Budget Woes Delaying Social Capital Projects

An increasing number of social overhead capital (SOC) projects have been postponed and halted in many places nationwide due to shortfalls in the national budget.

The government increased its budget for unessential state affairs like the recent increase in the number of public servants. However, governmental agencies that had ordered construction projects could not secure enough funds for such projects because the budget earmarked for SOC projects shrank.

As a result, national logistic and traffic congestion costs will increase. It has been noted that this will become a serious potential threat to Korea’s national competitiveness.

The Ministry of Finance and Budget and the Construction Association of Korea reported that Korea’s annual average SOC growth rate declined 19.1 percent from 1993 and 2000 to 8.3 percent over 2001-2003. The figure plummeted to 0.25 percent between 2004 and 2007 (based on the fixed budget).

In contrast, the number of public works that were ordered by the central government, localities, and public organizations stayed at 19,000 (costing 31-35 trillion won).

According to a survey of 409 SOC construction sites by the Construction Association of Korea released at the end of July, 194 sites cut their workforce or proceeded with construction on credit.

The government’s investment in the private sector, an alternative to reducing the SOC budget ratio, is becoming a financial burden because of the profit guarantee system adopted earlier.

The government paid 175.7 billion won (in profit guarantees) to private construction businesses operating eight construction sites--the highest since 2001 when the regulation took effect.

Given that there are still businesses to be completed in the near future, the fiscal burden that comes from this kind of investment is forecast to reach 12.6 trillion won (based on the constant price in January 2004) in 2038.

The Construction Association of Korea submitted a proposal for expanding SOC investment to the government after a number of SOC projects were recently put on hold.

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