Korea Eximbank announced plans to increase guarantee support to KRW 500 billion per year for medium-sized Korean construction companies participating in overseas construction projects.

The Bank also announced that it will reduce guarantee rates by 10~20bp during a meeting with executives of 13 major medium-sized construction firms* as part of Bank efforts to spur Korean participation in overseas construction projects.

Medium-sized construction firms are firms with annual overseas construction contract amounts of over USD 100 million.

After exceeding USD 10 billion in overseas contract orders in 2005, the overseas construction market has grown rapidly to total USD 59.1 billion in 2011.

However, growth was heavily polarized with the top ten construction giants securing 80% of overseas contracts (top 15 companies secured 90%).

In order to assist medium-sized construction companies with strong performance capacities expand participation in the market, the Bank increased support flexibility, such as expanding credit options for performance guarantees.

First, the Bank will fully cover bid bonds, the first step in winning contracts, on credit to lower bid prices and ultimately increase their chances to win bids.

Advance payment bonds will be provided wholly by credit given that advance payment is overseen by the Bank. This is expected to assist medium-sized construction companies by easing risk management and security liability.

Performance bond guarantees were provided on condition of full collateral but will now be provided on credit with partial collateral.

Bid bond: compensates for losses incurred by a bidder which violates bid regulations and requirements.

Advance Payment Bond: compensates for damages resulting from violation of terms of usage of advance payment that was received for initiating construction.

Performance Guarantee: compensates for damages resulting from non-execution of terms of the contract between the construction firm and sponsor.

(Case Example)
To participate in a bid placed by the State of Qatar for construction of roads, an experienced road construction firm submits a bid bond for the bid. When selected as the winning bidder for the contract, the firm submits a performance bond and signs a contract.
As a considerable amount of funds are needed to initiate the project, the firm submits an advance payment bond to secure liquidity and initiate the construction.

The Bank plans to base support for medium-sized construction firms on 100% credit for projects of EDCF, ADB, MDB, or subcontract construction of outstanding foreign companies, taking into account the transparency of the financing source and feasibility of the project.

In addition, the Bank decided to reduce guarantee rates by 10~20bp from current rates in light of the relatively high rates that medium-sized construction firms pay compared to their larger peers.

Provision of KRW 500 billion in guarantees to medium-sized Korean construction firms in accordance to the new support policy by the Bank is anticipated to result in overseas construction contract awards of KRW 2.5 trillion*. This amount is over 50% of the annual total of overseas construction orders secured by medium-sized construction firms.

* Amount of orders received (2.5 trillion won) x Performance Guarantee Rate (20%) = KRW 500 billion

* Anticipated increase in order amount from guarantees (KRW 2.5 trillion) ÷ Average order amount awarded to medium-sized construction companies in the last 3 years (4.6 trillion won) = 54%

Young-Hwan Sul, Executive Director of Korea Eximbank, stated, “The Bank will strive to strengthen the overseas competitiveness of medium-sized Korean construction companies by providing information on overseas construction projects and developing a variety of support plans.