Private infrastructure investor hitting a jam

Posted on : 2012-04-19 11:42 KST Modified on : 2012-04-19 11:42 KST
Macquarie put up funds for transportation projects in Korea, now criticized for

By Park Young-rule, staff writer

Controversy is plaguing Macquarie Korea Infrastructure Fund investment projects.

Following fare increases on Line 9 of the Seoul Subway and the Mt. Umyeon Tunnel that critics called an “ambush,” the fund is now drawing flak for excessive tolls and minimum revenue guarantee (MRG) contracts on the Ma-Chang Bridge between Masan and Changwon, the Gwangju No. 2 Beltway, and the Daegu No. 4 Beltway (Beoman Road).

Macquarie currently has about 1.1 trillion won (roughly US$164 billion) invested in 14 transportation networks in major regions throughout the country, including the Incheon International Airport Expressway and the Seoul-Chuncheon Expressway.

The Macquarie Korea Infrastructure Fund (MKIF), which was formed in 2002 as a collaborative venture between the Macquarie Group and Shinhan Financial Group, is the largest listed infrastructure fund in Asia.

Macquarie is an Australian financial group that makes money through infrastructure funds. The company first drew attention when it was mentioned as a possible buyer during a push to sell off Incheon International Airport early on in the Lee Myung-bak administration. In these funds, it collects investor money to invest in large infrastructure projects such as highways, airports, and seaports overseas, dividing up the profits reaped from the facilities’ operation.

Macquarie currently has infrastructure assets in over 110 facilities in 25 countries around the world, with South Korea its second largest investment destination after the United States.

Macquarie’s primary source of profits is indirect investment through equity partnership. Another source of revenue is high interest rates money lent to destination countries as with Line 9, and dividends for its equity investments.

One of the sources of stable, long-term profits for the company has been the now-discontinued Minimum Revenue Guarantee (MRG) system. This system was introduced by the government in the wake of the financial crisis as a way of increasing social overhead capital through private investment.

Even those investing minimum private equity capital of around 20 percent would be guaranteed operation rights for decades, allowing them to recoup their investment. In cases where traffic was not as high as anticipated, the government would provide up to 70% to 90% of the operating revenues for the predicted traffic.

For Zone 1 of the Gwangju No. 2 Beltway, the city paid 100.8 billion won in compensation to Gwangju Beltway Investment, in which Macquarie holds a 100% stake. Due to inaccurate traffic predictions, the compensation amount ballooned from 6.2 billion won in 2001 to 22.2 billion last year.

Tolls and usage fees in Macquarie investment sites like the Seoul-Chuncheon Expressway and Incheon International Airport Expressway are notoriously expensive.

Most of MKIF’s profits come from interest earnings. In the case of Gwangju Beltway Investment, a loan was taken out from Macquarie to repay the principal borrowed from Kookmin Bank at the time of construction after the equity was transferred to Macquarie. Macquarie’s interest rates ranged from 7.85% to 20%, compared to KB’s 7.5%, and annual operating revenues also end up going to the company.

For the Cheonan-Nonsan Expressway, the interest rate has risen sharply from 6% in 2006 and 2007 to 8% in 2008 and 16% for 2009 through 2012, and is scheduled to go up to 20% for 2013 to 2029.

In the past year, MKIF had earned a total of 161.8 billion won in interest from its project sites around the country.

Citizens’ Coalition for Economic Justice state project monitoring division chief Kim Heon-dong, a consistent critic of private investment projects, described their structure as one where “construction clique members profit in the building stage and speculators make off with profits in the operation stage.”

 

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