[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

For overseas investment development projects, expenses are incurred even before securing the contract. It is necessary to assess financial, technical, and legal feasibility. When factoring in local permits, demand surveys, and geological investigations, initial development costs alone can reach between 5 billion and 10 billion won per project. Even after the review is complete, around 20 contracts involving investors, senior lenders, construction companies, and operators need to be signed before the business model is finalized. This process usually takes one to two years. Out of 10 projects pursued, only two to three are usually successful. Any money spent on failed projects is treated entirely as a loss. It is difficult for companies to shoulder these costs using their own funds. This background also explains why Korean construction firms have been hesitant to enter into investment development-driven projects.

The government is accelerating the creation of a fund intended to serve as a catalyst for boosting investment. According to the Ministry of Land, Infrastructure and Transport on September 10, the 2025 budget proposal includes a 100 billion won contribution to the Overseas Construction New Strategy Fund. The plan is to establish a total fund of 3 trillion won, including 1 trillion won in future government funding, to mobilize private investment. Already, in major markets such as the United States and the Middle East, large-scale infrastructure projects are increasingly being undertaken not only with government finances but also by attracting private capital for construction and long-term operation. The market is shifting so that it is difficult to secure contracts unless the capability to raise funds and make investments is backed by construction competitiveness.

There are three domestic policy financial institutions that provide funding for overseas projects. Korea Overseas Infrastructure and Urban Development Corporation (KIND), under the Ministry of Land, Infrastructure and Transport, discovers projects and makes direct equity investments. Korea Eximbank provides loans and guarantees, and Korea Trade Insurance Corporation is responsible for insurance and guarantees. In the case of Korea Eximbank, the scope of investments expanded in June of this year due to the amendment of the Korea Eximbank Act. Previously, equity investments were allowed only for projects connected to loans or guarantees, but now direct investments without such conditions are also permitted. Korea Eximbank has recently formed a dedicated direct investment team and recruited experienced professionals. A representative of the bank said, "In many cases, the investor pool is finalized before loan arrangements are complete, so we eased restrictions on direct investments to capture high-quality opportunities," adding, "We are also reviewing energy and infrastructure projects."

KIND discovers overseas projects and participates as a direct investor. It discusses participation terms with project owners and meets with lenders to work out financing schemes. The policy fund managed by KIND has so far approved 2.3 trillion won in investments for 60 projects across 17 countries, supporting 10 trillion won in overseas contracts for Korean companies. Next year, a 'corporate matching fund' will also be launched, with companies and KIND investing equally on a 50:50 basis. The first fund (up to 200 billion won) began the recruitment process last May, and a second fund targeting small and medium-sized companies has also been arranged separately. Funding sources are being further diversified through 'country-specific strategic funds' with foreign governments or sovereign wealth funds, as well as 'global cooperation funds' that attract capital from overseas developers and pension funds.

Although the government and policy financial institutions are expanding support, the construction industry still feels significant barriers. A notable example involves projects where construction companies must also arrange the financing for the construction costs. Due to fiscal shortfalls, project owners in the target country may pay only 30% of the construction cost and require the construction company to obtain the remaining 70% from financial institutions. In very high-risk countries, such as those in the Middle East, there are lending limits imposed by Korea Eximbank. The shortfall must be covered by the companies' own credit. Moon Joong Kim, Executive Director of Global Business Division at the International Contractors Association of Korea, explained, "The ability to raise capital, not construction skills, determines who wins the contracts," and added, "The government should increase financial support for projects in ultra high-risk countries." The cost of preliminary local surveys before winning a project also poses a burden. An official from a major Korean construction company said, "Overseas projects are highly volatile and it is difficult to ensure profitability, which makes preliminary local surveys the most crucial element," and added, "However, the costs are high and the accuracy is low."

To address the limits of private sector financing, policy financial institution investment is essential. However, KIND's own capital base, as a government investor in overseas projects, is emerging as a bottleneck. Even though the legal capital ceiling is 2 trillion won, paid-in capital is less than 700 billion won. Allocating funds to just three or four large-scale overseas projects could exhaust its investment capacity. In investment development projects, equity size equates to voting power on the board. KIND needs to enter as the major shareholder with a significant equity stake of 100 billion to 200 billion won to obtain the influence required at the business planning stage to request construction participation and equipment supply from Korean firms. If investment is limited to just a few billion won, it is difficult to make such demands. A KIND official commented, "If our paid-in capital increases, our debt ratio and credit rating will improve, allowing us to raise more funds through bond issuance," and added, "With stronger equity, we can expect a virtuous cycle of attracting additional private capital and policy finance."

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