can take private equity participations, and have also launched several private equity funds. Our equity investments are aimed to create some catalytic impact on a transaction."
Financing institutions have moved away from commodities-based assets and toward power and infrastructure assets.
KEXIM and K-Sure are both helping to finance the construction of a US$20 billion chemical complex in Jubail, Saudi Arabia (White & Case represents the Saudi Arabian Oil Company in the joint venture with the Dow Chemical Company) and the Eurasia Tunnel project, which will link the European and Asian sides of Istanbul. To provide their much-coveted support for projects, KEXIM and K-Sure require sufficient "South Korean content". The involvement of South Korean contractors or vendors in the construction and/or supply chain of the project, sufficient equity investment in the project or the supply of natural resources produced by the project directly to South Korea is necessary. Experts have noted that, as a result, many bidders have approached South Korean groups in a quest to have access to the loans and guarantees provided by the two ECAs—which works as another boost to the growing internationalization of South Korea's infrastructure players.
In 2015, both KEXIM and K-Sure agreed to provide more than US$2 billion in loans and guarantees in Brazil. The project is owned in part by South Korean steelmakers Donguk Steel and POSCO, and it illustrates how the support provided by the two ECAs helps South Korea's corporations deploy the full extent of their financial muscle and enables South Korean banks to participate in infrastructure projects.
South Korean financial firms have also stepped up their presence in international infrastructure funding. According to reports, five Korean banks are setting up a joint fund, worth US$2 billion, to help finance contractors involved in construction project abroad. State-owned Korea Development Bank is also a relevant global player. It is, for example, a member of a group of lenders, advised by White & Case, which has provided €550 million for an integrated healthcare campus public-private partnership in Adana, Turkey.
As a country lacking in natural resources, South Korea for a time emphasized projects in areas such as oil and gas, and steel production. But with the fall of commodity prices, South Korean infrastructure businesses have shifted their attention to other kinds of infrastructure investments. Consequently, their funding providers are moving in the same direction, according to Art Scavone, a partner at White & Case in New York and the global head of the firm's 200-plus team of project Finance lawyers.
Today, South Korean infrastructure investors are strongly positioned in Asia, the Middle East, the United States and Latin America
"Financing institutions have moved away a bit from commodities based assets and toward power and infrastructure assets," he says. "A good example is the power sector. South Korean entities are actively supporting contractors in power projects in countries such as Mexico, Chile and Indonesia. Another example is transportation infrastructure." The main draw of such projects is the stable long-term cash flow that they generate—a significant bonus in a volatile world, especially compared to the rollercoaster nature of the commodities markets.
"Traditionally, South Korea has played a big role in power, natural resources, petrochemicals and oil refineries," KEXIM sources state. "These four sectors take the lion's share of our financing portfolio. Now we are following companies that are doing business in areas such as transportation infrastructure.
Roads, railways, metros, airports and seaports are the subsectors where we plan to increase our support to South Korean firms."
But opportunities can still be found in commodities sectors that investors have shied away from of late. One of the biggest oil importers in the world, South Korea has developed a sophisticated petrochemical sector, and both contractors and financial providers are eager to take their know-how in the area to other parts of the world. "When South Korean companies look now at oil and gas projects, they are aiming at cheap feeds for petrochemicals," says David Gartside, a project finance partner at White & Case in Singapore.
Firms like LG Chem and LOTTE CHEMICAL, for instance, are taking advantage of the shale gas revolution in the United States to produce refined petrochemical products there. South Korean groups are also making petrochemical investments in Kazakhstan and Uzbekistan, and KEXIM has just signed an agreement to evaluate opportunities to fund projects in oil-rich Turkmenistan.
Today, South Korean infrastructure investors are strongly positioned in Asia, the Middle East, the United States and Latin America. Next on the list, according to Gartside, is Africa, where they are looking at sectors such as petrochemicals in Uganda and liquefied natural gas in Mozambique.
It is a relatively new frontier, where South Korean companies will have to compete with their old regional rivals from Japan, traditionally a heavyweight in infrastructure investments, and their new regional rivals from China, who are gaining ever more clout in this field. "Today, the main concern for South Korean contractors is competition from Chinese competitors, and the Japanese are coming back into the market too," Scavone says.
"For South Korea, this means playing to the strengths of its contractors and consolidating its efforts in traditionally strong markets, such as the Middle East, as well as advancing on newer markets with the benefit of government-to government support for economic integration, as has been seen in Kazakhstan following the 2008 Memorandum of Understanding between the two nations, and as consolidated by President Park Geun-hye's state visit to Astana last year," according to Gartside.
Focusing on these political ties can provide a competitive advantage to South Korean exporters and their financiers, taking advantage of the cultural, economic and geopolitical synergies in strategic markets.
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