SEOUL, Nov. 10 (Korea Bizwire) – South Korea’s state-run financial institutions will check the profitability of large overseas construction projects and shipbuilding orders to prevent local companies from winning contracts that will lead to losses down the road, the government said Tuesday.
In a meeting chaired by Finance Minister Choi Kyung-hwan in Seoul, senior officials pointed out that excessive competition to secure bids have eroded profitability, leading to the winners eventually losing money.
Choi said state financial institutions need to take on more responsibility in preventing companies from signing contracts that can lead to losses. Financial institutions can exercise leverage since they often provide funds for large projects as well as offer payment guarantees.
“Money losing projects can put pressure on financial institutions and if lenders are seriously hurt, this can be a burden for the economy as a whole,” the official, who doubles as deputy prime minister in charge of economic affairs stressed. “There is a need to fundamentally tackle this problem.”
The comments come as local companies have taken flak for undercutting prices to win orders. Such tactics, while helpful in securing orders, have exacerbated problems for local companies such as Daewoo Shipbuilding and Marine Engineering Co., which has agreed to undergo painful restructuring to cope with losses.
Related to problems facing local companies, the Export-Import Bank of Korea (Korea Eximbank), Korea Development Bank (KDB) and Korea Trade Insurance Corporation (K-sure) announced that they will mandatorily check profitability of large projects by strengthening the role of Korea Consulting Center for Overseas Infra & Plant Projects and the Marine Finance Center.
The Korea Eximbank, the KDB and K-sure also agreed to exchange information on large scale projects won by local companies.
On the changes being sought, a finance ministry official said the goal is to get companies to think of profitability when taking part in bids.
He emphasized that winning projects that lose money, not only hurts the company, but the industry as a whole because many South Korean companies actually compete with each other to win overseas projects.