Inflow of Pension Funds into SOC Causes Harms

Pundits have begun to point out that the government`s plan to utilize a large scale of private capital, such as pension funds, starting next year as social overhead capital (SOC) and in investing in social welfare facilities may add a great burden to the nations finance in the long term.

A recent report of the Board of Audit and Inspection (BAI), which examined management of the private investment systems on SOC, revealed that a great sum of taxpayers` money is reluctantly paid out because contracts stipulate that the government make up losses created by the SOC projects.

The government is pushing a policy of attracting a grand scale of private capital including pension funds in its effort to reinvigorate the country`s economy in line with its comprehensive New Deal-like investment projects, said related authorities on Wednesday, including the Ministry of Finance and Economy (MOFE). The MOFE also hinted that seven to eight trillion won of private investment is expected to be enticed.

The government explains that, considering returns of the pension funds are diminishing, by guaranteeing a certain amount of returns, it is a sound measure that not only allows the government to carry out much-needed projects through private funds but also helps the profitability of pension funds escalate.

Economic experts, however, warn that it will add pressure to the country`s finance in the long run as the government has to ensure a fixed amount of return for private investment deals, even if inefficient or unproductive projects are pushed inordinately.

The BAI anticipates that the government will have to supplement 12,597 billion won between 2001 and 2038 for 17 road tunnel projects currently taking place through private investment in order to pay out the minimum returns promised for the projects.

Regarding four roads, which were constructed by having induced private funds and are managed by the government, the government supported 49.4 billion won for Cheonan-Nonsan Expressway, 105 billion won for Incheon International Airport Expressway, 6.8 billion won for Gwangju Belt Way Two, and plans to pour another 25.1 billion won for Mt. Woomyeon Tunnel in Seoul which opened December last year.

The government is, however, likely to suffer from a greater financial pressure if it introduces private capital not only into SOC but also into public-spirited areas as well, such as elderly nursing homes, public health care centers and educational institutions.

Although investment through pension funds into SOC, which the government is promoting, may look like a win-win deal for both the government and pension funds, it is only a trick to hide the country`s debt problem which has been getting even worse, criticized Kim Yong-ha, economics professor at the Soonchunhyang University.

Jong sik Kong Chi-Young Shin kong@donga.com higgledy@donga.com