The government has decided to improve the construction company’s responsibility completion system to stimulate construction investment amid a regional real estate market slump. Responsibility completion is a system where the construction company bears 100% of the project financing (PF) debt of the implementing agency if it is late by even just one day. The government has decided to ease the burden on construction companies by differentiating the debt assumption ratio based on the number of days past the completion deadline.
Policy financing institutions such as the Industrial Bank of Korea and the market stabilization program including the bond market stabilization fund will also be used to support construction companies facing liquidity crises.
The government will also reduce development charges, which allocate a portion of profits from development projects creating dwellings or industrial complexes to the state or local governments, by up to 100%. The Housing and Urban Guarantee Corporation (HUG) and the Korea Housing Finance Corporation (HF) will discount guarantee fees, and for PF projects with high equity ratios, plans are in place to expand the application of urban regulation exemptions, such as relaxation of floor area ratio.
The Ministry of Strategy and Finance, the Ministry of Land, Infrastructure and Transport, and the Financial Services Commission announced on the 19th a plan titled 'Supplementary Measures for the Local Construction Economy.'
The Ministry of Land, Infrastructure and Transport, the Financial Services Commission, and the construction industry will specify the reasons for extending the responsibility completion obligation by March. For example, plans are to define indemnity scopes similar to the 'Standard Construction Contract for Private Works' announced by the Ministry of Land, Infrastructure and Transport and to ease the responsibility completion obligation by differentiating the debt assumption ratio based on the duration past the completion deadline. Until now, the construction company had to bear all the debt if the completion date was delayed even by one day.
A Ministry of Land, Infrastructure and Transport official noted, 'Currently, only natural disasters, civil unrest, and war are recognized as exceptions for responsibility completion, but there are plans to expand the exceptions to include reasons such as typhoons, floods, earthquakes, and raw material supply issues, similar to the private construction standard contract document.’ The official added, 'We plan to discuss indemnity ranges for responsibility completion, such as if it is delayed by 2 to 60 days, compensating within the range of 20% to 40%, and release these discussions within the first quarter.'
Development charges for projects initiated last year and this year will also be reduced. Development charges are a system where a certain percentage (20% to 25%) of the profits obtained from development projects, such as the creation of dwelling complexes, industrial complex developments, tourism district developments, and golf course constructions, is paid as a charge. Fifty percent of the collected development charges goes to the local government where the land is located, and the remaining 50% goes to the state (Special Account for Regional Development). Plans are in place to revise the Recovery of Development Gains Act to exempt 50% in the capital region and 100% outside the capital region.
To support construction companies facing liquidity crises, market stabilization programs are being strengthened, including the bond market stabilization fund, corporate bond and commercial paper (CP) purchases, and bond collateralized securities (P-CBO) supply programs. Until now, these programs have supported only up to 17% of the funding amount in the construction sector, but going forward, they will consider support capacity to provide up to 5 trillion won.
Policy financing institutions such as the Industrial Bank of Korea, the Korea Development Bank, and the Korea Credit Guarantee Fund have agreed to provide about 8 trillion won (4 trillion won in loans and 4 trillion won in guarantees) targeting small and medium-sized construction companies. Additionally, guarantee institutions such as HUG and HF will introduce preferential items for guarantee fees for business sites with high equity ratios starting next month. Plans are also in place to amend the Real Estate Development Business Management Act to provide urban regulation exemptions, such as relaxation of floor area ratio, for PF projects operating with stable equity ratios.
The standard unit pricing used to calculate construction costs will be revised and reflected in the first half of the year. The standard unit pricing seeks to standardize labor costs, material costs, and other expenses needed for each representative construction type and method, and it will be revised to reflect site conditions.
A government official said, 'It is difficult to recover the economic growth rate (GDP), create jobs, and revive domestic demand without revitalizing the construction economy,' adding that 'the government plans to continue policies to support the local construction economy.'