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Zone struggles to lure foreign money

EVEN in a country known for economic miracles, trying to build the region's most competitive city from scratch looks ambitious.

But on a muddy patch of reclaimed land near South Korea's west coast port of Incheon, the skyline is already taking shape of a metropolis envisioned as a commerce center to rival Singapore or Shanghai, boasting a spotless environment and unrivalled quality of life.

With total building costs set to exceed US$20 billion, the Songdo International Business District is, according to its backers, the largest private development project ever undertaken.

Analysts however warn that South Korea's ambivalence toward foreign investment and the fallout from the financial crisis have also made it one of the more vulnerable.

Officials voice confidence over the future of Songdo and the Incheon Free Economic Zone (FEZ) of which it is part. According to Incheon FEZ Commissioner Heonseok Lee, the zone has attracted nearly US$60 billion in financing and investment commitments since it was established in 2003, offering tax incentives, subsidized office space and less rigid labor rules.

New York-based Gale International, which with South Korea's POSCO Engineering & Construction is Songdo's main developer, said work on the city is proceeding "at a consistent pace" thanks to financing secured from partners like Morgan Stanley before the downturn began.

The city plans to celebrate its official opening in August and by 2014 should include 4.6 million square meters of office space, 9,000 new homes, a 40.5-hectare park, top-ranked schools and a Jack Nicklaus-designed golf club.

The Incheon zone is the most prominent feature of an unprecedented drive to boost foreign direct investment (FDI).

Despite the uncertain economic environment, the government hopes to boost FDI by 7 percent this year to US$12.5 billion, with FEZs at the forefront of its strategy.

Authorities have designated six zones, each promising resident companies a similar package of cheap land, tax breaks and seamless infrastructure.

The costs to the government will be immense. But they are "the best way to make our country more competitive," an official at the Ministry of Knowledge Economy's FEZ planning office said.

In a place where foreign money can be a touchy subject, the zones allow the government to "experiment" with liberalization without fueling fear about opening all sectors at once.

Eventually, the official said, "the whole country will be like an FEZ."

There are signs progress may be far slower than hoped.

Despite the government designating three new FEZs last year, the amount of FDI pledges received in the first quarter posted the biggest drop in six years as the financial crisis pounded the local stock market and currency and kept investors away. Media reports have estimated FEZs are attracting as little as 2.5 percent of annual investment inflows.

The trophy Incheon zone had received just under US$500 million of a pledged US$6.6 billion in foreign direct investment as of the end of April, with Songdo developers Gale and POSCO accounting for a large share and some of the remainder tied to recession-hit firms such as General Motors.

There are concerns one of Songdo's crown jewels, an international school for children of foreign executives partnered with the US prestigious Milton Academy, may not be able to open on schedule in September due to a shortage of students.

"There's serious doubt whether Songdo would be developed as originally planned ... given the current economic crisis," said Soojong Kwak, a research fellow at the Seoul-based Samsung Economic Research Institute.

Kwak also said the sudden profusion of FEZs risked stoking "overheated competition."

Both the Incheon and Yellow Sea free economic zones are marketing themselves as high-tech and logistics centers, as is the Busan-Jinhae FEZ on South Korea's east coast, and the Gwangyang Bay Area FEZ to the south.

But the FDI campaign has won some converts. The Busan-Jinhae zone recently announced over US$50 million in investment commitments and Incheon FEZ will receive US$30 million this year from Berna Biotech Korea, a subsidiary of Netherlands-based biopharmaceutical company Crucell.


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