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[Economic Opinion] Success of the K-New Deal Funds

The grand plan with specific details named the Overall Korean New Deal Project was authorized at the Ministerial Meeting on July 14, 2020. Under the three pillars of the Digital New Deal, Green New Deal and Human New Deal, the Project is targeting to create 1.9 million new jobs by 2025, with a total budget of KRW 160 trillion.

The Digital New Deal project, as its name portends, is about creating an efficient digital society through the accumulation of data, enhancement of convergence in economy, building digital infrastructure, and technology development in AI and 5G. The total budget for this five-year project is KRW 58 trillion, among which KRW 45 trillion is government appropriation. The Green New Deal Project aims to make an eco-friendly community by encouraging environmental protection, renewable energy, and the green industry. This project will take up more than KRW 73 trillion for the five years, of which KRW 43 trillion is subscribed by government resources. With both the Digital and Green New Deals requiring KRW 130 trillion, equivalent to a quarter of the annual budget, one of the critical challenges of the Project is how to amass such huge sums of money in times of global economic sluggishness and financial stress.

Understanding the weight of the financial burden, the Korean government has decided to actively utilize abundant sources of funds in the private fund markets as well as mobilize public sources. In order to channel public financial resources to the New Deal Project, the government and the national banks first will establish a special purpose company, namely a fund, called the Policy ND Fund (PNDF, hereafter) with the total capitalization of KRW 7 trillion, subscribed KRW 3 trillion by the government and KRW 4 trillion by the national banks. This PNDF will set up a series of subsidiary funds for the specific purpose to invest in either ND firms, ND projects or ND venture firms. In fact, the government in the past used to adopt this method of creating funds for special policies or construction infrastructure. For example, the specific public funds for helping SMEs was established in 2005 with a total subscription of KRW 25 trillion, and another special purpose fund for a smart Korea and the development of raw material and parts were created in 2020.

However, more important than this KRW 7 trillion PNDF is the private source fund, which is generally called the New Deal Infra Fund (NDIF) and the public New Deal Fund (NDF). The government is expecting to tap KRW 13 trillion for the NDIF and NDF from the private sources like commercial banks, investment banks, pension funds and the general public. Nonetheless, such private funds have been neither popular nor successful as the public funds. The main reason for the relative weakness in the private funds popularity rests on the potential risks, which is well covered by the government in the case of public funds. This time also, the government is willing to bear the substantial extent of risks in the case of the PNDF’s subsidiary funds. But there seems to be no public protection or its guarantee of the investment capital in the private NDFs. In the case of existing built-to-lease (BTL) or built-to-operate (BTO) projects, there has been the legal protection of capital investment up to a certain level, usually KRW 500 billion in the construction of basic industrial infrastructure, but there is no specific such guarantee so far this time in NDF.

Another aspect lowering private participation in the NDF is that the government is not ‘pin-pointing’ new deal firms nor new deal projects for the fund investment. The government will announce the areas or the fields appertaining to the Digital or Green New Deal. The reason behind this lack of specificity is clear. The government is not willing to give a false impression of helping a certain firms or specific projects through either PNDF or NDF, which is understandable.

Then, the only incentive left for the good of NDF is the 9 percent withholding income tax for five years of the dividends of up to KRW 200 million investments. It is definitely lower than 14 percent income tax rate for the general interest or dividend income, but seems like a very thin incentive for such a grand and national project like the Korean New Deal. Considering the depths of the COVID-19 pandemic and the urgency of the success of national new deal projects like the K-New Deal, there has to be no room for doubt or murkiness in the financing for the New Deal funds. That is exactly why more drastic incentives should be given to the funds, especially the private NDFs. A couple of major private asset management companies have already announced to establish NDFs so far, but more active participation by other investment banks and retirement funds are crucial not just for the fund’s sake but for the Korean New Deal itself.

The Ministry of Economy and Finance will soon announce a guideline for the Korean New Deal fund investing companies and projects. It is expected that PNDFs will be on the market probably early next year after careful preparation this year. Mostly accommodative to government policy, there seems not to be any trouble in PNDFs. It is the voluntary NDFs issued and marketed by the private sector, which is about twice bigger than the public twin that concerns many people in the government. If it is hoped that the NDFs be as successful as some of the recent IPOs like Kakao Games or Big Hit Enterprise, the incentives for Korean New Deal should be as welcomed as such IPOs.

By Professor Se Don Shin
Dean, Sookmyung Women’s University

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA

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