[Exclusive] Distorted North Korean Light Water Reactor... Government Paid Interest Alone Amounting to 2 Trillion Won

'North Korea Nuclear Development Halts "Inter-Korean Light Water Reactor" Project
Government Rolls Over Principal and Interest... Interest Exceeds Principal
Annual Average 74.2 Billion Won, Continued Funding Means Ongoing Taxpayer Burden'

Since the suspension of the light-water reactor project for North Korea due to its nuclear development, it has been confirmed that nearly 2 trillion won of government budget has been spent solely on interest payments. This amount has surpassed the principal of 1.3744 trillion won, making the interest payments larger than the principal itself. Although North Korea's default is the fundamental issue, the government has found no effective way other than covering the interest with taxpayers' money. If this continues, hundreds of billions of won of public funds will have to be used annually to manage the debt.

According to data obtained by Asia Economy on the 11th, the government had spent 1.8847 trillion won on interest payments for the light-water reactor project as of the end of last month. Initially, the principal and interest were covered by the Public Fund Management Fund (a fund created from surplus funds for public projects), but since 2012, only the interest has been paid using government contributions (transfers from the general account). Over the past 12 years, an average of about 74.2 billion won per year in taxes has been spent.

'Nuclear Development' North Korea Betrays the Light-Water Reactor Project

The story of the government taking on North Korea's debt is as follows. North Korea and the United States signed the 'Geneva Agreement' in 1994. In exchange for abandoning nuclear development, it was agreed to build two 1000 MW-class light-water reactors in the Sinpo area of South Hamgyong Province. To this end, the Korean Peninsula Energy Development Organization (KEDO) was established, involving South Korea, the United States, and Japan. The estimated construction cost was set at 4.6 billion dollars, with South Korea agreeing to cover 70%, amounting to 3.22 billion dollars (3.542 trillion won). The actual amount spent was 1.146 billion dollars, or 1.3744 trillion won (principal).

The funds were disbursed in three stages. The government deposited funds from the 'Public Fund Management Fund' into the light-water reactor account within the 'Inter-Korean Cooperation Fund,' and KEDO borrowed these funds interest-free to carry out the project in North Korea. Upon completion, North Korea would own the reactors and repay the investment in installments over 20 years. The repayment structure was to recover funds in reverse order of disbursement. Construction began in 2001, but the project was halted in October the following year after a U.S. report revealed North Korea's development of highly enriched uranium (HEU).

Effectively, the KEDO Executive Board, led by the U.S., stopped supplying heavy fuel oil to North Korea, which retaliated by expelling International Atomic Energy Agency (IAEA) staff and demanding compensation. The troubled project ended in May 2006 with a 34.5% completion rate, and North Korea conducted its first nuclear test in October that year.

Government Rolls Over Principal and Interest, Interest Surpasses Principal

The bigger problem than not recovering a single won of the principal already spent is the continuously increasing interest. Initially, the government borrowed both principal and interest through the Public Fund Management Fund by issuing bonds. Simply put, it borrowed money again to pay the interest. This vicious cycle of interest on principal plus interest caused the debt to balloon like a snowball. Due to this issue, since 2012, only interest has been paid using government contributions instead of issuing bonds. Here, government contributions refer to transfers from the general account, meaning the interest is paid from the budget collected as 'taxes.'

Using the general account to roll over interest has a blind spot. Broadly speaking, since the money circulates within the government's 'pocket' by lending and repaying itself, it can prevent an immediate increase in liabilities on the accounting books. However, the principal debt assumed on behalf of North Korea continues to grow, which means that an equivalent amount of tax money is not being invested in national affairs. It is also unclear how the increased amount will be settled in the future. The accumulated refinancing amount has already exceeded 9 trillion won, with 7.6533 trillion won in principal and 1.8847 trillion won in interest.

In the 21st National Assembly, the ruling and opposition parties clashed over this issue. According to meeting minutes obtained by this outlet, in November 2017, members of the Liberty Korea Party raised concerns in a subcommittee of the Budget and Accounts Special Committee about borrowing interest payments from the general account. They pointed out that there was no regulation requiring interest to be paid from the general account and that continuing to roll over debt with tax money without a mid- to long-term plan to settle the debt was inappropriate.

However, at that time, the government insisted on general account expenditures citing 'fiscal soundness.' Members of the ruling Democratic Party also supported this policy, and after heated debate, no significant conclusion was reached, and the issue was shelved.

Unable to Demand Debt Settlement, Nearly Built Nuclear Power Plant for North Korea

Satellite image taken in December 2022. The construction site of a light-water reactor remains intact in the Sinpo area of South Hamgyong Province. [Image source=Google Earth]

The government cannot even demand that North Korea repay the money directly. More precisely, the demand for debt settlement should come from KEDO, as the project was carried out by KEDO, not the government.

According to the Ministry of Foreign Affairs, KEDO has been sending a 'notice of claim for damages' to North Korea every second half of the year to maintain its claim rights after the light-water reactor project ended. However, North Korea has not responded to the notices sent to its mission at the United Nations. The only reply was in 2011, calling it an 'unfair act.'

As long as North Korea refuses to fulfill its debt obligations, it is currently difficult to recover the KEDO loan (principal of 1.3744 trillion won) disbursed through the Inter-Korean Cooperation Fund. The government’s position is that a memorandum of understanding has been signed to defer the debt until negotiations on the loan handling between South Korea and KEDO are concluded. A Ministry of Unification official said, "We are closely consulting with relevant ministries, including the Ministry of Strategy and Finance, to devise fundamental measures for repaying the principal of the Public Fund Management Fund, and we will continue to seek reasonable repayment plans."

Meanwhile, the light-water reactor project is also linked to the 'North Korea nuclear power plant promotion suspicion' that surfaced during the Moon Jae-in administration. When prosecutors investigated allegations of economic manipulation of the Wolseong Nuclear Power Plant Unit 1, documents that the Ministry of Trade, Industry and Energy officials tried to conceal included a report on 'Plans to Promote Nuclear Power Plant Construction in North Korea,' a 'Light-Water Reactor White Paper,' and a 'List of Personnel Experienced with KEDO-related Work.' A government official pointed out, "Finding a way to demand settlement from North Korea is the best course, but even during periods focused on dialogue, there were repeated misjudgments of ignoring the debt and nearly building nuclear power plants for them."