KIC Sovereign Wealth Fund Also Criticized in Budget Review: "May Not Be Able to Invest Right Away"

"If the schedule slips, capital contributions could become idle funds"
Concerns also raised over overlap with policy-financing functions

Criticism has been raised that even if the strategic sovereign wealth fund initiative, which the Korea Investment Corporation (KIC) is setting up to make long-term investments in strategic domestic industries, is established next year, it will take time before investments can actually be made. If the schedule slips because of legal amendments or the creation of an investment framework, even the capital contributions available for use next year could be tied up as idle funds for a period of time. Some say the implementation timeline should be clarified and the timing of investments adjusted, including by quickly selecting investment targets.

According to the National Assembly and other sources on November 10, Lee Jeongeun, chief expert member of the National Assembly Finance and Economy Planning Committee, said in a report reviewing the preliminary examination of the committee's budget proposal that "it is necessary to review whether the scale and timing of cash capital contributions for 2027 are appropriate, taking into account the timelines for legal amendments and the establishment of an investment management framework, as well as the funds that can actually be invested."

The Korean-style strategic sovereign wealth fund initiative is designed to expand KIC's existing role of investing in overseas portfolios centered on foreign-currency assets, enabling it to make long-term, direct investments in strategic domestic industries such as semiconductors and artificial intelligence (AI). A strategic investment account will be established separately from the existing account for managing entrusted assets. The fund's initial capital will total at least 20 trillion won. Specifically, the government will contribute in kind shares worth at least 16 trillion won in institutions such as Korea Development Bank, the Export-Import Bank of Korea, and Industrial Bank of Korea, along with a 4 trillion won stake in NXC, Nexon's holding company, received in lieu of taxes. The Future Response Fund will provide a cash contribution of 500 billion won.

Lee first pointed out that, relative to the fund's initial capital, there are limits to securing liquidity that can actually be used for investment. She noted in particular that shares in policy-financing institutions are held to secure dividend income, so the assessed value of those assets does not mean that the funds can be invested immediately. In addition, under current law, KIC can invest only in overseas assets, so a separate legal basis must be established. It is also expected to take time to secure the specialized personnel and investment capabilities needed to invest directly in domestic companies.

"There could be a considerable lag between the amendment of the law and the actual execution of investments," she said. "Even if the government's 500 billion won contribution for next year is paid to KIC, it may take time before it is translated into investments in strategic industries. If the schedules for establishing the investment framework and identifying investment targets do not align with the timing of the contribution, there is a risk that the funds will be managed as idle cash." She added that the government should provide specific timelines and estimated durations for each stage, and review the appropriate scale and timing of cash contributions after comprehensively considering next year's investment targets and projected investment amounts.

The issue also came up during the National Assembly Finance and Economy Planning Committee's audit of state affairs on October 23. In response to People Power Party lawmaker Kim Sanghoon's criticism that "the funding for strategic investments is unclear," KIC President Park Ilyoung said that the fund would receive a cash contribution of 500 billion won and could immediately access 1 trillion won by combining it with dividends from bank shares. Park also said that KIC would need to hire more staff in response to criticism that it lacked expertise in domestic strategic investment.

Concerns were also raised about overlap with existing policy-financing programs. The sovereign wealth fund is expected to target companies in national strategic and core industries, including semiconductors, AI, and biotechnology, as well as companies related to overseas supply chains. Lee said this creates a high likelihood of overlap with existing policy-financing programs in terms of investment targets and support functions. The Ministry of Finance and Economy maintains that the fund is distinct from existing policy funds because it will hold equity stakes over the long term, without a set maturity or liquidation date. However, Korea Development Bank, the Export-Import Bank of Korea, and Industrial Bank of Korea already support these industries through loans, guarantees, capital contributions, and investments. The government also provides support through direct and indirect investments and loans using the National Growth Fund and the Advanced Strategic Industries Fund. Lee stressed that differences limited to the investment period and method of recovery would not be enough to resolve concerns about overlap with existing policy-financing functions.

She also pointed out that contributing government-held shares in kind could transfer dividend income previously received directly by the government to the sovereign wealth fund, reducing the government's non-tax revenue. "This does not generate new income for the country as a whole; it changes who receives the existing dividend income. The impact of reduced government revenue should therefore be considered alongside the fund's ability to secure investment resources," Lee explained.

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