San-eun and Gi-eun Even Pull Money for 'New Deal Fund'... Provide Profits to Private Sector First

Laying the Foundation for Private Capital Inflow
Profits Distributed to Private Investors First
Concerns Raised Over Fiscal Soundness Deterioration

Kim Yong-beom, the 1st Vice Minister of the Ministry of Economy and Finance, is speaking at the 11th Emergency Economic Central Countermeasures Headquarters meeting and the 1st Korean New Deal related ministers' meeting briefing held at the Government Seoul Office on the 23rd. Photo by Moon Ho-nam munonam@

[Asia Economy Reporter Jang Sehee] The government plans to inject policy funds from the Korea Development Bank and the Industrial Bank of Korea to revitalize the New Deal Fund (a public infrastructure fund with citizen participation). The intention is for policy funds to play the role of venture capital and create a foundation for the inflow of private funds. Additionally, the government is considering a method where investment returns are distributed first to private investors, and the remaining profits are taken by the state. However, some critics argue that injecting additional fiscal resources into projects without guaranteed profitability could further deteriorate fiscal soundness.

According to the Democratic Party of Korea and the government on the 6th, policy finance funds from institutions such as pension funds and retirement pensions, as well as from the Korea Development Bank and the Industrial Bank of Korea, are expected to be included in the initial capital of the New Deal Fund, which is scheduled to be finalized and announced this month. A government official said, "The New Deal Fund is being promoted as a joint investment by the government and private investors," adding, "It is not simply difficult to raise the entire amount, but rather due to the investment incentive effect."

The government is benchmarking the "Growth Ladder Fund" introduced in 2013. At that time, the Korea Development Bank invested 1.35 trillion won, the Industrial Bank of Korea 150 billion won, and the Bank Sector Youth Startup Foundation 350 billion won. According to the Korea Development Bank Act and the Industrial Bank of Korea Act, surplus funds can be invested in areas recognized by the government as requiring delegated tasks. When the Growth Ladder Fund was launched, the government encouraged private investor participation by having policy finance take a subordinated position and private investors a senior position, so that policy finance would bear losses first. Kim Yong-beom, then Director of the Financial Policy Bureau at the Financial Services Commission, conceived the fund.

Furthermore, the government is also exploring Build-Transfer-Lease (BTL) and Build-Transfer-Operate (BTO) projects that guarantee principal and interest payments. The Ministry of Economy and Finance is additionally reviewing seismic reinforcement projects and LED (Light Emitting Diode) lighting replacements. The government plans to establish the New Deal Fund on a broad scale and allow investors to freely choose between BTL, BTO, and other strategies according to their investment approach. Hong Seong-guk, a member of the Democratic Party of Korea, said in a phone interview with Asia Economy, "Different models can be applied depending on the business, such as senior public offering funds or investing fiscal funds in stocks." The investment targets for the New Deal Fund include 5G communication relay networks, data centers, and renewable energy sectors such as solar and wind power.

The New Deal Fund's rate of return is reportedly being considered around 2%. This is interpreted as setting a rate higher than government bond yields to increase private investment incentives. Considering the current 3-year government bond yield at 0.8% and 10-year at 1.3%, the expected range is approximately 1.5% to 2.5%. The ruling party and government plan to guarantee an appropriate rate of return for the New Deal Fund to ensure stability and expand investment scale through unprecedented tax benefits. Lee Kwang-jae, chairman of the Democratic Party's K-New Deal Committee, is expected to propose an amendment to the Restriction of Special Taxation Act by mid-month to impose a low tax rate in the 5% range on investments up to 300 million won in the New Deal Fund.

In this regard, some criticisms have emerged suggesting that the government might be supplementing returns with fiscal funds. Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "If the project was profitable, private investors would likely have already invested," adding, "Ultimately, the government guarantees a certain portion of returns while additionally injecting taxes." There are also concerns about overlapping support from budgets and tax systems as the government announced an investment of about 160 trillion won in the Korean New Deal by 2025. Professor Sung stated, "Since budgets have already been allocated to New Deal projects, using policy finance as well raises concerns about deteriorating soundness," and "If public policy institutions are also tasked with fiscal policy, it is expected to place a considerable burden on their primary role as policy finance institutions in the future."

This content was produced with the assistance of AI translation services.