[Changing Landscape of Overseas Construction ⑥] Up to 10 Billion Won in Pre-Construction Survey Costs per Project... Need to Boost Policy Finance as a Catalyst for Overseas Construction

Corporate Matching Fund Next Year:
Fifty-Fifty Investment with Companies

Overseas investment development projects require capital even before winning a contract. Companies must first assess financial, technical, and legal feasibility. When factoring in local permits, market research, and geological surveys, initial development costs alone can reach between 5 billion and 10 billion won per project. Even after completing the due diligence, the project structure is only finalized once around 20 contracts between investors, lenders, construction companies, and operators are in place. This usually takes one to two years. Out of every 10 projects pursued, only two to three are successful. All funds invested in projects that fall through are written off as a complete loss, making it difficult for companies to shoulder the burden with their own capital. This is one of the reasons why domestic construction companies have been hesitant to pursue investment development projects abroad.

The government is accelerating the creation of a fund intended to act as a catalyst for investment activation. According to the Ministry of Land, Infrastructure and Transport on September 10, the government has allocated 100 billion won for contributions to the Overseas Construction New Strategy Fund in next year’s budget proposal. The plan is to establish a fund of 3 trillion won in total—including 1 trillion won of government financing—to attract private investment. Already, major countries such as the United States and those in the Middle East are carrying out large-scale infrastructure projects by mobilizing not just public finance but also private capital to construct and operate facilities over the long term. The market landscape is shifting such that without financial capacity and investment capabilities to accompany construction competitiveness, securing contracts is becoming increasingly difficult.

There are three major domestic policy financial institutions that provide funding for overseas projects. Korea Overseas Infrastructure and Urban Development Corporation (KIND) discovers and invests equity directly as an investor; The Export-Import Bank of Korea provides loans and guarantees in the next stage; and Korea Trade Insurance Corporation offers insurance and guarantees. Since a revision of The Export-Import Bank of Korea Act in June this year, The Export-Import Bank of Korea has been able to make more diverse investments. Previously, it could only invest in projects connected to its own loans or guarantees, but it can now invest directly without such requirements. The bank has recently set up a dedicated direct investment team and begun hiring experienced professionals. An official from The Export-Import Bank of Korea stated, "Because the investor structure is often finalized before loan procurement, we have eased restrictions on direct investments to seize high-quality investment opportunities," adding, "Energy and other infrastructure projects are also being considered."

KIND discovers overseas projects and participates directly as an investor. It consults with project owners on participation terms and meets with lending institutions to devise financing strategies. To date, policy funds managed by KIND have approved 2.3 trillion won in investments for 60 projects in 17 countries, supporting 10 trillion won in overseas contracts won by domestic companies. Starting next year, a ‘Corporate Matching Fund’ will also be in operation. Under this model, companies co-invest with KIND at a 50:50 ratio, relieving them from bearing the full financial burden alone. The first such fund (up to 200 billion won) began soliciting participants in May, and a separate fund has been prepared for small and medium-sized enterprises. Funding sources are being diversified as well, including ‘Country-Specific Strategic Funds’ co-invested with foreign governments or sovereign wealth funds, and a ‘Global Cooperation Fund’ to attract overseas developers and pension funds.

Despite increased support from the government and policy financial institutions, construction companies still perceive significant obstacles. One of the main issues is projects where the builder must also secure financing. Frequently, the ordering country, due to budget constraints, pays only 30% of the construction cost and requires the builder to raise the remaining 70% from financial institutions. In ultra-high-risk countries like those in the Middle East, The Export-Import Bank of Korea imposes lending limits, forcing companies to cover the shortfall through their own credit. Woonjung Kim, Executive Director of the Global Business Division at the International Contractors Association of Korea, stated, "Winning contracts is determined less by construction prowess and more by the ability to raise capital," adding, "The government must expand its financial support for projects in ultra-high-risk countries." The costs of pre-bid site investigations also pose a burden. A representative of a major domestic construction company said, "Overseas projects involve high volatility and it is difficult to secure profitability, so thorough local due diligence is most critical," adding, "However, the costs are high and the accuracy is often low."

If the limited access to private financing is to be addressed, investments from policy financial institutions are essential. However, the main stumbling block lies in the capacity of KIND, which participates as an overseas investor. Although the legal cap for its capital is set at 2 trillion won, the actual paid-in capital is under 700 billion won. If even several overseas projects, each worth trillions of won, are financed, KIND’s investment capacity is quickly exhausted. In investment development projects, equity stake determines board voting rights. Only by committing substantial capital—typically between 100 billion and 200 billion won—as a major shareholder from the planning stage can KIND advocate for Korean construction companies’ participation and demand equipment supply. With only a few hundred billion won invested, it is difficult to make such demands stick. A KIND official stated, "Increasing our capital improves our debt ratio and credit standing, and expands capacity to raise funds through corporate bonds. With the growth in equity, we expect to generate a virtuous cycle by attracting additional private and policy funds from outside sources."

This content was produced with the assistance of AI translation services.