hankyoreh

By Jung Tae-woo and Park Ki-yong, staff reporters

The Macquarie Korea Infrastructure Fund (MKIF) appears poised to pull out of the Seoul Subway Line 9 as early as the end of this month.

The decision comes after the company, which is a major player in foreign private infrastructure projects in South Korea, placed a growing financial burden on the city through minimum revenue guarantees (MRGs) that had to be paid regardless of the amount of revenue generated by Subway Line 9. If Macquarie does indeed withdraw, it would be the first time in the history of Seoul that a private infrastructure provider has pulled out.

On Aug. 7, a high-ranking official with the city told reporters that negotiations for MKIF and Hyundai Rotem to sell off their 49.5% share of Line 9 were in their final stages.

“The next investor will be selected as early as the end of this month,” the official said.

A South Korean consortium made up of two asset management companies (one identified by the initial “S”) and three insurance companies (one a life insurance company identified as “H”) is set to participate as a new investor in the subway line. Negotiations between MKIF and the South Korean consortium on pricing are currently under way. The asking price is estimated to be between 700 billion and 800 billion won (US$630-720 million). A citizen fund, with investment from the general public, is also being pushed, with a target amount of 100 billion won (US$90 million).

MKIF invested just 663.1 billion won (US$595 million) of the 3,568.8 billion won (US$3.2 billion) in total construction costs for Line 9. But because of the MRG system guaranteeing a certain rate of return even if ridership is lower than predicted, the city has had to pay the company tens of millions of dollars each year. MKIF and other investors made 13.1 billion won (US$11.8 million) from the line in 2010, 29.2 billion won (US$26.2 million) in 2011, and 38.4 billion won (US$34.5 million).

The company also ended up locking horns with the city after attempting to unilaterally pass a fare hike in April 2012. A legal battle is currently under way.

Initially, the MRG system was seen as an unavoidable way of attracting foreign investors. But it quickly became the subject of public scorn after evidence surfaced showing that local governments would have to pay the difference between predicted and actual rates of usage for decades to come. The rates that were initially predicted were often unrealistically optimistic.

As “mediator” for the MKIF selloff, Seoul City Government is also pushing for a “restructuring” of the subway line, emphasizing its public service character by beefing up the city’s oversight authority in enforcing agreements signed with new investors. In particular, it plans to do away with the now-notorious MRGs and stipulate its own authority to set fares and appoint directors. A “public interest director” is also set to participate in board meetings with the existing directors. The aim is to prevent new investors from interfering with the line’s management through indirect investment.

But the biggest change is a deep cut in the rate of return guaranteed to private investors, from its current annual level of just over 13% (8.9% after taxes) all the way down to just under 4%.

“Taking inflation into account, the actual rate of return is probably going to be in the 2% range,” a Seoul City Government official said.

MKIF’s decision to pull out of Line 9 brings its total of South Korean infrastructure investments down from 13 to 12. It marks a second high-profile withdrawal after MKIF sold off its shares in the Daegu East Circular Road to four South Korean insurance companies, including Korea Life (now known as Hanhwa Life Insurance), in June 2012.

The decision could foreshadow a more general retreat from South Korea by Macquarie, which has been investing in major social overhead capital projects over the past decade or so.

An important factor in the decision was the public’s anger over the revenue structure, which is widely seen as excessive and unsuited to new financial situation. Many blasted what they saw as an unfair agreement that saw MKIF earning over one trillion won (US$900 million) over the past five years in loss compensation from its infrastructure investments.

The question now is whether this new agreement will sufficiently guarantee the public interest. This explains why so much attention is focusing on the negotiations: the terms of the new contract would have strong implications for other local governments currently renegotiating with MKIF, as well as Seoul’s own light rail project.

Kang Hee-yong, a Seoul Metropolitan Council member who has been among the most vocal critics of “special treatment” in private infrastructure projects, said MRGs were just part of the problem.

“You’ve also got high-interest subordinated security bonds, along with major shareholders drumming up profits through management and maintenance companies,” Kang said. “Unless we make improvements, the deficit is going to skyrocket going ahead. That’s what we need to focus on in this restructuring.”

Please direct questions or comments to [english@hani.co.kr]