By Choi Sung-jin
Starting next year, Korean shipbuilders that make contracts on condition they receive 70 percent or more of payments after the delivery of vessels are unlikely to be eligible for financial support, officials said.
In other words, those shipyards whose receipts of advanced payment do not exceed 40 percent of the total contract amount will not be able to get funding support, they said. State-run lenders, such as the Export-Import Bank of Korea and Korea Development Bank, provide these support funds in the form of refund guarantees (RG).
An interagency committee comprised of government and bank officials will use the toughened funding criteria to assess the profitability of shipbuilding orders to be received from next month. It will ensure the portion of advanced payment is at least 40 percent of the total.
Shipbuilding had been one of Korea's thriving industries _ until it fell into a prolonged slump in the aftermath of the global financial crisis and consequent setback of the shipping sector. As large domestic companies staged cutthroat competition to get overseas orders, the portion of advances from customers continued to fall while that of post-delivery payment rose, in what industry insiders call the "heavy-tail" payment formula.
"The larger the share of post-delivery payment becomes, the bigger the incentives for foreign ship owners to cancel their orders placed," a government official said. "To keep this trend in check, we need a rule to stipulate the portion of advances received to 40 percent or higher.
The official noted that the comparable share has been in mid-30 percent range, on average, over the past five years, adding that the government's decision is due to the high losses resulting from contracts with a high portion of heavy-tail payment. "Some shipyards even signed contracts for offshore plants, LNG carriers and very large container carriers with the share of advanced payment at a mere 10-20 percent," he said.
The latest move is also aimed at preventing the aggravation of lenders' financial positions. The Exim Bank, for instance, issued 8.4 trillion won of refund guarantees last year and an additional 6.5 trillion won in the first 10 months of this year. Up to 8 trillion won was issued for the troubled Daewoo Shipbuilding & Marine Engineering. "If shipping companies withdraw their orders after paying 10-20 percent of the contract money in advances, the lending institutions' financial health can seriously deteriorate," the official said.
To keep the new standard from hurting the competitiveness of domestic shipyards, however, the committee will not apply it where Korean shipbuilders vie with Chinese and Japanese competitors, he said.
Starting next year, Korean shipbuilders that make contracts on condition they receive 70 percent or more of payments after the delivery of vessels are unlikely to be eligible for financial support, officials said.
In other words, those shipyards whose receipts of advanced payment do not exceed 40 percent of the total contract amount will not be able to get funding support, they said. State-run lenders, such as the Export-Import Bank of Korea and Korea Development Bank, provide these support funds in the form of refund guarantees (RG).
An interagency committee comprised of government and bank officials will use the toughened funding criteria to assess the profitability of shipbuilding orders to be received from next month. It will ensure the portion of advanced payment is at least 40 percent of the total.
Shipbuilding had been one of Korea's thriving industries _ until it fell into a prolonged slump in the aftermath of the global financial crisis and consequent setback of the shipping sector. As large domestic companies staged cutthroat competition to get overseas orders, the portion of advances from customers continued to fall while that of post-delivery payment rose, in what industry insiders call the "heavy-tail" payment formula.
"The larger the share of post-delivery payment becomes, the bigger the incentives for foreign ship owners to cancel their orders placed," a government official said. "To keep this trend in check, we need a rule to stipulate the portion of advances received to 40 percent or higher.
The official noted that the comparable share has been in mid-30 percent range, on average, over the past five years, adding that the government's decision is due to the high losses resulting from contracts with a high portion of heavy-tail payment. "Some shipyards even signed contracts for offshore plants, LNG carriers and very large container carriers with the share of advanced payment at a mere 10-20 percent," he said.
The latest move is also aimed at preventing the aggravation of lenders' financial positions. The Exim Bank, for instance, issued 8.4 trillion won of refund guarantees last year and an additional 6.5 trillion won in the first 10 months of this year. Up to 8 trillion won was issued for the troubled Daewoo Shipbuilding & Marine Engineering. "If shipping companies withdraw their orders after paying 10-20 percent of the contract money in advances, the lending institutions' financial health can seriously deteriorate," the official said.
To keep the new standard from hurting the competitiveness of domestic shipyards, however, the committee will not apply it where Korean shipbuilders vie with Chinese and Japanese competitors, he said.
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