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Lee & Ko 

Published: September, 2007 - Korea

Submission: September, 2007

 

 

Light Rail Transit Projects in Korea: Case Study of Two International Projects
by Tom Shin

 


In July 2007, Seoul Metropolitan Government announced an ambitious plan to build seven new light rail transit systems by 2017. The light rail transits will be implemented as Private Participation in Infrastructure (PPI) projects at the total cost of about W4.73 trillion (approximately US$5.08bn). Given the preference for international LRT technology, this would mean greater opportunities for international companies to participate in the expanding Korean LRT market. In the past, there have been two international LRT projects in Korea. This article examines these projects and introduces two different methods by which international sponsors can


participate in Korean PPI projects.


 


Light Rail Transit (“LRT”) in Korea


LRT is a form of transportation that uses electric driven rail cars on private rights-of-way. The term “light rail” is used to distinguish it from conventional rail technologies such as high-speed, freight and metro/subway, which are considered “heavy rail”. Although it is not easy to distinguish light rail and light rapid, light rapid transit can be considered as a step above light rail as it features fully grade-separated system. In Korea, LRT generally refers to light rapid trains running on its separated rights-of-way, usually on elevated platforms.


 


The need for LRT in Korea increased since the mid- 1980s, coinciding with the popular demand for cheaper and cleaner mass transit system. Compared to subways, LRT systems are shorter and provide limited local coverage. However, Korean LRT systems are linked to major subway systems through interconnection stations allowing access to other parts of the city and neighboring cities.


 


PPI Act


The Private Participation in Infrastructure Act (“PPI Act”) was enacted in 1995 to promote private investments in infrastructure facilities. The PPI Act defines the role of the private sector in PPI projects and seeks to promote transparency in the competitive tender process. The private sector participant selected by the competent authority will be granted the concession right to develop, construct and operate the infrastructure facility for a predetermined number of years.


The PPI Act provides various benefits. These are highlighted below:


• Government undertaking of necessary expropriation process.


• Government subsidy for construction costs.


• Minimum revenue guarantees (“MRG”).


• Buy-out in case of government default and certain force majeure.


• Partial compensation of foreign exchange losses.


• Compensation in case of force majeure.


• Favourable tax incentives.


 


Yongin LRT Project


The Yongin LRT project was first solicited for public bidding in 1997. The consortium formed by Daelim Industrial Co., Ltd. (“Daelim”) and Bombardier Transportation (“Bombardier”) was selected as the preferred bidder in 2002. In July 2004, Yongin LRT consortium was awarded the 30 year concession right to develop, construct and operate the fully automated 18.4 kilometer rapid transit system. Yongin LRT will feature Bombardier’s CITYFLO 650 vehicles which will run mostly on elevated platforms and service 16 stations. The Yongin LRT has been commercially named Yongin Everline after Everland Amusement Park, which is the last station on the route. As of July 2007, the construction has achieved 53% completion rate. Yongin LRT is scheduled to open to the public in June 2009.


 


Financing


The total project cost is estimated at W697bn (2001 fixed price), 43% of which will be subsidised by the Government. The senior facility consists of three facilities: construction cost facility, standby facility and VAT facility. The construction cost facility comprises four tranches with combination of fixed and floating rate tranches. Two of the tranches are guaranteed by Korea Credit Guarantee Fund, a public financial institution set up by the Korean Government. The standby facility will fund shortfalls in the government subsidies and MRG. The VAT facility will fund VATs during the construction period. The subordinated facility is extended by Korean financial investors. The sponsors are required to make additional equity (subject to a cap) in case of cost overruns.


 


Construction and O&M


The construction is divided into separate three works:


(1) civil works; (2) electrical and mechanical systems (E&M) works; and (3) project management works. Daelim is the lead contractor for civil works. Bombardier is the lead contractor for E&M works. Both companies are jointly involved in the project management works. Following the operation commencement date, it is expected that the O&M works will be subcontracted out to a Bombardier affiliate.


 


Uijeongbu LRT (“UJB LRT”)


In 2004, Uijeongbu City (located on the northern perimeter of Seoul) nominated the GS consortium (led by GS Engineering & Construction and Siemens) as the first priority bidder. After more than 64 rounds of negotiations, the concession agreement was signed in 2006. UJB LRT will be a 10.6km LRT line connecting 15 stations with a fully automated guideway transit system using Siemens’ VAL 208 driver-less technology. The ground-breaking ceremony was held on July 26, 2007. It is scheduled to start commercial operation in May 2011.


 


Financing


The total project cost is estimated at W475bn (2004 fixed price), 48% of which will be subsidised by the Government. UJB LRT is the first PPI project with euro currency financing. The dual currency senior debt financing comprises three tranches: euro facility, Korean Won facility and standby credit facility. The standby credit facility will fund any shortfall in the government subsidies, MRG and working capital. Korean Won-euro cross currency and interest swap is in place for senior facility. The subordinated facility is extended by Korean financial investors. The support package provided by the sponsors under the UJB LRT is stronger than Yongin LRT. The sponsor support is given by the project sponsors (except for Siemens) to cover cost overruns. In addition, the sponsors provide completion guarantee and cash deficiency support (subject to a cap) to fund shortfalls in operating costs.


 


Construction and O&M


The construction is divided into two contracts: (1) EPC contract with Siemens, GS and other Korean construction companies covering both civil works and E&M works and (2) project management  agreement with Systra as the project manager. After completion, the project company has the discretion to appoint Systra as the O&M operator.


 


Two different models


Yongin LRT and UJB LRT are the two Korean LRT projects in which international companies have participated so far. Although Bombardier and Siemens are both leaders of LRT technology around the world, their investment models in Korea stand in stark contrast to each other. The main differences are summarised in Figure 1.



 

 


During the initial project solicitation and bidding stages, both Siemens and Bombardier took on the role of a project sponsor typical to a PPI project. Both companies played similar roles in preparing the bidding documents, liaising with the government, forming consortium, negotiating the concession terms, etc. However, during the negotiations process, Siemens divested itself of its sponsorship position and in effect, assumed the role of an equipment supplier.


These two models offer insight into how international LRT companies may participate in the Korean LRT market. In each of the four categories (equity investment, project construction, sponsor support, O&M), the level of project commitment and participation differ between the Yongin model and the UJB model.


 


Under the Yongin model, the international sponsor takes on the role of an active project sponsor, closely involved in all aspects of the project development process. As typically required in PPI projects, the sponsor will be expected to provide some form of sponsor support. However, it will have a share of the development profit as the project sponsor. In some cases, the international sponsor may also reap O&M benefits as the O&M operator during the concession period. In contrast, the international sponsor merely assumes the role of an equipment supplier in the UJB model. Because it is not a project sponsor and has no equity interest in the project, it will likely be exempted from obligations to provide sponsor support. It will not be exposed to project development risk and operation risk and, at the same time, will not share in any of the project upside.


 


Concluding remarks


Just in the Province of Kyonggi alone, there are more than 10 LRT projects being considered by local governments. It has been reported that some of the LRT systems will incorporate vehicles from Mitsubishi, Hitachi and Ansala. As noted in the introduction, Seoul Metropolitan Government has also announced plans to build seven new LRTs by 2017 at the total cost of about W4.73 trillion. When Seoul Metropolitan Government unveils its detailed plan in September 2007, we can expect higher level of activities among Korean construction companies to form consortiums with potential E&M contractors and rolling stock suppliers. Although there is a Korean rolling stock manufacturer, the preference is still in favour of international LRT technology. For international LRT companies considering the Korean market, the Yongin model and UJB model offer guidance on which investment model to follow in LRT projects in Korea.


 


Tom Shin, Partner, Lee & Ko, 11th Floor


Hanjin Main Building, 118 Namdaemunro-2ka


Chung-ku, Seoul, Korea.


Tel: +822 772 4363


Fax: +822 772 4001/2


Email: sws@leeko.com


Web: www.leeko.com


 



 


 

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