Gas power plant, nuclear facility among leading candidates; US demands add uncertainty

Minister of Trade, Industry and Energy Kim Jung-kwan attends the G20 Ministers for the Digital Economy meeting in Chapel Hill, North Carolina, on Tuesday (local time). [Ministry of Trade, Industry and Energy]
Minister of Trade, Industry and Energy Kim Jung-kwan attends the G20 Ministers for the Digital Economy meeting in Chapel Hill, North Carolina, on Tuesday (local time). [Ministry of Trade, Industry and Energy]

South Korea is expected to unveil its first US-bound investment project as early as this week.

Seoul incorporated safeguard provisions into the Korea-US Strategic Investment MOU signed last year, but mounting US demands over project scale and costs have deepened concerns about the risks surrounding the investment commitment.

According to the Ministry of Trade, Industry and Energy, Minister Kim Jung-kwan met with US Commerce Secretary Howard Lutnick and others in New York from Thursday through Saturday (local time) for final-stage negotiations on the investment projects.

The two sides are expected to have ironed out details — including investment scale and terms — centered on two leading candidates: the construction of a gas-fired combined-cycle power plant in Encinal, Texas, and the construction of large-scale nuclear power plants.

The ministry recently briefed the National Assembly in a closed session on the progress of follow-up negotiations under the Korea-US strategic investment framework. A National Assembly official who received the briefing said the two projects were "heard to be nearly confirmed."

The government maintains that no specific investment targets have been finalized and that consultations between the two countries are still ongoing. However, Kim is scheduled to report the results of the negotiations to the National Assembly on Thursday, meaning the outlines of the US investment projects are expected to come into view soon.

Equally closely watched is the effectiveness of the investment safeguards the two countries enshrined in the MOU. Last year, South Korea pledged a total of $350 billion in US investment — including $150 billion in the shipbuilding sector and $200 billion in strategic investment — in exchange for a tariff reduction from 25 percent to 15 percent, attaching a "commercial reasonableness" safeguard to the commitment.

The MOU stipulates that only investments deemed commercially reasonable will be recommended to the US president. Commercial reasonableness refers to cases where an investment is judged likely to generate sufficient cash flow to service principal and interest repayments over the investment period.

However, final decision-making authority rests with President Donald Trump. Under the MOU, an investment committee chaired by Commerce Secretary Lutnick is to recommend projects after consulting with the Korean side, but the ultimate choice of investment destination is Trump's to make.

This creates a structural vulnerability in which Trump could ultimately designate unprofitable projects as US investment targets, regardless of commercial merit.

The MOU also caps South Korea's annual investment at $20 billion and requires that funds be remitted no earlier than 45 business days after Seoul receives notification of a US-selected investment destination.

The central question is how investment risk will be shared. The two countries also agreed to establish an umbrella-type special purpose company through which the United States would manage the overall portfolio of projects — a structure designed to allow losses in any single project to be offset by returns from others.

Recent reports suggest, however, that these safeguards are fraying during negotiations. With the two sides apparently moving toward settling profits and losses on a project-by-project basis, the umbrella structure that was the cornerstone of the risk-management framework has in effect been rendered inoperative.

In the case of the Encinal power plant, the United States pushed for a cost increase from the originally discussed figure of around $20 billion, with the two sides reportedly settling on approximately $22 billion.

The nuclear power plant project, cited as the second US investment initiative, has also drawn criticism for vagueness — despite its massive scale of up to eight reactors, the actual investment parties, financing arrangements and profit-recovery structure remain unclear.

The government has repeatedly issued only brief press statements saying "nothing has been confirmed" in response to reports about the US investment plans.

Domestically, the process for finalizing such investments involves the Korea-US Strategic Investment Corporation convening an operating committee to select projects and deliberate on whether to proceed. The funds would then be disbursed through individual project-level special purpose companies after a report to the relevant standing committee of the National Assembly.

"The government should transparently disclose the negotiation process with the United States to the public and seek their understanding," said an official in the trade policy academic community. "Repeatedly dismissing reports with blanket denials — burying one's head in the sand — could invite far greater backlash down the road."


oskymoon@heraldcorp.com