Seosuwon-Osan-Pyungtaek Expressway


After recovering form the Asian financial crisis of 1997, South Korea is opening great investment possibilities for project finance in transport and other sectors

The east Asian economy went through an intense phase legislative restructuring to attract private investment, and is set with a pipeline of attractive projects

A few months after completing its dual listing on the Korean stock exchange and the LSE, Macquarie Korean Infrastructure Fund has closed a US$130 million transport transaction in Korea - the Seosuwon-Osan-Pyungtaek Expressway project south of Seoul.

However, South Korea has other projects to be implemented and waits for whoever will beat AMEC. The company holds the record of the largest concession for a foreign investor - the US$1.4 Incheon bridge project.

Background - project finance in South Korea

South Korea was among the worst affected countries by the East Asian financial crisis in 1997, after experiencing a wave of high GDP growth in the 1990s - between 8-12 per cent.

Despite the setback triggered by the financial crisis, South Korea re-emerged as a major economic power in Asia and kept its position as the world's 10th largest economy.

Private infrastructure finance in Korea first broke through in 1994, when an Act on Promotion of Private Capital Inducement (PPCI) was passed. The government had a specific need of responding to a crisis in the port sector, and the law was followed by the implementation of a Private Participation in Port Infrastructure (PPPI) scheme.

Some major changes in the legal framework occurred in the past 10 years. In 1998 the PPCI act was replaced with a broader Act on Private Participation in Infrastructure, and in 2004 the private finance policy was expanded to other sectors rather than only transport.

One of the features of the Korean law for infrastructure is that projects benefit from long-term inflation-adjusted government revenue support.

South Korea set up a dedicated team within the ministry of finance - the Public and Private Infrastructure Investment Management Center (PIMAC).

The main functions of PIMAC are:

  • execution and management of pre-feasibility studies on large-scale publicly-financed projects
  • organisation of research on reassessment of feasibility study on projects screened for total project cost
  • providing support in formulating policies and plans on the PPI program

PIMAC also lends assistance in selecting concessionaire and obtaining approvals and permits needed in PPI promotion.

Following these developments, South Korea planned a US$3 billion pipeline of investments in 2006 alone, as last February the government announced plans to invest US$700 million before June this year and US$2.3 billion in the second half.

An impressive task - as the Korean PPP market in 2005 was valued at a total of US$130 million. The new project announced by the government were all greenfield and not only for the transport sector.

The first PPP deal to be closed by a foreign firm in South Korea was scooped by AMEC, which bagged the construction and operation of a bridge project - Incheon - valued at US$1.4 billion.

AMEC signed the DBOM contract in June 2005 and became the first foreign investor to lead a major project in the country.

The project was to finance, design, build, maintain and operate one of the world's longest bridges. It gave the firm a long-term income stream from the project management of the construction phase and an initial contract to operate and maintain the bridge for seven years, in addition to returns on its equity investment.

Samsung Corporation Joint Venture took responsibility for the design and construction of the works, which are scheduled for completion in 2009.

AMEC's equity investment by the end of the project will total US$38m, representing a 23 per cent interest in Koda - the AMEC-led SPV which agreed the 30-year concession with the South Korean construction and transport ministry.

The remaining equity and debt was provided by a consortium of Korean Banks led by Kookmin Bank and IBK of Korea.

Macquarie Korea Infrastructure Fund

Macquarie Korea Infrastructure Fund (MKIF) completed the dual listing of its shares on the Korea Exchange (KRX) and on the LSE on 15 March 2006. Gross proceeds of the IPO were around KRW942 billion (US$1 billion).

The IPO of MKIF was the second largest IPO in Korea in the past 12 months and the second largest IPO in Asia in 2006, excluding Japan.

MKIF is the first infrastructure fund to be listed in Korea and only the second infrastructure fund to be listed in Asia.

MKIF's dual-listing provided Korean retail and institutional investors as well as international institutions with the opportunity to invest in private sector portfolios of infrastructure as sets in Korea.

Infrastructure projects in Korea benefit of some form of long-term inflation-adjusted government revenue support.

The IPO of MKIF consisted of a Korean offering of 31,360,640 shares at an offering price of KRW7,000 per share and an international institutional offering of 103,228,446 GDSs with an offering price of US$7.1921.

Of the KRW942 billion proceeds KRW500 billion was paid to MKIF for the issuance of new shares and KRW442 billion was paid to four selling shareholders.

Prior to the listing, MKIF had reached financial close of on another road project - Daegu 4 Beltway. MKIF acquired an 85 per cent equity stake in Macquarie East Daegu Investment (MEDIC) which holds 100 per cent of the concession company - Daegu East Circulation Road. In addition, MKIF provided KRW32 billion (US$34 million) of subordinated loans to D4 East.

MKIF was established in 2002 and has a portfolio of investments in concession companies that operate infrastructure assets in the country.

The fund has investments in, or investment commitments to, 14 infrastructure assets in
Korea, including:

  • 13 toll road assets
  • subway rail project
The Seosuwon-Osan-Pyungtaek Expressway project

The Seosuwon-Osan-Pyungtaek Expressway project is a toll road development in Kyunggi Province south of Seoul. 

The southern Kyunggi region is experiencing fast-paced growth and the project is hoped to benefit from continued population and economic growth in the region.

The project involves the construction of a 38.5km toll road, immediately south of the capital.

The road will serve local and long-distance traffic in Kyunggi Province and it will provide an alternative direct connection for traffic traveling from Seoul to the major satellite cities in the southern Kyunggi Province including:

  • Suwon
  • Hwaseong
  • Osan
  • Pyungtaek

The holder of the concession - Kyunggi Highway - signed a 30-year agreement which includes minimum revenue support from the ministry of construction and transport (MOCT) for a period of 15 years.

The minimum revenue support level decreases from 80 per cent to 70 per cent to 60 per cent of concession agreement forecasts at 5-yearly intervals.

If toll revenues fall below 50 per cent of the forecasts included in the concession agreement forecast during any of the first 15 year of operation, the minimum revenue support is withdrawn for that year.

Construction of the Project commenced in June 2005, is due to be completed in
October 2009.

Financing

MKIF tied up the financing for Kyunggi Highway with Shinhan Bank - the bank which manages the fund listed on the Korean exchange.

The total cost of the project is KRW857 billion (US$924 million). Total equity commitments are KRW239 billion (US$257 million) and are being provided by a consortium including:

  • Doosan Heavy Industries & Construction
  • Kumho Construction
  • Daelim Construction
  • Dongbu Corporation
  • Hanwha Engineering & Construction
  • Shinhan Bank

The two mandated lead arrangers provided a US$133 debt facility which included a facility term of 20 years amortising over the last 5 years of the term. The breakdown was:

  • US$85 million (64 per cent of the total debt) provided by MKIF
  • US$48 million (36 pre cent of the debt) by Shinhan bank

Although financial close documents have been signed, the first drawdown of the financing is scheduled for December 2006, with the final drawdown to occur in September 2009.

The price of debt is at 9.0 per cent during construction and 11.0 per cent during operation of the road.
MKIF will hold pre-emptive rights over shares in the project company, ranking after existing shareholders.

The infrastructure investor has forecast a cash yield in the first 10 years of its investment of 9.3 per cent and an internal investment return (IRR) over the life of the investment of 11.0 per cent.

The IRR rate represents a risk premium of around 6.16 per cent above the Korean 10-year government bond yield.

MKIF director Nick van Gelder said: 'The project is one of the few remaining greenfield toll road investments in Korea and it benefits from a limited form of central government revenue support.

'The risk premium implied by the forecast investment IRR is attractive, considering protections provided by the subordinated loan commitment, the limited government revenue guarantee and the project's termination payment protections.'

He added: 'MKIF will also have pre-emptive rights over the project's equity in future, should the participating construction companies choose to sell down their shareholding positions and/or not exercise their own pre-emptive rights.'

The project enjoys support from the Korean government (through the Ministry of Construction and Transport) in the form of a minimum revenue guarantee and termination payment coverage.

Legal advisers to MKIF were Lee & Ko, and the company was advised on the financial side by Shinhan Macquarie Financial Advisory. 

Conclusion

While Macquarie and AMEC stabilise their assets in South Korea, the country's transport market has all the characteristics to go through a further expansion and open up to foreign investors.

Junglim Hahm of the World Bank - who has formerly worked for South Korea's PPP unit, PIMAC - said: 'After the crisis, Korea is a stable, attractive market for foreign investors. Political risk, apart from the North Korea issue, is not a problem - the country being part of the OECD.' The country joined the organization in 1996.

Andrew Major of MKIF said: 'We consider the political risk in this transaction to be acceptable, based on the returns anticipated. S&P sovereign rating for Republic of Korea is A+ stable and there has been no history of default by the Korean government on any of its contractual obligations.'

He added: 'In relation to broader political risks (e.g. North Korea), MKIF is a Korean company and is comfortable with general risks and returns in the Korean market, which are consistent with the broader international market for toll road infrastructure transactions.'

MKIF is evaluating other PPI projects in Korea, both greenfield and brownfield investments. MKIF is also actively evaluating further participation in and financial restructuring of its existing investments on an ongoing basis. 

Junglim Hahm said that there is a pipeline of successful projects that have been implemented in the airport, railway and highway sector - and that regulators are busy working on a further improvement of the legal framework.

'The government is now active on reducing - possibly scrapping - the minimum revenue guarantee. This is a sign that officials are confident of attracting foreign investment in South Korea.'

The project at a glance

Project Name Seosuwon-Osan-Pyungtaek Expressway
Location Kyunggi Province south of Seoul
Description construction of a 38.5km toll road south linking Seosuwon, Osan and Pyungtaek
Sponsors

Kyunggi Highway: Doosan Heavy Industries & Construction, Kumho Construction, Daelim Construction,  Dongbu Corporation, Hanwha Engineering & Construction, Shinhan Bank

Project Duration
(Including construction)
 30 years
Construction Stage construction started in 2005
Total project value US$924 million
Total equity US$257 million
Subordinated debt US$133 million
Subordinated debt breakdown MKIF- US$85 million
Shinhan - US$48 million
Senior debt pricing 9.0 per cent during construction and 11.0 per cent during operation

Mandated lead arrangers

Macquarie Korean Infrastructure Fund - MKIF

Shinhan Bank

Finanicial adviser to MLAs Shinhan Macquarie Financial Advisory
Legal advisers to banks

Lee & Ko