South Korean financial authorities have unveiled plans to reform project financing (PF) regulations. (Image courtesy of Yonhap)
SEOUL, Feb. 17 (Korea Bizwire) — South Korean financial authorities have unveiled plans to reform project financing (PF) regulations, significantly relaxing the strict completion guarantee requirements that construction companies have long argued were excessively burdensome.
According to financial authorities, the Financial Services Commission (FSC) shared a draft of improved completion guarantee guidelines with about 40 representatives from the construction and financial sectors during a meeting at the Construction Association Building on February 14.
Under the completion guarantee system, construction companies are obligated to complete projects within specified timeframes and ensure approval for use or construction completion. Financial institutions have traditionally required these guarantees, along with debt assumption provisions, as additional credit enhancements when providing PF loans, particularly given the financial vulnerability of small development companies.
Under current practices, if a construction company misses the completion deadline by even a single day, they become liable for the entire PF loan, which can amount to hundreds of billions of won. For instance, Construction Company A is currently in litigation with its creditors after being ordered to assume 83 billion won in debt for completing a logistics center in Danwon-gu, Ansan, just one day late.
The existing system also severely limited the circumstances under which completion deadlines could be extended. Unlike standard private construction contracts, which broadly recognize force majeure events, PF completion guarantees only acknowledged natural disasters and wars as valid reasons for extensions.
The new guidelines introduce a graduated system for debt assumption based on the length of delay. For delays up to 30 days, construction companies would be responsible for 20% of the debt; 40% for 30-60 days; 60% for 60-90 days; and the full amount for delays exceeding 90 days.
The reforms also expand the recognized causes for deadline extensions. These now include raw material supply disruptions, epidemics, and legislative changes affecting working hours, subject to government interpretation. Weather-related events such as typhoons, floods, heat waves, cold spells, and earthquakes can qualify for extensions based on meteorological standards and actual work stoppage periods.
The construction industry, which has struggled with significant debt assumptions due to completion guarantee violations amid this year’s economic downturn, expects the new measures to provide substantial financial relief.
However, some in the financial sector express concerns that these changes might further contract the already cautious PF loan market due to increased risks.
The FSC plans to finalize the guidelines next month after gathering industry feedback and incorporate them into the financial sector’s PF best practices.
“We aim to develop reasonable measures that minimize the contraction of financial sector PF investment while easing the excessive burden on the construction industry,” an FSC official said.
M. H. Lee (mhlee@koreabizwire.com)
