With Returns Plummeting, Private Sector Turns Away... Major Overhaul Needed for 'Quality Over Quantity'

Increased Business Risk Due to Abolition of Minimum Income Guarantee System
Government to Promote Korean New Deal via Private Investment
Potential Revival of Investment in Safety and Environment

[Asia Economy Reporter Jang Sehee] The government has attempted to revitalize investment through private investment projects to revive the economy stagnated by the novel coronavirus infection (COVID-19), but has yet to achieve significant results. This is because the Minimum Revenue Guarantee (MRG) system has been abolished, increasing the risks borne by project operators, and major social overhead capital (SOC) projects such as roads and railways with high profitability are already established. Accordingly, experts point out that private investment projects should now focus on the quality rather than the quantity of investments.

◆Operator risks increase... profitability decreases= According to the Ministry of Economy and Finance on the 23rd, large-scale private investment projects such as roads and railways are mostly operated under a high-risk, high-return investment model (BTO - Build-Transfer-Operate / revenue-type private investment projects). With the abolition of the MRG system, which guaranteed operators' income through public funds if they failed to generate a certain amount of revenue, the risk burden has further increased.

The Ministry of Economy and Finance states that through amendments to the Private Investment in Social Overhead Capital Act (PISOC Act), the high-risk, high-return parts have been redesigned into a medium-risk, medium-return structure.

There is also analysis that investment returns have declined compared to the past due to the downward stabilization of interest rates. The Ministry sets the final investment return rate based on the basic 5-year maturity government bond rate, considering the project type and other factors. Currently, BTO investment returns are around 4-5%, and BTL (Build-Transfer-Lease type private investment projects) returns are about 2-3%.

Since private investment projects began in 1995, infrastructure such as roads and railways in major regions is already in place. A government official said, "Projects like roads and railways that generate some revenue are already established through public and private investments," adding, "Although the scale is not large, SOC related to environment and safety is still largely insufficient."

◆Focus on quality over quantity... post-project evaluation is also important= Experts advise focusing on the quality rather than the quantity of investments. Professor Kim Soyoung of Seoul National University’s Department of Economics said, "The amount of investment is important, but the qualitative aspect is even more crucial," adding, "It is also necessary to evaluate how good the investment was in the future." She pointed out, "Many SOC projects have long durations, but since there is no mid-term evaluation of these projects, there can be cases where no measures are available when evaluated later." Professor Sung Taeyoon of Yonsei University’s Department of Economics said, "Discovering high-quality investment projects is the most important," and "To find economically viable projects, cooperation among the private sector and related ministries is necessary." There is also an opinion that competition among private entities should be encouraged to discover diverse projects. Currently, third parties can participate in competitive bidding, but the initial project proposer receives additional points. The National Assembly Budget Office emphasized in its report "Problems and Improvement Measures of Private Investment Attraction Projects" that "additional points should be avoided, pre-qualification screening should be used to assess eligibility, and among those who pass, the lowest price proposer should be selected to activate competition."

◆Is there no problem with private investment promotion in the Korean New Deal?= In this situation, the government announced plans to promote private investment projects for the Green Smart School and hydrogen charging station expansion under the Korean New Deal. Hong Namki, Deputy Prime Minister and Minister of Economy and Finance, previously emphasized, "We will create productive investment destinations to increase private investment returns and absorb liquidity."

However, there is an opinion that projects with business feasibility and economic viability must be discovered to attract long-term corporate investment. Professor Sung said, "Projects are listed under the broad premise of the Korean New Deal," adding, "Rather than simple goals about the scale of development, it is important to discover projects with business feasibility and economic viability." He advised, "Projects that lack business feasibility and economic viability but are deemed necessary should be connected to public funds, and projects difficult to finance publicly should additionally attract private funds."

The government expects private investment in SOC sectors related to safety and environment to revive in the future. It also forecasted that large-scale private investment could occur in 2025 as most contracts signed in 1995 expire. A government official emphasized, "Most private investment projects in roads and construction signed over about 30 years since 1995 will be completed by 2025," adding, "Private investment is expected to revive during the process of finding additional investment destinations."

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