CONSTRUCTION CRISIS CAUSES RIPPLE EFFECTS

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Subcontractors of Dongwon Construction and Engineering located in Gyeongsangnam-do Province are seeing damages due to suspended constructions after the company declared its bankruptcy. In fact, construction companies are faced with financial difficulties as 'project financing' loans, the main source of funds for major construction companies, have become difficult to receive ever since Gnagwondo's Lego Land scandal.

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A construction site in Changwon, Gyeongsangnam-do Province. A ground-breaking ceremony was held last month, but construction remains suspended. The situation is similar with a project to build a commercial building in Masangu District. With the construction halted, procedures to sell properties have also stopped. This is because Dongwon Construction and Engineering defaulted on its bank loan of 2.2 billion won and was declared bankrupt. It is the nation's 388th largest construction company in terms of contracts, with sales reaching 54.2 billion won last year. It has about 70 subcontractors. It was faced with financial difficulty as a savings bank refused to provide more loans in the form of project financing.

[Soundbite] (Property Sale Agency official (VOICE MODIFIED)) : "It was project financing. To my knowledge, promissory notes that expired were not extended. The construction firm was not able to secure additional funds."

This is due to lenders' growing concerns about possible loan delinquencies by constructors, after Gangwon Jungdo Development Corporation, the developer of Lego Land, applied for a debt workout program.

[Soundbite] (Bank official (VOICE MODIFIED)) : "Project financing is a structure to retrieve loans through the pre-sale of properties. Therefore, loan requests can be rejected when we conclude that there could be problems with payments."

According to the Bank of Korea, 0.2 percent of promissory notes were dishonored across the nation in October. The rate stood at 0.26 percent the previous month, reaching the highest point in more than five years. The situation is similar in Gyeongsangnam-do Province. A local bank saw the rate of dishonored notes and bills reach 0.86 percent in the third quarter of this year. With 345 notes and bills unpaid, that is more than double the 0.41 percent recorded a year ago. Construction firms declaring bankruptcy will deal a financial blow to their subcontractors.

[Soundbite] Roh Eun-mi(Gyeongnam Branch, Korea Specialty Contractors Association) : "Promissory notes are discounted when they are cashed. When bankruptcies occur, we have difficulty paying even the uncashed amount."

This is also having impacts on construction projects ordered by public agencies. There are growing concerns that the industry's financial struggle could dampen the local economy.