"Despite Pledge to Execute 70% of SOC Budget Early..." [Why&Next]

Uncertainty Over Execution of Gadukdo Budget This Year
Public Construction Payments Drop by 700 Billion Won Over Four Years
Major Projects Face Repeated Bid Failures and Delays

The government announced that it would spend 70% of this year's first-half budget related to social overhead capital (SOC) to help revive the regional economy and the construction sector. However, actual execution has been sluggish. As local unsold housing and project financing (PF) insolvencies have emerged, private sector orders have slowed, so the government intended to use fiscal spending as a priming pump for recovery. However, the results so far have been disappointing. With the possibility of budget adjustments after the presidential election and the launch of a new administration, attention is focused on whether the pace of execution can be accelerated.

Aerial perspective view near Gadukdo New Airport. Provided by Busan City

Uncertainty Over Execution of 600 Billion Won Gadukdo Budget This Year

According to the monthly expenditure budget management data compiled by the Ministry of Land, Infrastructure and Transport, approximately 314.3 billion won was spent from January to April this year under the name of the Gadukdo New Airport construction in Busan. Considering that the total budget allocated to this project for the year, including last year's carryover, is about 977.7 billion won, only about 32% has been executed.

However, the land development project, for which more than 600 billion won was allocated this year alone, has been postponed indefinitely. Initially, only the Hyundai Construction consortium (hereafter Hyundai Construction) expressed intent to take on the project, so a private contract was pursued. However, since Hyundai Construction requested an extension of the construction period, the bidding process must now start over from the beginning.

The Ministry of Land, Infrastructure and Transport recently formed a design review committee for the Gadukdo land development project in accordance with relevant laws. However, the industry believes that even with a rebidding process, there may not be any suitable participants. Even if the process is expedited, it is unlikely that construction will begin within this year. Gadukdo New Airport is a mega national project with a total project cost exceeding 13 trillion won, making it the largest individual SOC project under the ministry's jurisdiction. An official stated, "Airports, roads, and railways are all grouped under the special account for transportation facilities, so total funding is limited. As the airport budget increased due to the Gadukdo project, other budgets inevitably had to be reduced."

In addition, this year's budget for the Shinansan Line double-track railway, including carryover, is 265.5 billion won, of which the government has spent 63.8 billion won. This is about 24%. As this is a private investment project, most of the government budget was scheduled to be spent as private capital subsidies. However, after a collapse accident occurred last month at the Gwangmyeong section, work has been suspended for accident investigation and recovery, which is expected to take a considerable amount of time.

Public Construction Payments Down 700 Billion Won in Four Years

There are numerous projects with sluggish budget execution. The Pohang-Yeongdeok Expressway (budget: 204.3 billion won, execution rate: 2%) and Saemangeum New Airport (94.2 billion won, 0%) have either been suspended or are not yet in a position to proceed in earnest, resulting in low execution. The Pohang-Yeongdeok Expressway, which began construction in 2016 and had achieved about 70-80% progress in most sections, was delayed due to the discovery of cultural assets during the project. Although completion was initially expected by the end of this year, it is currently difficult to specify an opening date.

The basic plan for Saemangeum New Airport was finalized in 2022, but a lawsuit to cancel the basic plan has been filed by civic groups, with a verdict expected in the second half of this year. Last year as well, more than 30 billion won of the Saemangeum New Airport budget was carried over due to unspent funds. According to this newspaper's analysis of the top 10 large-scale SOC projects under the ministry's jurisdiction that involve construction work, the average execution rate was about 39%.

According to Statistics Korea's construction economy trend survey, as of the first quarter of this year, the construction payments for public sector orders amounted to 6.8939 trillion won. This figure, which represents the funds actually received by construction companies for completed work, decreased by 6.7% compared to the same period last year. This is the first time since 2021 that public sector construction payments have fallen below 7 trillion won per quarter.

Site of the bridge deck collapse accident during the construction of the Seoul-Sejong Expressway in Anseong, Gyeonggi Province. Yonhap News, Joint Coverage

Major Projects Face Repeated Bid Failures, Delaying Progress

The main reasons why major SOC projects are not progressing as planned are the ongoing political instability, frequent changes to project plans, and accidents, with each project facing its own set of issues. The persistently low level of public construction project budgets is also cited as a reason for the slow pace. Construction companies often refrain from bidding because the projects are not profitable.

Of the 39 projects worth more than 30 billion won each, for which bidding results were announced on the Public Procurement Service's Nara Marketplace from the beginning of this year to the previous day, 13 had no bidders or failed due to a single bid. When conditions are changed or kept the same and rebidding occurs, project delays are inevitable.

An official from the Korea Construction Association said, "When the budget authorities conduct cost-benefit (BC) analyses for each project, the expected benefits (B) are not significant, so they have no choice but to keep project costs (C) down. Even for the ordering agencies, unless there is a natural disaster, it is difficult to reflect increases in construction costs due to design changes."

A government official stated, "Ultimately, the Ministry of Economy and Finance holds the key to determining total project costs, including construction expenses. They set the budget by considering the units, quantities, and construction periods for each type of work. However, construction difficulty is not taken into account, which leads to a certain gap between the budget and reality."