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Korea's changing infrastructure opportunities

31 Mar 2016

Korea’s experience stimulating productivity and infrastructure development is likely to be increasingly valuable to the Economic Community of the Association of South East Asian Nations, a committee finalised in 2015.

With the fastest ageing population in history and the fifth largest pension fund in the world, Korea is a capital exporting country with a domestic capital surplus. 

It has spent the past 20 years streamlining its Public Private Partnership funding models, proving ongoing government commitment for PPP projects and establishing a stable judicature and legislative regime. 

The November 2015 launch of the ASEAN Economic Community (AEC) marked a concerted move by the world’s seventh largest collective economy to reduce trade barriers and increase the free flow of people and capital. 

“That will obviously have a stimulating effect on intra-Asian capital flows to invest in infrastructure,” Macquarie Group’s Seoul based head of Korean Infrastructure Chul Hum Paik says. 

“In Asia, relative stability has been achieved in the Philippines, for example, who have started a very successful PPP program. Other South East Asian countries, like Vietnam, and later Myanmar, they know where to go, and what to aspire to,” Paik says of Korea’s economic reputation. 

While many of its southern neighbours are in their development phase, Korea’s mature economy poses different challenges and opportunities for investment in sectors such as infrastructure. 

Early government subsidies to incentivise investment - including minimum revenue guarantees for core infrastructure projects and strong termination to ensure lenders were comfortable - meant a very active program. 

Korea pioneered PPPs in Asia after the debilitating impact of the Asian Financial Crisis in the late 1990s, procuring in excess of $US80 billion in assets through private, mostly domestic, capital.

As a result, there is a “deep and knowledgable financial sector used to investing in infrastructure as an asset class,” Paik says. 

Early government subsidies to incentivise investment - including minimum revenue guarantees for core infrastructure projects and strong termination to ensure lenders were comfortable - meant a very active program. 

“Korea is well known for its defined regulatory framework and the strong administration of it, and for being very transparent when you are procuring government projects,” Paik says. 

The recent uptick in PPP interest is encouraging for foreign investors, following a market slow-down when the generous subsidies were rolled back.

Macquarie Group now sees definite opportunities not in the ‘Red Ocean’ projects - either core infrastructure, or the PPP schemes to build social infrastructure - but in the changing dynamics of Korea’s economy, and its urbanisation.

A saturated economy, Korea is dominated by family run conglomerates, which account for about 39 per cent of its GDP. With traditional growth channels slowing, both the conglomerates and the government are retrenching assets. 

In Korea, Samsung accounts for nearly 23 per cent of GDP. In that sort of economic environment, it is important to stimulate infrastructure, stimulate SMEs and to allow the economy to be more competitive and dynamic, says Macquarie’s Head of the Asian Infrastructure Fund, Ben Way.

“Most of the deal flow today is generated by distressed assets and non-core assets of family run conglomerates, so we are seeing a very robust deal flow, particularly in areas like city gas, renewables, waste management,” explains Way.  

Paik says transport infrastructure needs to be replenished and reinvigorated with new technology to run roads, ports and airports. 

Increasingly, he adds, urban infrastructure will dominate new spending, as a greater city based population demands better services.  

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