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By Jonathan Hopfner
SEOUL, May 20 (Reuters) - 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 centre to rival Singapore or Shanghai, boasting a spotless environment and unrivalled quality of life.
With total building costs set to exceed $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 towards 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 IFEZ commissioner Heonseok Lee, the zone has attracted nearly $60 billion in financing and investment commitments since it was established in 2003, offering tax incentives, subsidised office space and less rigid labour 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 50 million square feet of office space, 9,000 new homes, a 100-acre park, top-ranked schools and a Jack Nicklaus-designed golf club.
EXPERIMENT WITH LIBERALISATION
The Incheon zone is the most prominent feature of an unprecedented drive to boost foreign direct investment (FDI), an area in which South Korea has long lagged its neighbours.
Despite the uncertain economic environment, the government hopes to boost FDI by 7 percent this year to $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 liberalisation 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 $500 million of a pledged $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.
"OVERHEATED COMPETITION"
There are concerns one of Songdo's crown jewels, an international school for children of foreign executives partnered with the U.S.'s 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 (SERI).
Kwak also said the sudden profusion of FEZs risked stoking "overheated competition". Both the Incheon and Yellow Sea Free Economic Zone, barely an hour apart by road, are marketing themselves as high-tech and logistics centres, as is the Busan-Jinhae FEZ on South Korea's east coast, and the Gwangyang Bay Area FEZ to the south.
Zones tout similar slogans -- Busan-Jinhae calls itself a "Northeast Asia business hub," Saemangeum-Gunsan in the southwest is the "hub of biz frontier in East Asia," and Gwangyang the "greatest logistics and business hub of Northeast Asia."
All lean heavily on their proximity to key markets such as China and Japan, a trait analysts say is not necessarily a plus.
"The advantage from locational arbitrage against China is close to zero," Kwak said, with South Korean zones bound to face tough competition from their Chinese counterparts.
Analysts also warn that fencing off certain areas for foreign investors, an approach that has gained traction globally since it was pioneered by China in the 1980s, risks masking the need for more comprehensive reforms to improve the business climate and reduce barriers to foreign ownership.
"The emphasis on special zones should not distract policymakers from these more important priorities," said Randall Jones, head of the Japan and Korea desk at the Organisation for Economic Cooperation and Development.
But the FDI campaign has won some converts. The Busan-Jinhae zone recently announced over $50 million in investment commitments from European and U.S. marine engineering firms, while the Incheon FEZ will receive $30 million this year from Berna Biotech Korea, a subsidiary of Netherlands-based biopharmaceutical company Crucell.
Berna Biotech CFO Maik Slijpen said the zone's generous tax and duty exemptions, proximity to Incheon International Airport and "international atmosphere" played a role in Berna's decision to invest there, though he also voiced concerns about developers' apparent focus on "prestigious but non-practical" projects.
But officials insist aiming high is the best way to take the zones forward.
"A well-designed, beautiful city will attract people from other countries," says IFEZ's Lee.
(Editing by Jonathan Thatcher)