Exemption from Preliminary Feasibility Study at 2.2 Trillion Won in the First Half of This Year... Over 50% for Three Consecutive Years

Reviewing Increase of Preliminary Feasibility Study Budget to 100 Billion KRW
Potential Gaps in SOC Verification
National Finance Act's Broad Provisions... Higher Possibility of Political and Administrative Discretion Intervention

[Asia Economy Reporter Jang Sehee] The ruling and opposition parties have decided to push for raising the preliminary feasibility study (PFS) project cost threshold to 100 billion won in this regular National Assembly session, with the apparent reason being the need to consider the scale of the economy. Since the system was introduced 22 years ago, the cost threshold has never been changed, meaning that inflation and gross domestic product (GDP) growth have not been reflected. However, with the demand to activate regional projects ahead of next year’s presidential election, it is considered impossible to ignore this. Some voices warn that raising the threshold without sufficient review could create loopholes in the verification of social overhead capital (SOC) projects.

◆In the past 3 years, PFS exemption rate exceeded 50%= According to the Ministry of Economy and Finance on the 23rd, as of the first half of 2021 (end of June), the number of projects exempted from PFS was six, totaling 2.2 trillion won. Notably, the small business loss compensation legislation project, a 1 trillion won project in response to COVID-19, was also exempted from PFS. When PFS exemptions are granted at the discretion of political or administrative authorities, relaxing the total project cost criteria could lead to situations where taxes are invested in projects without proven economic feasibility.

Article 38 of the National Finance Act stipulates that PFS exemptions can be granted for projects that are nationally necessary for regional balanced development or urgent socio-economic situations.

In the past three years, the proportion of PFS exemptions has also exceeded 50%. According to the “2020 Fiscal Year Settlement Analysis” released by the National Assembly Budget Office, the exemption rate rose from 50.8% in 2018 to 58.7% in 2019, and recorded 56.4% last year. In terms of amount, it was still high at 12.9 trillion won in 2018, 36 trillion won in 2019, and 30 trillion won in 2020. Going forward, projects exempted from PFS will also be exempted from local finance investment reviews, accelerating regional development projects.

◆"Fiscal deficit increase and possible budget cuts in other sectors"= Experts point out that relaxing the project cost threshold could increase fiscal deficits and relatively reduce support budgets in other sectors.

Professor Park Kiback of the Department of Taxation at University of Seoul said, “Efforts are needed to reduce the scope of PFS exemptions,” adding, “Most of the recent increase in fiscal deficits is due to increased discretionary spending such as PFS exemptions.” Professor Kim Sangbong of Hansung University’s Department of Economics emphasized, “Most PFS-exempt projects are promoted as private investment projects, but there are situations where taxes must be spent on operating costs for decades. When support is provided to PFS projects while the total budget remains unchanged, support budgets for other sectors inevitably decrease.”

It is also important to note that the proportion of exempted projects is continuously expanding under the current National Finance Act. The National Assembly Budget Office pointed out, “The continued situation where the exemption rate exceeds 50% for broad reasons could weaken the purpose of the PFS system, which aims to prevent inefficient allocation of resources through objective public investment management.”

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