Withholding 2.2 Billion Won Out of 3.4 Billion Won Deemed Justified
Gyeongnam Province has achieved a partial victory in an international arbitration case regarding financial support payments with Machang Bridge Management and Operation Corporation, Machang Bridge Co., Ltd.
On the afternoon of the 23rd, Gyeongnam Province announced the results of the International Chamber of Commerce (ICC) international arbitration ruling, which was delivered on June 18, at the provincial government press center.
According to the province, the ICC ruled that Gyeongnam Province's decision to withhold 2.2 billion won out of the 3.4 billion won in financial support that was not paid to Machang Bridge was justified.
This marks the first case in which Gyeongnam Province has recovered financial support funds from a private operator through international arbitration in a private investment project.
Park Myungkyun, Deputy Governor of Gyeongnam Province, is announcing the results of the international arbitration ruling with the Machang Bridge side. Photo by Lee Seryoung
Previously, on September 25, 2023, Machang Bridge filed an application for international arbitration with the ICC, claiming that Gyeongnam Province, the competent authority, had withheld 3.4 billion won out of a total of 4.2 billion won in financial support payments.
The main issues at the time were threefold: whether value-added tax (VAT) should be included as part of toll revenue and thus be subject to distribution; who should receive the penalty toll revenue, which is calculated as ten times the unpaid toll; and whether the consumer price index (CPI) used for toll revenue distribution should be based on the end of December or the annual average.
The ICC sided with Gyeongnam Province, ruling that VAT should be included in toll revenue for distribution purposes and that Machang Bridge must pay the full amount of VAT.
However, the ICC accepted Machang Bridge's arguments that penalty tolls are considered fines under the Paid Road Act and that the standard toll should be calculated using the consumer price index at the end of the previous year.
International Chamber of Commerce (ICC) International Arbitration Award Result. Provided by Gyeongnam Province
The amount of VAT withheld that Gyeongnam Province won totals approximately 2.164 billion won, accounting for 64.7% of the total arbitration amount.
The portions won by Machang Bridge amount to approximately 248 million won for penalty tolls and 968 million won for the consumer price index issue.
Based on the ruling, Gyeongnam Province plans to pay 2 billion won, including interest, to Machang Bridge out of the 5.7 billion won withheld since 2017, while the remaining 3.7 billion won and statutory interest of 5% will be recognized as provincial revenue.
Park Myungkyun, Deputy Governor for Administrative Affairs, who made the announcement directly, stated, "With this partial victory in international arbitration, we estimate a budget savings of approximately 13.8 billion won by 2038," adding, "The savings will be returned to residents who frequently use Machang Bridge in the form of toll discounts."
Machang Bridge, managed and operated by Machang Bridge Co., Ltd., is a 1.7-kilometer-long sea bridge connecting Gapo-dong in Masanhappo-gu and Gwisandong in Seongsan-gu, Changwon City. It officially opened as a privately funded road on July 1, 2008.
Major shareholder Macquarie Korea Infrastructure Fund (MKIF) has invested 3.38 billion won, representing a 70% stake, and 7.9 billion won in subordinated loans, which is 50% of the total. The company has been granted management and operation rights for 30 years, from 2008 to 2038.
Previously, on January 26, 2017, Gyeongnam Province and Machang Bridge switched from a Minimum Revenue Guarantee (MRG) system, in which the local government compensated for the revenue shortfall below the estimated daily traffic, to a revenue-sharing agreement, in which revenue is divided according to a certain ratio.
Under the revised agreement, revenue is now distributed based on the actual traffic volume multiplied by the base toll at current prices, with Machang Bridge receiving 68.44% and Gyeongnam Province receiving 31.56%. In return, Gyeongnam Province is responsible for senior loans and corporate taxes, while Machang Bridge covers the remaining operating expenses.
Since the launch of the 8th popularly elected government in 2022, Gyeongnam Province and Machang Bridge have had differing opinions regarding the application and interpretation of the revised agreement, particularly concerning penalty toll revenue and the criteria for toll revenue sharing. Although the two sides held discussions, they ultimately failed to reach an agreement, and a decision was rendered through international arbitration after approximately 21 months.
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