The Export-Import Bank of Korea announced on July 11 that it will provide USD 1.16 billion in guarantees for the Bismayah New City Project in Iraq, a project awarded to Hanwha Engineering & Construction (Hanwha E&C).

The guarantee is comprised of a USD 775 million advance payment bond* and a USD 388 million performance bond.

* Advance payment bond: guarantee covering the liability of the construction firm to repay advance payments received for initiating construction.

** Performance bond: guarantee covering the liability of the construction firm (typically 10% of the contract amount but 5% in this case) for failure to execute the terms of the contract between the construction firm and sponsor.

For this 7-year project, Hanwha E&C is to build a new city accommodating 100,000 households in Bismayah, a region near Baghdad.

The project’s USD 7.75 billion contract is the largest single overseas construction project on record.

Korea Eximbank provided this guarantee support in order to assist Korean construction firms make headway into Iraq, a market regarded as a blue ocean for overseas construction.

Upon the launch of Iraq’s new government in 2010, the region has gained international attention for its potential large-scale project orders as the country rebuilds and develops its economy. However, Korean firms find it difficult to secure financing for project participation in the area as there is a high level of political risk.

However, the Bank significantly reduced risks for Korean firms by negotiating guarantee conditions with the National Investment Committee of Iraq, for instance making exceptions* for acts of force majeure such as war or terrorism, as grounds for claims.

* Typically, Bank guarantees compensate the sponsor for the guarantee amount as requested without investigation or verification of the breach of contract.

A representative of the Bank commented, “We expressed our willingness to provide financing early on in the project as we recognized its importance to obtaining project orders and successful execution of Korean firms in Middle Eastern countries such as Iraq. We will continue to support Korean firms’ expansion overseas by providing financing, in this case, designed to reduce political risk, so that companies can secure large-scale overseas projects.