Policy Issues - Korean New Deal Fund

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    Background: Korean New Deal

    • The government unveiled its national development strategy called the Korean New Deal (K-New Deal) on July 14, 2020, which aims to lead the transformation of the Korean economy in the post-COVID-19 era. The K-New Deal has three key objectives – (a) creating jobs in both traditional and newly emerging digital and green sectors, (b) building necessary infrastructures that will facilitate a transition to a digital and green economy and (c) transforming the Korean economy from a ‘fast follower’ to a ‘first mover’ economy in the post-COVID-19 era. The structural changes inflicted by the COVID-19 pandemic, such as the rising demand for contactless or ‘untact’ services, as well as for a low-carbon and eco-friendly economy, and the need to adapt to changes in socioeconomic structures and the labor market, make it necessary to pursue the K-New Deal

      The K-New Deal consists of the Digital New Deal, Green New Deal and stronger safety net. The Digital New Deal focuses on building digital infrastructures in DNA (data, network and artificial intelligence) sectors while promoting a digital transformation in education infrastructure and other ‘untact’ industries. The Green New Deal aims to shift the Korean economy from a carbon-intensive to a green economy by promoting the use of low-carbon and decentralized energy and making infrastructures more eco-friendly and energy-efficient. At the same time, the K-New Deal also seeks to provide stronger employment and social safety net and boost investment in human capital. The government estimates that the K-New Deal projects will cost approximately KRW160 trillion until 2025 and create about 1.9 million new jobs. Against this backdrop, the government announced its plans to establish the ‘Korean New Deal fund’ to facilitate the funding of the K-New Deal projects and beyond.

    Overview

    • The ‘K-New Deal fund’ aims to (i) provide strong funding support for the New Deal projects, (ii) help channel abundant market liquidity to productive sectors and (iii) make profit sharing from K-New Deal investment projects more widely available to the general public.

      To provide sustainable and sufficient funding for the K-New Deal projects, it is necessary to establish a self-sustaining and thriving New Deal eco-system driven by private sector investment, while the government provides a pump-priming role to encourage more private sector investments

      To this end, the government introduced its plans for creating the ‘K-New Deal fund,’ which consists of the following three key pillars.
      • (a) Launching a KRW20 trillion public sector led New Deal fund
      • (b) Promoting New Deal SOC investment funds
      • (c) Boosting private sector investments in New Deal projects

      At the 1st Korean New Deal Strategy Meeting chaired by President Moon Jae-in on September 3, President Moon noted the significance of the KRW100 trillion commitment made by policy banks in lending support for New Deal projects and businesses and of the KRW70 trillion investment commitment made by major financial holding groups over the next five years. At the meeting, President Moon said that “The Korean New Deal will open the future of Korea’s economy through the New Deal Fund and New Deal Finance.”
    • overview of korea new deal fund

    3 Key Pillars of K-New Deal Fund

    I. PUBLIC SECTOR LED NEW DEAL FUND

    • The public sector led New Deal fund will be created in the amount of KRW20 trillion for 2021-2025. Over the next five years, the government and state-backed financial institutions including the ‘growth ladder fund’ will invest KRW3 trillion and KRW4 trillion each to launch a KRW7 trillion master fund (fund-of-funds) which will make up about 35 percent of the public sector led New Deal fund. The private sector financial institutions, pension funds and the general public will then contribute KRW13 trillion in matching investments over the same period to create feeder funds which will represent about 65 percent of the total fund size. The master fund financed by the public sector will serve as a backstop to absorb part of losses first, lessening investment risks of private sector investors.

      The New Deal fund will invest in wide-ranging areas of New Deal projects and businesses through various investment methods, such as equity investments and loans. By providing the general public with opportunities to invest in K-New Deal projects through public offerings at lower risk, the New Deal fund encourages active participation from retail investors. In order to guarantee effective funding supply, investments will take the form of both project-based and blind-pool funds, and the feeder funds’ structures will be diversified according to expected investment risks.

    II. PROMOTE NEW DEAL SOC INVESTMENT FUNDS

    • The second pillar of the K-New Deal fund focuses on SOC investment related to both Digital and Green New Deal projects. As such, the New Deal SOC investment funds will invest in digital SOC safety management system, smart collective warehousing solutions, data centers, ‘contactless’ business facilities, development of new renewable energy sources, green smart schools, hydrogen fueling stations, etc.

      The public sector led master fund and SOC investment funds that have been created and managed by private sector entities will be utilized to create the New Deal SOC investment funds. In order to promote private sector investments, tax incentives will be provided in the form of separate taxation at a low tax rate (9 percent) on dividend income earned from K-New Deal SOC investment funds. As in the case of the public sector led New Deal fund, the public sector led master fund will help absorb investment risks through a subordinated investment position. Tax incentives in this regard will be restricted only to investments made to public equity funds to promote active participation by retail investors in the SOC investment fund market, which has been traditionally dominated by institutional investor activities. The government also plans to set up rules to promote SOC investment by pension funds. The public sector led master fund and SOC investment funds that have been created and managed by private sector entities will be utilized to create the New Deal SOC investment funds. In order to promote private sector investments, tax incentives will be provided in the form of separate taxation at a low tax rate (9 percent) on dividend income earned from K-New Deal SOC investment funds. As in the case of the public sector led New Deal fund, the public sector led master fund will help absorb investment risks through a subordinated investment position. Tax incentives in this regard will be restricted only to investments made to public equity funds to promote active participation by retail investors in the SOC investment fund market, which has been traditionally dominated by institutional investor activities. The government also plans to set up rules to promote SOC investment by pension funds.

    III. BOOST PRIVATE SECTOR INVESTMENTS IN NEW DEAL PROJECTS

    • Creating conditions for the development of private sector New Deal funds based on the ingenuity and autonomy of the private sector is an important task. As such, the government will encourage private sector financial institutions to search for promising New deal investment projects and create funds to supply private sector capital. To this end, the government will operate on-site support teams to provide assistance and help remove obstacles for financial institutions carrying out investments in K-New Deal projects. At the same time, the government will work to improve regulations to promote RE100 and ESG investment. Retail investors will then have an opportunity to invest in these privately run New Deal funds according to their risk appetite and share profits from K-New Deal projects.

    KRX Launches BBIG K-New Deal Indexes

    • As part of the industry-wide support for the K-New Deal initiative, the Korea Exchange (KRX) launched five new indexes on September 7, made up of 40 blue chip stocks that are deemed as essential to K-New Deal projects. The five new indexes will be made up of stocks in the secondary battery, bio, internet and gaming (BBIG) industries and will include a comprehensive BBIG index encompassing all four sectors. As of the end of August 2020, market capitalization of ten major stocks in the BBIG sectors made up KRW322 trillion (or representing about 20.4 percent share of KOSPI). Since 2015, the average annual yield of the BBIG indexes hovered around 30 percent, showing a significant outperformance in comparison to that of the average KOSPI index of about 3 percent. KRX also plans to develop the “carbon-efficiency Green New Deal index” in October this year to help promote businesses make a transition to an eco-friendly and low-carbon business environment.

    K-New Deal Finance

    • In order to help stimulate private sector investment in K-New Deal projects and relevant businesses, the government will expand financing support through state-backed financial institutions while improving regulations.

    I. EXPAND THE ROLE OF STATE-BACKED FINANCIAL INSTITUTIONS

    • State-backed financial institutions will increase K-New Deal project financing to more than 12 percent by 2025 (8.4% in 2019 → 10% in 2022 → 12% in 2025). Through targeted loan programs and special guarantees, state-backed financial institutions will make available KRW100 trillion in low-cost lending support over a five-year period (KRW1 trillion by KDB, KRW69 trillion by KDB, IBK & KEXIM and KRW30 trillion by KODIT).

      As part of the government-wide plans to cultivate one thousand innovative firms (click to see details), the government will also provide targeted support to selective firms in K-New Deal sectors by designating more than 60 percent of businesses from K-New Deal sectors in Q4 2020.

    II. IMPROVE REGULATIONS TO FACILITATE PRIVATE SECTOR INVESTMENT

    • The government will work to improve rules and regulations to facilitate a growth of private sector investment and capital injection into the K-New Deal sectors.

    III. PROMOTE PROJECT FINANCING ASSET-BACKED SECURITIES

    • The government will work to improve rules and regulations to facilitate a growth of private sector investment and capital injection into the K-New Deal sectors.

    IV. BOOST LENDING SUPPORT FOR NEW DEAL PROJECTS

    • Major financial holding groups announced their plans to make more than KRW70 trillion available over the next five years in support of the government’s K-New Deal initiative. In this regard, the government will work to create an environment to facilitate investments from financial institutions, boost support for digital finance and develop a self-sustainable and thriving ecosystem for K-New Deal sectors.

    Last updated: Sep. 8, 2020