Special Measures to Reduce Construction Cost Burden... Introduction of 200 Billion Won Special Infrastructure Fund

June 2 Economic Ministers' Meeting on 'Measures to Revitalize Private Investment'

The government will establish special measures to alleviate the burden of rising construction costs. This decision was made based on the judgment that the deteriorating business conditions need to be improved to revitalize private investment projects. Amid increasing uncertainty in the financial environment, a special private equity-only infrastructure fund worth 200 billion KRW will also be introduced to drive investments from major investors such as financial institutions. Additionally, the government plans to promote insurance companies' investments by establishing the basis for a publicly offered infrastructure fund with no maturity and a prohibition on redemption.

On the 2nd, the government held an Economic Ministers' Meeting and announced the "Private Investment Revitalization Plan" containing these measures. This plan was prepared to address the current issues faced by private investment projects and to rationalize regulations.

First, to resolve the issue of rising construction costs that hinder the vitality of private investment projects, the government decided to increase the project budget. Since construction costs rose significantly from 2021 to 2022, the aim is to ease this burden. The intention is to inject vitality into the construction market by using public sector funds as a catalyst.

For revenue-generating private investment projects (BTO), an amount up to 4.4% of the total project cost can be reflected in the total project budget. This plan reflects the difference between the construction investment GDP deflator increase rate (16.4%) and the CPI increase rate (7.6%) from 2021 to 2022. A Ministry of Economy and Finance official explained, "For a project worth 1 trillion KRW, this means an increase of 44 billion KRW in the project cost." When promoting lease-type private investment projects, a special case will be established to reflect 50% of the price fluctuation between the 'price calculation standard and the announcement date' in the construction cost.

This measure aims to alleviate concerns that private investment may be delayed due to the sharp rise in construction costs such as materials and labor in recent years. Difficulties in project promotion have arisen because construction companies have refrained from bidding on public sector projects due to low construction cost estimates. Additionally, the Ministry of Economy and Finance will lower the risk weight from 40% to 100% when banks invest in private investment projects (BTL) with government demand risk-sharing under certain conditions, and will specify the basis for equity investment in public institution private investment projects.

Furthermore, a special equity-only infrastructure fund worth 200 billion KRW will be newly established to support the raising of equity capital for private investment projects. The special infrastructure fund will be structured to be used exclusively for equity investments. The Korea Development Bank will prepare 100 billion KRW, and the Korea Credit Guarantee Fund will prepare 100 billion KRW for the fund. The operation period is up to 10 years. A Ministry of Economy and Finance official stated, "It is expected that financial institutions and others will be able to participate in the fund additionally in the future."

The establishment of publicly offered infrastructure funds with no maturity and a prohibition on redemption will also be allowed. To this end, the Ministry of Economy and Finance plans to amend the Private Investment Act. The ministry expects that allowing the establishment of funds without maturity will facilitate the inflow of private capital such as insurance companies. If no maturity is set, insurance companies can classify the fund as an equity product and recognize it as other comprehensive income.

Unnecessary regulations will be significantly eased to improve the private investment system. Existing facilities operated as private investment projects will also be allowed to undergo improvement and expansion to immediately upgrade aging and congested infrastructure. The establishment period of management and operation rights for improvement-operation type private investment projects will also be extended up to 100 years.