"Preventing Daejang-dong Scandal"... Government Pushes for Public-Private Joint Development 'Profit Rate Cap'

Ministry of Land, Infrastructure and Transport to Strengthen Public Interest in Urban Development Projects
Considering Legislation to Specify Private Profit Rate Cap
Also Reviewing Appropriateness of Determination by Investor Agreement
Applying Sale Price Ceiling System if Public Investment Exceeds 50%

[Image source=Yonhap News]

The government is pushing forward measures to significantly strengthen the recovery of private development profits in response to the 'Daejang-dong Development Project Privilege' scandal. The profit margin for private companies will be limited to 6-10% of the total project cost, and for projects where the public investment ratio exceeds 50%, a price ceiling system will be applied to prevent excessive profits. The aim is to ensure that incidents like the 'Daejang-dong case' do not recur.

On the 4th, the Ministry of Land, Infrastructure and Transport (MOLIT) announced the 'Plan to Strengthen Public Interest in Urban Development Projects,' which includes these measures. Minister of Land, Infrastructure and Transport Noh Hyung-wook had previously expressed the intention to significantly enhance the public nature of public-private joint development projects during last month’s National Assembly audit and recent press briefings. This announcement is a comprehensive response after reviewing demands for institutional improvements raised so far.

The Urban Development Act was enacted in 2000 to move away from central government-led land supply and to facilitate the supply of various urban lands based on private company participation and local government autonomy. However, since its implementation, frequent amendments and exemption clauses have led to criticisms that it has not fulfilled its intended role. Especially following the recent Daejang-dong incident, calls for improvement have intensified.

Kim Man-bae, the major shareholder of Hwacheon Daeyu involved in the Daejang-dong scandal, is attending the warrant hearing held at the Seoul Central District Court in Seocho-gu, Seoul on the 3rd. Photo by Kang Jin-hyung aymsdream@

Strengthening Recovery of Private Development Profits

First, MOLIT plans to limit the profit margin of private entities in urban development projects jointly funded and implemented by public and private sectors, to prevent excessive profits during land development and sales processes.

They are considering either directly stipulating the private profit margin cap in the law or mandating the establishment of such caps through investor agreements, along with procedures for the designated authority to review the appropriateness of the profit margin cap.

Looking at other laws, the 'Land Development Promotion Act' limits the profit margin of joint project participants to within 6% of the total project cost, and the 'Industrial Location and Development Act' sets the sale price for industrial facility land within a 15% profit margin of the development cost.

Currently, Representative Lee Heon-seung of the People Power Party and Representative Jin Sung-jun of the Democratic Party of Korea have proposed amendments to the Urban Development Act to limit private profit margins in public-private joint projects to 6% or 10% of the total project cost. MOLIT plans to pursue amendments by comprehensively considering other laws and bills proposed in the National Assembly.

Reinvestment of Excess Profits for Public Purposes within the Region

MOLIT intends to institutionalize the reinvestment of profits exceeding the profit margin cap into various public purposes within the region. Excess profits will be used for installing living infrastructure such as parking lots, cross-subsidizing public interest projects like rental housing, and reducing prices for public land supply.

In particular, for projects where the public investment ratio exceeds 50%, the land will be classified as public land and subject to a price ceiling system. Since such projects can acquire land without securing ownership, the application of a price ceiling system is highly necessary.

The effectiveness of development charges imposed on development projects, including urban development projects, will also be enhanced. Currently, development charges are levied at 20% of development profits for planned sites and 25% for individual sites. Although the rate was 50% when introduced in the 1990s, it has since been halved. Additionally, various exemptions and reductions have accumulated.

MOLIT stated, "Considering that related bills have already been proposed in the National Assembly, we plan to raise the development charge rate and reduce exemption projects after sufficient consultation and discussion with local governments and experts during this regular session of the National Assembly."

Strengthening Public Interest in Land Expropriation Methods

The public interest in land expropriation-based development projects will also be strengthened. To this end, the function of verifying public contribution in the public interest verification conducted by the Central Land Expropriation Committee, which assesses the necessity of land expropriation, will be enhanced. Evaluations of public investment ratios and prior land acquisition ratios during project implementation will be strengthened, and verification committee members will be expanded to include development experts.

Currently, there are no regulations on procedures and methods to be followed when establishing public-private corporations to promote projects, but specific guidelines will be established to ensure procedural transparency.

When selecting private participants, a public contest method will be used, and detailed selection procedures such as contest and evaluation methods, matters to be included in project agreements, and approval by the designated authority will be specifically regulated.

There were no restrictions on the scope of use when investors directly use developed land, but usage will be limited within the investment scope. Although currently direct use plans only need to be submitted to the designated authority, this will be improved to require approval, thereby strengthening the review of the appropriateness of direct use.

Reducing Local Government Discretion

The discretion of local governments regarding the mandatory ratio of rental housing will be reduced from ±10 percentage points to ±5 percentage points around the mandatory ratio. Procedures for changes will also be strengthened, such as requiring urban planning committee review for significant changes in development plans when converting to sale housing land.

Additionally, the price of rental housing land supplied to public rental housing providers such as the Korea Land and Housing Corporation (LH) will be changed from appraised price to development cost to support the sale of rental housing land.

Currently, to secure local government autonomy, the designated authority is granted management and supervision rights, but within the scope that does not reduce the authority of local government heads, central government management and supervision will be strengthened and support expanded.

The threshold for projects requiring consultation between the designated authority and the Minister of Land, Infrastructure and Transport during district designation and development plan establishment will be lowered from projects of 1 million square meters or more to those of 500,000 square meters or more.

MOLIT plans to cooperate with the National Assembly to promptly proceed with follow-up procedures so that these improvement measures can be legislated as soon as possible. Matters that can be improved through subordinate legislation without amending laws will be revised immediately.

A MOLIT official said, "It is undesirable for development profits to be excessively privatized in development projects based on land expropriation, and we will closely monitor to prevent the recurrence of controversies over private development profits in public-private joint projects."

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