Like most countries in the world, infrastructure facilities in South Korea used to be financed largely through government budgets. Another financing tool was the Special Account. Its sources of revenue included subsidies from the general account, overseas loans, and transfers from the Fiscal Investment and Financing Special Account.[1]National Finance Act: Article 14 & 15View It was designed not only to speed up road construction in a short period of time, but to improve efficiency in road management.
A significant portion of Special Account revenue came from the special excise taxes on gasoline, diesel fuel and passenger cars, and charges on the use of expressways or other roads. These monies were earmarked for particular infrastructure developments such as highway construction. Many highway projects in the late 1980s and throughout the 1990s were completed thanks to the Special Account for the Road Sector, established in 1989.[2]The National Railroad Special Account was established as early as in 1964, but it was not so active as the Road Account because of insufficient funds. Both Road and Railroad Accounts merged into the Special Account for Transport in 1994, generating as much as 85% of the total transport infrastructure investment once. Refer to MOLT homepage for further information. It is a bit like the Interstate Highway Fund in the US which helped finance interstate highway construction since the Eisenhower administration.[3]U.S. Department of Transportation. Federal Highway Administration. (2015) Financing Federal-Aid Highways. Electronic version of Publication No.FHWA-PL-99-015.View
The third type of infrastructure finance was bond-based debt-financing.[4]Up to now bond-based debt financing methods were applied only to Brown field projects in the early 2000s. Government or public corporations sold bonds mostly to financial institutions to secure funds. When fees were collected, a large portion of the revenues were used to pay for principal and interest on the borrowing of funds over a long period of time. But this type of financing has rarely been used recently because of the complexity of long term debt-financing.[5]There are two reasons why the long term debt financing is inappropriate for infrastructure development projects. First, even though the bond-financed money capital is not fully in use during the construction phase, interest payments should be made regularly. Capital expenditure tends to increase steadily according to the construction schedule, but bonds are issued all at once, thus bearing the full interest costs. Consequently there arises an ‘idle money’ problem, and losses occur when the interest cost outweighs interest income from the idle money. Accordingly developers prefer progressive loans, instead. Second, it is unpredictable how much money will have to be disbursed when the construction progresses. There may be either a shortage or a surplus of the fund when the construction is completed. When fund surplus occurs, the government may have to unnecessarily pay the interests until the bond matures. When money is in short supply, the government probably will have to issue additional bonds to make up for the shortage. But normally the government is allowed to issue bonds only when the total value of the bond issue exceeds an officially predefined limit. Therefore, even in case that the government may have to rely on bond-financing, it would use bridge loans first, and then, when all the project costs are revealed and confirmed, the government can issue either bonds or ABS as a means of refinancing. Potentially, pension funds could have been an attractive source of infrastructure financing under a PrivatePublic Partnership scheme, but most of these projects are found to be fully committed.
The final source was the private sector. South Korea actively promoted private sector participation in infrastructure development for two reasons. The primary reason was the shortage of government funds. No matter how one might add up all the available funds from the primary sources, one would find a huge gap between the funds required and available. Nonetheless the demand for infrastructure services was increasing rapidly as the country’s economy progressed.[6]Public-Private Partnerships Laws/Concession Laws. PPPIRC.View One study conducted in the late 1990s pointed out that South Korea should invest in transport infrastructure alone a minimum of 2 to 2.3% of GDP between 2004 and 2010.[7]This was equivalent to 8 to 9% of the total national budget, but the government’s fiscal outlay fell far short of the desirable amount and the study concluded that the private sector should share a substantial portion of the investment monies required for an adequate level of infrastructure investment, in the range of 6 to 7% until 2010. Refer to the Background Study Report for the 4th Comprehensive National Territorial Plan of 2000-2020, 1999, KRIHS and International Workshop on Building an Integrated Infrastructure in the Korean Peninsula, A Collection of Papers for International Seminar, KRIHS, 1994
The second reason for private sector participation in infrastructure development was the government’s intention to take advantage of the private sector’s ‘efficiency mind-set’ in both facility development and facility operation and management. This was consistent with the governing philosophy of the new administration from 1993-1998, which strongly advocated reforms toward liberalization, deregulation, and privatization.[8]Sanghyun Yoon (1996). South Korea’s Kim Young Sam Government: Political Agendas. Asian Survey Vol. 36, No. 5, pp.511-522.View The changing attitude of the government was very likely conducive to private sector participation in public affairs, and in case of infrastructure development it was revealed and manifested in the form of Public Private Partnership in Infrastructure (hereinafter, referred to simply as PPP).
