Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4671-KO MEMORANDUM AND RECOMMENDATION OF THE ?RESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USt5O MILLION TO THE KOREA TECHNOLOGY DEVELOPMENT CORPORATION WITH THE GUARANTEE OF THE REPUBLIC OF KOREA FOR A THIRD TECHNOLOGY DEVELOPMENT PROJECT / January 20, 1988 This document has a resticted distrtion nd may be used by recipients only in the perfomance of their official duties. Its content may not otherwise be disclosed wthout Wodd Bank authorization. CURRENCY EQUIVALENTS (As of July 1987) Currency Unit - Von (W) US$1 - V 800 US$1 million - W 0.8 oillion W1 - US$0.00125 Wi million - US$1,250 VI billion - US$1,250,000 FISCAL YEAR Government of Korea and KTDC January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED lTD 'Industrial Technology Development KTDC Korea Technology Development Corporation MTIC Korea Technology Investment Corporation R&D Research and Development sm1 Small and Medium Industry FOR omCAL USE ONLY KOREA THIRD TECHNOLOGY DEVELOPMENT PROJECT Loan and Proiect Summary Borrower: Korea Technology Development Corporation (KTDC) Guarantor: Republic of Korea Loan Amounts US$50 million equivalent Terms: 11 years, including a grace period of 5 years, at the standard variable interest rate. Relending Terms: KTDC would pass on the proceeds of the Bank loan to the final beneficiaries using the following financial instruments: (a) conventional loans to subborrowers with a maximum term c. 10 years including three years grace at interest rates which provide adequate spreads to KTDC; (b) conditional loans that would provide KTDC with a partial claim on sales revenues in the case of successful projects but, if no sales revenues are generated, would allow KTDC to recover only a portion (commonly 302) of the loan; (c) equity participation in companies set up to commercialize the results of research and development; and (d) leasing of equipment (purchased with loan funds) for use in industrial technology development projects. For at least 802 of loan funds, the foreign exchange risk would be borne by the subborrowers. KTDC would, however, offer an option to certain small- and medium-scale industries which could pay KTDC a premium to bear the foreign exchange risk. For the inherently risky equity investments and conditional loans, KTDC would bear the foreign exchange risk. IThisdocument has a mtricted distribution and may be mm, :Y ocipients only in the performance of their fticl dutieL Its contents may not otherwihebe disclsed without World bankauthonzadon.| - ii - Financins Plan 1988-91 USS million Equity Private 22.0 Asian Development Bank 3.0 Subtotal 25.0 KTDC Internal Cash Generation 49.0 Long-term Loans Government 75.0 KTDC debentures 48.7 World Bank loans 61.9 la Other sources 51.7 /b Subtotal 237.3 Collections 322.0 Total 633.3 Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 7019-KO Map; IBRD 20234 La Includes Bank loan pr:oceeds remaining from the Second Technology Development Project (Loan 2473-KO). /b Expected local and foreign commercial borrowings. A MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TEE KOREAN TECHNOLOGY DEVELOPMENT CORPORATION FOR A THIRD TECHNOLOGY DEVELOPMENT PROJECT * 1. The following memorandum and recommendation on a proposed loan for US$50 million to the Korea Technology Development Corporation (KTDC), with the guarantee of the Republic of Korea, is submitted for approval. The proposed * loan would be for a term of 11 years including 5 years of grace at the Bank's standard variable interest rate and would help finance a third technology development project. 2. Background. Initially, Korea's impressive post-war industrial development took advantage of superior labor produetivity and organization skills. Since the early 1970s, the Government has recognized the need to deepen the country's industrial base and to promote industrial technology development (ITD). Consequently, science and technology infrastructure, including facilities and programs for research, standards, testing, and technical education, were developed and a range of fiscal incentives were provided to industry for carrying out research and development (R&D). To help finance ITD, KTDC was established in 1981. Since then, the Government has liberalized restrictions on technology i-',orts and foreign investment, and provided incentives for stimulating ventare capital investment. With Bank assistance under two previous projects, KTDC has developed into the country's leading financial agency for ITD. In view of the important role that small- and medium-scale industries (SMI) can play in many industrial subsectors, as well as their growing demand for financing of ITD, KTDC's lending has increasingly gone to SMI, which in 1986 received more than three quarters of KTDC's total amount of financing. KTDC's success has in par- stimulated the formation of venture capital companies and its expertise has )een widely tapped by industry, prompting Government to delegate to KTDC responsibility for appraising nationally-funded R&D projects. While KTDC is far less rigid and conservative than much of Korea's financial sector, it has on'y recently become venturesome in supporting an increasing proportion of higher-risk projects. . 3. Rationale for Bank Involvement. Continued Bank support to KTDC is in line with Bank recommendations to move Korean industrial policy away from one in which the Government takes the lead in "picking winners" toward one which emphasizes functional intervention in such areas as ITD and development of SMI and venture capital, where market imperfections and externalities exist. Assistance to KTDC complements Bank involvement in science and technology education and support for SMIs, including technology extension. The Bank can also help KTDC manage its transition from a mixed public-private enterprise dependent on government support to a private finance company with limited government assistance in an increasingly liberalized financial sector. For its part, KTDC desires continued association with the Bank to gain advice on divestiture procedures and to assist it in mobilizing increased private sector - 2 - funds. Bank involvement, although somewhat small in relation to KTDC's overall operations, will be directed toward helping KTDC maintain its leadership role as a model ITD financial institution. For the Bank itself, experience gained in the course of KTDC's further development and the progress of ITD in Korea would be useful in assisting other countries planning to embark on similar efforts. 4. Proiect Obiectives. The proposed project would build on the accomplishments of previous Bank projects aiding Korea to foster the transformation of its industrial structure. The project aims to further strengthen KTDC by helping the Corporation and its newly-established venture capital subsidiary, the Korea Technology Investment Corporation (KTIC), to expand gradually into projects with greater risk and to adjust to a changing financial market and industrial environment. 5. Project Description. The project would consist of: (a) financing KTDC and KTIC lending to enterprises for the import, adaptation, and development of industrial technology; (b) assistance to KTDC in upgrading its project appraisal and supervision capabilities, especially for nrojects involving risk-sharing financial instruments (i.e., conditional loans and equity investment); and (c) assistance to KTDC in the development of KTIC. The project would finance the costs of goods and services needed for technology subprojects carried out by firms and financed by KTDC. The majority would be imported, although locally-manufactured equipment purchased by SMIs would also be eligible for partial financing. Project funds would largely be on-lent on conventional terms which provide dn adequate spread to KTDC. A small percentage of the loan is expected to be used for leasing operations, and possibly, for conditional loans and equity investments. Between 1988 and 191, KTDC's total financing would be US$633 million, of which the Bank would provide nearly 10X. A breakdown of the financing plan is presented in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule, are shown in Schedule B. A timetable of key project procesaing events and the status of Bank Group operations in Korea are shown in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report, No. 7019, dated January 20,1988 is also attached. 6. Agreed Actions. Agreement has been reached with Government on (a) exchanging views with the Bank on the conditions and transition arrangements for the divestiture of KTDC; (b) providing KTDC with loans of W 27 billion in 1988, ar.u (c) providing guarantees to KTDC debentures for W 10 billion in 1988. Agreement with KTDC has been reached on: (a) carrying out the project in accordance with its key operating policy documents, including the Institutional Policy Statement agreed at negotiations; (b) reviewing annually with the Bank, various operational and financial plans and programs, particularly, those for staff training, portfolio monitoring system, support to SMI, interest rate policy, and the use of various financial instruments; and (c) maintaining its debtlequity ratio within the maximum limit of 6:1. In addition, the loan would be made effective after KTDC adopts the Institutional Policy Statement. 7. Benefits. The proposed project would continue the institutional development of KTDC under the country's changing regulatory,' policy, economic and financial environment. It would also support more rapid ITD, especially in SMIs and component industries of key subsectors like automobiles and -3- electronics manufacturing. The increased availability of funds by ITD would encourage greater and earlier technological improvements and development in Korea's most important industries thus maintaining the country's longer-term industrial competitiveness. The project would also encourage the continued testing of various financial instruments for supporting ITD. 8. Risks. The-project involves no major risks. KTDC management and staff have shown the resolve and entrepreneurship to develop KTDC into a prime ITD financing organization. Regular exchange of views with the Bank in the course of the project should aid in KTDC's adjustments to the changing economic and financial environment. After government divestiture. continued KTDC leadership in ITD financing would be safeguarded through the maintenance of KTDC's existing policies. 9. Recoumendation. I dm satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington. D.C. January 20, 1988 c -4. Schedule A KOREA THIRD.TECHNOLOGY DEVELOPMENT PROJECT Financint Plan (1988-91) V billion US$ million 2- Equity Private 17.6 22.0 3.5 Asian Development Barak 2.4 3.0 0.4 Subtoal 20.0 25.0 3.9 KTDC Internal Cash Generation 39.2 49.0 7.7 Long-term Loans Government 60.0 75.0 11.8 KTDC debentures 39.0 48.7 7.7 World Bank loans 49.5_ja 61.9 9.8 Other sources 41.4 lb 51.7 8.2 Subtotal 189.f 237.3 37.5 Collections 257.6 322.0 50.9 Total Financing Required 506.7 633.3 100.0 /a Includes Bank loan proceeds remaining from the Second Technology Development Project (Loan 2473-KO). /b Expected local and foreign commercial borrowings. Schedule B KOREA THIRD TECHNOLOGY DEVELOPMENT PROJECT Procurement Method and Disbursements Since most KTDC zabloans are relatively small (US$440,000 equivalent, on average) and finance many hardware and software iters. available only from a limited number of suppliers, procurement w=der the f.rqt and second Bank- assisted ITD projects was carried out through internatianal or local shopping in accordance with standard procedures acceptable to the Bank. This would be continued under the proposed project and would apply to leasing operations as well. Disbursements The proposed Bank loan would be disbursed against: (a) 1002 of foreign exchange expenditures for directly imported goods and services for subloans, (b) 1002 of total expenditures for consulting services and overseas training for KTDC, and (c) 602 of local expenditures for and services procured locally for subloans. Item (c) would not be available for large corporations. All subloans below US$250,000 equivalent as well as consulting services and overseas training for KTDC would be disbursed against statements of expenditures (SOEs). Related documents would be retained by KTDC and made available for inspection by Bank supervision missions. Subloans for amounts above US$250,000 equivalent would require full documentation. A special account for US$5 million equivalent would be established to facilitate the disbursement process. Estimated Bank Disbursements Bank Fiscal Year 1988 1989 1990 1991 1992 --US$ million ----------- Annual '.0 7.0 15.0 13.5 9.5 Cumulative 5.0 12.0 27.0 40.5 50.0 -6- Schedule C THIRD TECHNOLOGY DEVELOPMENS PROJECT Timetable of Rey Proiect Processing Events (a) Time taken to prepare: Eight months (b) Prepared by: KTDC with Bank assistance (c) First Bank missionz May 1987 (d) Appraisal mission departure: June 1987 (e) Negotiations: December 7-10, 1987 (f) Planned Date of Effectiveness: June 30, 1988 - 7 Schedule n Page 1 of 2 TRE STATUS OF BMNK GROUP OPMATIONS IN THE REPUBLIC OF KORIA /a A. Statement of Bank Loans and IDA Credits (as of September 30, 1987) Loan or Amount (S million) Credit '.lendar (less cancellations) Nuaber Year Borrower Purpose Bank TV rDA UndIsbursed Sixty-four loans and eight credits fully disbursed 3,962.86 40.00 113.58 1774 1979 Republic of Korea Population 1 30.00 - - 4.12 2072 1982 Republic of Rorea Water Supply 83.01 - - 0.72 2215 1982 Republic of Korea M1chinery Industry 56.99 - - 10.99 2228 1982 Republic of Korea Provxncial and County Roads 125.00 - - 29.00 2267 1983 Republic of Korea Coal and Cement Distribution 54.45 - - 4.71 2309 1983 Republic of Korea Industrial Finance 255.00 - - 1.69 2350 1983 Republic of Korea Second Water Supply 63.80 - - 13.58 2388 1984 Republic of Korea Jeonju Regional Development 44.31 - - 24.25 2392 1984 Republic of Korea Highway Sector 220.00 - - 61.75 242' 1984 Republic of Korea Education Sector 100.00 - - 54.14 2473 1984 KTDC Second Technology Developmsnt 50.00 - - 14.49 2491 1985 Republic of Korea Water Supply 95.00 - - 40.31 2514 1985 SG Urban Transportation 28.76 - - 19.68 2515 1985 S4IPC Small/Y4diun Industry 21.00 - - 12.27 2549 1985 Republic of Korea Fourth Agricultural Credit 25.00 - - 2.79 2571 198S Republic of Korea Second Industrial finance 222.00 - - 133.05 2600 1985 Republic of Korea Seoul-Dusan Corridor 3S.59 - - 19.78 261S 1985 Republic of Korea Fourth Water Supply 35.74 - - 28.95 2671 1986 KEPCO Second Power 230.00 - - 141.51 2704 1986 KLDC Urban Land Development 150.00 - - 130.81 2726 hlii Republic of Korea Pusan Port 134.50 - - 117.10 2801 1987 Pusan City Govt. Pusan Urban Management 50.00 - - 43.98 2853 1987 Republic of Korea Rousing Finance Sector 150.00 - - 150.00 Total 6,223.01 40.00 115.58 l.n59.67 Of which has been repaid 1,839.90 7.80 11.06 Total Now Outstanding 4,383.11 32.20 104.52 Less: Amount sold 104.03 Total Now Held by Bank and IDA (prior to exchange adjustment) 4.279.08 32.20 104.52 Total Undisbursed 1,059.67 - - 1,059.67 /a The status of the projects listed in Part A are described in a separate report on all Bank/IDA-finenced projects tn execution, which is updated twice vearly and circulated to the Executive Directors on April 30 and October 31. Schedule 0 S. Statement of UIC tnveetnents (tA of September 30. 1987 Flscai ~iAount (S ailton) Year Obligor Types of Business Lon LEquity Tot*& 1968 RLB (KDFC) Development Financing - 0.7 0.7 1969 Ronan Sllk Co. Textiles 1.4 0.3 1.7 1470 Atlas Paper Pulp and paper 4.5 0.5 5.0/s 1971 Korea tnveotment Finance Corp. Capital Market Development - 0.7 0.1 1974 RL8 (KDFC) Development Financing - 0.4 0.4 1974 Korea Investment flnance Corp. Capital Market Development - 0.3 0.3 1975 Cold Star & Co. Ltd. Electronic Products 16.0 1.3 17.3 1975 Korea Securities Finance Corp. Capital Market Developmnt 3.0 0.6 5.6 1975 Tong Yang Nylon Company, Ltd. Synthetic Fibers 6.9 2.7 9.6 1975 Rae Un Dae Develop- ment CoMpany Ltd. Tourism 2.8 0.7 3.5 1976 Korea Investment Finance Corp. Capital MArket Development - 0.4 0.4 1976/ S4/87 Chonju Paper Mfg. Co. Paper 5.0 1.0 6.0 1976/86 Korea Zinc. Co. Ltd. Zinc 21.0 4.0 25.0 1976 ILB (KDFC) Development Financing 17.8 - 17.8 1976 Cold Star S Co. Ltd. Electronlc Products 10.0 0.4 10.4 1977 Gold Star & Co. Ltd. Electronic Products - 0.2 0.2 1977 KLB (RDFC) Develoapnt Financing - 0.3 0.3 1977 Korea Securities Finance Corp. Capital Market - 0.5 0.5 1977 Korea Development Leasing Corp. Capital Market IS.O 0.4 15.4 1978 KLB (KDOC) Development Financiag - 1.1 1.1 1979 Cold Star & Co. Ltd. Electronic Products - 1.7 1.7 1979 KIFC Capital Mafket - 0.6 0.6 1979 Korea Development Leasing Corp - 0.5 0.5 1979 Cold Star & Co. Ltd. Electronic Products - 1.5 1.5 1980/84 85/87 Gold Star & Co. Ltd. Electronic Products - 11.5 8.1 1980 Korea investment Finance Corp. Capital Market - 0.6 0.6 1980/ Korea Securities 82/84 Finance Corp. - 2.3 2.3 1980 RLB (RDPC) Development Financing - 2.2 2.2 198! Talhan Bulk Termlial Co. Ltd. Grain Pott Terminal 7.0 2.S 9.5 1982/85 KIFC Capltal Market - 1.1 1.1 1982 K-TAC (Korea Technology Advancement Corp.) Research & Development - 0.6 0.6 1983/85 XDIC Money 6 Capital Market - 5.9 5.9 1964 H lla Cement Cemnt Conast. Material 4.3 3.9 8.2 1985/86 Korea Fund Money 6 Capital Market - 12.8 12.8 1987 Korea Business 6 Re- search Information Money and Capital Market - 0.1 0.1 Total Gross Comitments 116.7 64.3 181.0 Less cancellations, termlnations repaymaent and sales 108.1 32.6 140.7 Total Commitments Now Reld by lIC 8.6 31.7 40.3 Total Undisbursed 1.0 3.5 4.5 a Cancelled at the request of the Company. IBRD 20234 se-,'jUS$R i ,- AI 3,.1 - DEMOCRATIC PEOPLE'S REPUBLIC I CHINA S OF KOREA 13. r - REA JAPAN N -> gCHONt \ . ( * ' K NGA ON W- .; { DO' ) '< / , A O DO - is rt- 125 ~~~~~12VL w~~~~~~~~~~~~~~~~~~~~~~~~~ie § ' . - REPUBUC OF ~~~~~~~~~~~GBKO E 3$- -35. D p v l ~~~~~~~~~~~Prmy Rod _- s -. - , -- Raros N~~~~~~A N . - - ailroods Under ConstruWtion 4 AIrports .~~~~~~~~~~~~~C: ?spt ati OSpecilCI1W -Province BowkW ch* Wormmwml~~~~~~_ nc Soandades 0 20 *0, # !* 120 s* *o - 12, S'* 12,tw I7}7M 1 1998 MARCH 1987