Growth initiative marred as policy fund could strong-arm lenders
By Lee Kyung-min
The much-hyped New Deal Fund may not be as effective a growth plan as the government expects, unless preceded by a drastic measure to guarantee profit margins acceptable to businesses that have no need to borrow money at a higher rate from the fund pooled by the public, experts said Thursday.
The profit-oriented infrastructure builders and renewable energy producers will have no incentive to find a new source of funding, since the sector has established way of financing and deal-sourcing with minimal government intervention for over two decades.
Even if a few big name lenders cough up money to set up the fund just to "toe the government line," the collective, forced move will be criticized as nothing less than "extortion," altogether undermining the government initiative supposedly set up to bolster sustainable growth.
The government said it will invest in 197 digital and green projects in 40 sectors via the Korean New Deal Fund, a government policy fund of 20 trillion won ($17 billion) designed to promote the Korean New Deal, defined by 160 trillion won of investments in the two (digital and green) sustainable growth areas.
Of the 20 trillion won, a third, or 7 trillion won, will be from government spending (3 trillion won) and state-run lenders (4 trillion won), with the remaining 13 trillion won to come from a private investors pool created by state-run and private financial services firms including pension funds, banks and insurers.
The fund will be backed by the New Deal Infrastructure Fund, a publicly raised fund set up to invest in infrastructure needed to foster the digital and green initiatives.
Examples include 5G networks, cloud computing, blockchain, data centers, traffic systems, logistics and industrial complexes for eco-friendly energy plants, and facilities related to electric vehicles (EVs) and fuel cell electric vehicles (FCEVs) as well as for air treatment including dust filtration.
Process in reverse
Financing plans come last after finalizing specifics about business projects backed by stable institutions and government policies. Or, at least that is how any solid business plan has taken shape so far, according to a senior industry figure who refused be identified.
"Things are simply backwards," said a worker at a local securities firm with 13 years of experience in alternative investments.
The government has outlined how the fund would be financed first without any mention of ways it will make profits from the use of it, a plan that cannot be executed or advanced at all.
"Financing is not at all a concern for renewables- and infrastructure-building businesses because of ample liquidity in the market brought on by near-zero interest rates. The government investment plan defined only by the amount of funds in that sense is not only unattractive but also illogical to them," he said.
Another problem is that businesses will not be able to draw equity investment from the public, indicating that the projects will certainly fail if profits do not meet a pre-set target range.
The government says profits of up to 3 percent would be possible, but that in the securities official's view does not make any sense given there is no plan outlined to reach that solid a performance.
"Lenders are not charity organizers and they will charge interest in addition to the forecast profit. Maybe some 500 billion won out of their combined 400 trillion won in assets can be set aside to please the financial authorities but it will be a farce and everyone will know it," he said.
The digital and green industries mentioned involve what are essentially considered public goods, a reason why the current business model relies heavily on state subsidies to offset continued operating losses from the newer source of energy production and groundwork-laying projects that still remain highly expensive, according to Seoul National University economist Kim So-young.
The profit margin of the two industries are determined solely by the amount of government subsidies, a reason why Kim says the businesses will not choose to opt for higher borrowing costs entailed by using the state policy fund unless they are given some discretion to dramatically increase their profit margins.
Unless the government guarantees that they can jack up service prices for using infrastructure or that they can sell energy at a higher cost, Kim said, the businesses will have no incentive to seek financing from the state-offered funds.
"Projects involving energy and infrastructure are run by the government precisely because for the public good they cannot and should not become lucrative. This should not become a source of financial investment and I don't see how the plan will draw the intended outcome without raising taxes," he said.
Little enthusiasm is seen from market participants, most of whom usually jump at the chance of making substantial profits in a short-period of time, according to Standard Chartered Bank Korea investment strategist Hong Dong-hee.
"There seems no rapid exchange of ideas on the development of financial products, a sense that I get after meeting officials from asset management firms. This is understandable because the investment is part of the virus-induced fiscal stimulus. There is talk that New Deal-related exchange-traded funds (ETFs) will be rolled out in the first half of next year, so we will have to wait and see how they go," he said.