In an effort to mobilize private sector resources in infrastructure build-up, the Korean government has devised a new legal framework to induce foreign investors into the social overhead capital ("SOC") sector. During 1998, the Planning and Budget Commission (the "PBC") took the initiative to revise the Act for the Promotion of Private Capital Inducement into SOC Facilities (the "Private Capital Inducement Act").

The PBC intended to build up a transparent and efficient infrastructure development system in line with the generally implemented global standards, to provide private investors with sufficient incentives including improved profitability, and thereby to enhance the nation's competitiveness and the overall economic growth potentials.

Act on Private Investment in SOC Facilities Established

As a result, the Act on Private Investment in SOC Facilities (the "SOC Investment Act" or the "Act") was established and finally promulgated on December 31, 1998. The SOC Investment Act will come into force three months after its promulgation. As the title change of the infrastructure law indicated, the Act is not a mere amendment, but a fully revised version of the current Private Capital Inducement Act.

The main points of the new Act are: (i) to diversify the ways and means of private participation, (ii) to enhance the efficiency of private investments, (iii) to provide support to private investors, and (iv) to clarify infrastructure-related legal matters.

In this regard, private sector investments in SOC facilities are encouraged irrespective of investors' nationality. Foreign investors are ushered in to invest into local SOC facilities. Except as otherwise provided for, foreign investors are subject to the Foreign Exchange Transaction Act and the Foreign Investment Promotion Act, which were also amended during 1998.

Gist of the SOC Investment Act

Introducing BOT Approach

The most efficient way for the private sector to construct highways, harbors and power plants is believed to allow those investors to operate such SOC facilities until they recover the total investments with an appropriate profit. This is called a BOT (build-operate-transfer) approach.

So far, only BTO (build-transfer-operate) projects have been endorsed by the government with respect to Category I facilities including roads, railroads, metro-subways, ports, airports, multi-purpose dams, water supply systems, telecommunications systems; while BOO (build-own-operate) projects are for Category II facilities such as power generators, gas supply facilities, computer networks, distribution centers, bus terminals, sports complex, libraries and museums.

However, foreign investors are unfamiliar with the BTO method because franchisers cannot have the ownership of the facilities. In order to stimulate foreign investment into the SOC sector, a variety of approaches of private participation, such as BOT, BTO, BLT (build-lease-transfer) and ROT (rehabilitate-operate-transfer) will be offered to investors as they may choose.

At the same time, the government has abolished Category I or II classification in the Act. It is because such classification is too uniform and regid, that private sector investors shy away from the resultant BTO-type operations. More often than not, the government authorities used to implement Category I projects with government budget.

Improving Project Selection Process

Each year, the government should comprehensively formulate and announce a basic plan for private investment projects for SOC facilities (the "Basic Private Investment Plan") in order to promote balanced development of the nation, to enhance the competitiveness of industries and to improve the convenience and quality of life(Sec.7¨ç). The government needs to exploit private expertise and management skills, while maintaining the public nature of the facilities, in conformity with the national economic plans and investment priorities(Sec.7¨è). The Basic Private Investment Plan spells out the government policy statement by SOC sector, the designation criteria of large-size private investment projects, the desirable private investment projects, investment terms and conditions, the operation and management (O&M) of project facilities, the government incentives and supporting measures, and other related policy matters(Sec.8).

In this context, only profitable projects will be selected after appropriate feasibility studies have been conducted by an internationally recognized professional firm.

To review and screen government policy, the Basic Private Investment Plan, major SOC project proposals and other necessary SOC matters, the PBC operates a deliberation committee. However, the private sector may propose an appropriate project which will be suitably implemented under the private sector's initiative on a BTO, BOT or BOO basis, but excluded from the Basic Private Investment Plan(Sec.9).

After the Basic Private Investment Plan is publicly announced, the state or local government body (the "Authority") should make out and publish the basic plan to implement SOC facility projects (the "Basic Project Plan") within one year(Sec.11). The Basic Project Plan sets forth the proposed project along with its site, total costs, construction period, user fee, incidental income-generating businesses, BTO or BOT schemes, the incentives and supporting measures, O&M conditions of the project facility, qualifications of the project company (small and medium-sized enterprises are recommended to participate), and other necessary matters.

When private companies tender proposals for project implementation, the Authority should review each of the proposals, select a qualified and suitable project company (or its sponsors), and designate it as a negotiation counterparty. If all the terms and conditions are concluded, the Authority should make a project implementation agreement including the total project costs, construction period and other terms and conditions with the project company(Sec.13).

When the Authority awards a concession, the project company should prepare a project implementation plan to get the Authority's authorization(Sec.13¨ë). When the Authority designates the project company, it is deemed to have obtained the authorization in accordance with relevant laws(Sec.13¨ê). By the time it applies for the said authorization, the project company shall be formed as a juridical person(Sec.14¨é).

On the other hand, a sunset clause applies to delayed projects which have been designated by the Authority, but do not make any further progress in a certain period of time. Such projects may be repealed by the Authority(Sec.50¨ç,Sec.10).

Expanding the Support System for Private Investment

The government has established the "Private Investment Support Center" in the Korea Research Institute for Human Settlements to provide one-stop services to would-be private investors in SOC facilities(Sec.23).

The Infrastructure Credit Guarantee Fund, which has been managed by three financial institutions, i.e., the Korea Development Bank (KDB), the Credit Guarantee Fund and the Technology Credit Guarantee Fund, will be administered solely by the Credit Guarantee Fund so as to enhance its specialty(Sec.30).

One of the major points in the new Act is to provide for the formation of infrastructure funds. These funds shall be formed and operated as a kind of mutual funds under the Securities Investment Company Act of 1998. Upon the Act's coming into force, the first fund will be established by domestic financial institutions, including KDB, and international financial institutions like the International Finance Corporation.

The infrastructure funds have a minimum capital requirement, and they shall engage in equity investment, lending on a limited basis and underwriting qualified bonds. Since these funds are, in effect, paper companies, they have to operate hand in hand with asset management companies, asset custodian companies and sales companies.

To mobilize funding sources to the maximum, the project company or participating financiers may issue SOC bonds, irrespective of Category I or II facilities, of which proceeds shall be used only for the private investments in SOC facilities(Sec.58).

Clarifying Legal Aspects of Infrastructure Financing

First of all, the Act stipulates the requirements for ancillary businesses of the project company. When the Authority authorizes the project implementation plan, it may approve the income-generating business, e.g., development of housing lots and industrial sites, or home construction, so as to compensate the total costs of project facilities(Sec.21). But conditions for the ancillary business such as the cost range and geographical limits shall be explicitly defined.

The acknowledgement of force majeure is another point of the Act. Uninsurable force majeure risks cannot be taken by a project company or its sponsors. Therefore, the Act provides that the Authority should protect the public interest in case there occurs some circumstantial changes in SOC facilities, delays in construction or force majeure events i.e., war, natural disaster and acts of God beyond the control of the project company(Sec.47¨ç). In such cases, the Authority shall make a proper compensation to the project company that suffered loss, subject to mutual consultation, and finally, to a decision of land expropriation(Sec.47¨è).

If and when the project company is not able to construct nor operate SOC facilities owing to force majeure events, it may demand the purchase of the project including ancillary business from the state or local government(Sec.59). But nothing in this provision creates any claim for the project company.

Although the private sector commits itself to building up infrastructure, the Authority is responsible for adequate control and monitoring of project implementation. In doing so, the Authority may request periodic reports from the project company, examine on-site project facilities, and have access to all documents and records of the company(Sec.51).

Transitional Measures Relating to Previous Projects

As mentioned before, the Act shall come into force on April 1, 1999, while the provisions with respect to the Infrastructure Credit Guarantee Fund are effective on January 1, 1999.

This Act shall apply to those projects which have been initiated under the old Private Capital Inducement Act by submitting the project implementation plan to, or by obtaining the designation as a project company from the Authority. Moreover, the parties to such projects may modify the project implementation plan or agreement in accordance with the new Act(Addenda Sec.2¨é¨ê).
(Source: KDB Economic & Industrial Focus, March 1999)