[ Investment > Q&A ] 

Q&A on SOC (Social Overhead Capital) Investment

Q. What legal framework exists to support private investment in infrastructure?

Private investment in infrastructure is supported by the new Act on Private Participation in Infrastructure (PPI), an amended version of the Private Capital Inducement Promotion Act for the Expansion of Social Overhead Capital (PCIP Act) of 1994. It is specifically designed to promote private domestic and foreign investment in Korean infrastructure.  The act marks the government's commitment to boldly reforming the way Korean infrastructure  projects will be financed, managed and owned in the future.
The purpose of the PPI Act is to facilitate private investment in Korean infrastructure by:

* Moving away from a regulatory system towards  a promotional system
* Formulating clearly defined and transparent bidding process
* Establishing standard and internationally accepted institutional arrangements for project execution
* Clarifying and strengthening the role of the  private sector

 Q. What methods are available for private companies to invest in infrastructure projects?

Investment in infrastructure projects may be conducted by one of the following methods.

 BTO (Build-Transfer-Operate): The most widely pursued method. Ownership of the infrastructure facilities is transferred to the central or local government upon completion of construction, and the concessionaire has the right to operate the infrastructure facilities for a specified period of time.

 BOT (Build-Operate-Transfer): The concessionaire assumes ownership of the infrastructure facilities for a specified period of time after completion of construction, upon which ownership is transferred to the  central or local government upon termination of the concession period.

BOO (Build-Own-Operate): The concessionaire owns and operates the infrastructure facilities upon completion of construction.

 BLT (Build-Lease-Transfer): Upon completion  of construction of the infrastructure facilities, the  concessionaire leases them to the government for a set period of time and upon termination of the lease, ownership is transferred to the central or local government.

ROT (Rehabilitate-Operate-Transfer): Upon  rehabilitation of existing infrastructure facilities owned by the central or the local government, the concessionaire has the right to operate the facilities for a specified period of time.

  Q. How can a private investor participate in an infrastructure project?

Private sector investors can participate in infrastructure projects through open bidding in the case of solicited projects or by submission of a proposal in the case of unsolicited projects

Q. What sort of incentives are provided to encourage PPI projects?

The law and regulations on PPI provides for the  following incentives.

* A minimum revenue guarantee up to 90 percent for solicited projects and 80 percent for unsolicited projects
* A buy-out clause in the case of a force majeure and in the case of a breach of agreement by the government
* Measures to stimulate creativity on the part of the private sector. For example, in the case where a concessionaire completes construction at a lower-than-projected cost, the guaranteed tariff is not adjusted accordingly. The cost reduction is then the concessionaire's additional gain.
* Partial compensation for foreign exchange rate fluctuations.
* Put options for foreign equity investments up to 50 percent of the total cost of a project.

Q. Infrastructure projects typically involve large costs. Are Korean banks able to provide the funding as well as the long-term maturity that project finance loans require?

Considering the number and size of the infrastructure projects in Korea, the funding available through  the domestic financial market is rather limited.   In terms of the maturity, local banks typically  provide loans with maturities of 16 years (including  a grace period of five years). This may not be long enough, but bridge loans are available to cover any difference between the limits of bank financing and the requirements of private investors.  

 Updated January 3rd 2001