Loan Security for Gaesong-Bound Firms

The government has decided to provide enterprises entering the Gaesong Industrial Complex (GIC) with exceptional loan guarantees up to 10 billion won each. However, the idea to use the national budget for this purpose has been suspended for the time being. It seems that this decision is based on awareness of criticism that “aid to North Korea is recklessly generous” and the currently delicate atmosphere surrounding North Korea concerned with issues such as the missile test threats and the sixth anniversary of the June 15 Joint Declaration between the two Koreas.

Yesterday, the government held an economic policy coordination meeting, while relevant ministries such as the Ministry of Finance and Economy, the Ministry of Planning Budget, and the Ministry of Unification were participating. A decision was made that the Korea Credit Guarantee Fund (KCGF) offers each firm that opens a factory in the GIC exceptional guarantee money up to 10 billion won.

1.2 trillion won expected for the first stage of GIC project-

From the latter half of this year, the government will embark on the first stage of the GIC project in earnest. In addition to the model complex (28,000 pyeong, 15 companies) already in operation, 23 firms will launch their business in the GIC on 50,000 pyeong of land, and 570,000 pyeong of land will be sold during the first stage until 2007. According to the government’s prediction, more than 800 firms will enter the GIC once the first stage is done, and they might need about 1.2 trillion won for facility expenses and working capital.

However, in the inter-Korean economic cooperation fund, there is only 42.1 billion won left for loan use, and it could hardly be enough to support enterprises entering the GIC. Moreover, banks can’t provide financial support since they can’t take factories in the GIC as security for loans. Therefore, the government has set up a plan to establish a system in which private financial companies can give loans to firms entering the GIC by making the KCGF support those firms with exceptional guarantee up to 10 billion won.

Use of national budget and issue of disparity is in dispute-

Through documents the government distributed before the meeting, the government suggested an option to contribute the national funds to the KCGF. This paragraph, however, was deleted after the meeting.

The assistant director general of developmental strategy at MOFE, Ahn Gwang-myeong, said, “Although the concerned government organizations all agreed with the general direction, they decided to practically deliberate on how much of the budget should be used.” Since the option is not abolished but temporarily suspended, it is expected that the issue of investing additional budget for inter-Korean cooperative operations might cause disputes even from the deliberation process at the National Assembly. As 1.2 trillion won is required solely for the first stage, the cost won’t be cheap once the decision is made to use the budget.

Discrimination against other small and medium-sized enterprises running businesses in South Korea is another problem. According to the KCGF, from 2003 until last year, while 192.1 billion won for 3,360 cases of exceptional guarantees had been issued, they were limited to the few occasions when small and medium-sized firms were damaged by typhoons, forest fires, heavy snowfalls or the Daegu subway fire in 2003.

Han Dong-ahn, the KCGF team’s chief of public relations, said that “compared to other exceptional guarantees issued, this one (supporting companies entering the GIC) is indeed ‘exceptional.’”

In documents released at the meeting, the government provided the rationale for the support that “the GIC not only symbolizes the inter-Korean cooperation, but also grants a breakthrough for sustainable development to small and medium-sized enterprises, hence causing immense influence on our economy.”

Hyun-Jin Park witness@donga.com