📄 This document is an English translation of the original 2025 Annual Budget Review authored by Junghwan Kim, Senior Budget Analyst at the Special Committee on Budget and Accounts (na32@assembly.go.kr). It is intended for public dissemination and policy transparency. The translated content is faithful to the original Korean manuscript and structured for readability. Contact: Junghwan Kim, Senior Budget Analyst (na32@assembly.go.kr)

1. Introduction

1.A. Overview of Build-Transfer-Lease (BTL) Projects

Private Investment Projects (PPP) are initiatives promoted under the Act on Public-Private Partnerships in Infrastructure, aimed at encouraging private-sector involvement in traditionally public-funded sectors such as roads, ports, railways, schools, and environmental facilities. These projects aim to enhance infrastructure expansion and operation through creative and efficient private sector participation.

PPP projects are broadly categorized into:

1. Revenue-based Models:
   • Types: BTO (Build-Transfer-Operate), BOT (Build-Operate-Transfer), BOO (Build-Own-Operate).
   • After construction, private operators are granted operation rights and recover investments through user fees collected from end-users.
2. Lease-type Models (BTL):
   • Similar to revenue-based models in granting temporary operational rights.
   • However, instead of charging user fees, the government leases the facility and pays rent over time.
   • Rent payments are used to recover the private investment and cover operating expenses.

Comparison: Revenue-Based vs Lease-Based PPP Models

Source: Ministry of Economy and Finance (MOEF), Republic of Korea

1.B. 2025 Ceiling Allocation for BTL Projects

Article 4 of the Act on Public-Private Partnerships in Infrastructure enumerates revenue-based and lease-based (BTL) private investment models as official PPP methods. Article 2, Clause 2 of the same Act formally recognizes BTL as a legal PPP type.

Furthermore, Article 7-2 stipulates that, for BTL projects, the total ceiling, ceilings by facility, and contingency ceilings must be submitted to the National Assembly at least 120 days before the start of the fiscal year, and the Assembly must approve the allocation at least 30 days prior to the fiscal year’s start.

The government’s 2025 BTL ceiling proposal submitted to the Assembly includes KRW 1.6431 trillion across 11 projects.

BTL Ceiling by Facility (Unit: KRW 100 million)

Source: 2025 BTL Ceiling Proposal, Ministry of Economy and Finance (MOEF)

According to Article 9-2 of the National Finance Act, the Minister of Economy and Finance must submit a government payment projection (under Article 24-2 of the PPP Act) at least 120 days prior to each fiscal year.

The projection must cover a 10-year period, specifying expected rental payments and operating costs by project type and line ministry.

According to the 2024–2033 BTL Government Payment Projection, the total projected nominal payments over 10 years amount to KRW 18.8583 trillion, composed of:

• Rental Payments (National Projects): KRW 12.1647 trillion
• Rental Payments (Subsidized Local Projects): KRW 3.8397 trillion
• Operating Expenses (National Projects): KRW 2.8539 trillion

Government Payment Projections by Year (Unit: KRW 100 million)

Note: Only includes government-funded payments. Excludes local government co-financing portions.
Source: Ministry of Economy and Finance, 2024–2033 BTL Government Payment Forecast, 2023, p.3

2. Budget Review amd Implications

2.A. Issues Concerning the Ceiling Allocation for BTL Projects

The ceiling allocation for BTL projects submitted by the government only includes the total facility construction costs, excluding the operating costs to be paid to the project operator over the operational period.

However, since operating costs are later bundled into government payments (rental + O&M), they represent a de facto fiscal obligation. Thus, they should also be subject to parliamentary deliberation.

Legal Ambiguity in the Definition of “Total Ceiling”

• Article 7-2 of the Act on Public-Private Partnerships in Infrastructure mandates that the total ceiling, facility-specific ceilings, and contingency ceilings for BTL projects be submitted to the National Assembly 120 days before the start of the fiscal year and approved 30 days before the start.
• However, the term “total ceiling” itself is not legally defined.
• The Enforcement Decree only prescribes procedural submission requirements (including previous year’s contingency usage), but does not define the components or calculation method of the total ceiling.

Due to this ambiguity, the Ministry of Economy and Finance (MOEF) currently interprets the “Total Ceiling” based on the 2024 Basic Plan for Private Investment Projects (Part II, General Guidelines), which defines it as the estimated total project cost under Article 2-2 of the Enforcement Decree. This estimate includes:

• Feasibility study costs,
• Design and engineering fees,
• Construction,
• Land compensation,
• Incidental expenses.

Under this definition, O&M (Operating and Maintenance) expenses are not included.

However, in reality, government payments for BTL projects include:

1. Rental payments (covering capital investment), and
2. Operating costs (recurring quarterly payments during the operation period).

Example: Seogye-dong Cultural Facility BTL Project

In 2021, the Ministry of Culture, Sports and Tourism (MCST) proposed a ceiling of KRW 104.0 billion for the Seogye-dong cultural complex. In the 2023 ceiling amendment, the total ceiling was adjusted to KRW 124.4 billion through contingency usage reporting.

However, the final implementation agreement revealed:

• The facility construction cost was KRW 122.9 billion (within ceiling),
• Operating cost of KRW 92.3 billion was not reflected in the ceiling,
• Supervision cost of KRW 4.4 billion also added later.

Breakdown of Final Project Costs (Unit: KRW million)

Shaded rows indicate costs not reflected in the original ceiling but ultimately included in government payments.

Source: Ministry of Culture, Sports and Tourism
Status of the Seogye-dong Cultural Facility BTL Project as of July 2024

Despite being excluded from the ceiling proposal, operating costs are eventually paid as part of government obligations, without prior review by the National Assembly.

By contrast, the Total Project Cost Management System for informatization projects includes O&M for five years post-construction, along with future expansion costs.

Thus, excluding O&M from the BTL ceiling constitutes a serious procedural flaw that undermines legislative oversight.

While the Ministry of Economy and Finance argues that operating costs are not fixed debts but arise annually, the implementation agreements clearly predetermine total O&M amounts and schedules, implying their contractual nature as binding obligations.

2.B. Issues in Value-for-Money (VfM) Analysis of BTL Projects

Under the Act on Public-Private Partnerships in Infrastructure, competent authorities must designate infrastructure projects as eligible for private investment. Projects exceeding a certain scale require a feasibility analysis and review by a steering committee.

The Enforcement Decree mandates that for privately proposed projects exceeding KRW 200 billion, a Value-for-Money (VfM) analysis be conducted. This includes evaluating demand projections and comparing costs against public-sector implementation alternatives.

According to the 2024 Basic Plan for PPP Projects, government-notified projects undergo this VfM analysis, while large private proposals require VfM studies. In practice, even small-scale projects are often assessed using similar standards.

A VfM analysis compares:

• PSC (Public Sector Comparator): Traditional public implementation.
• PFI (Private Finance Initiative): Lease-type (BTL) model.

The comparison involves calculating the present value of the total life-cycle costs for both alternatives. The PFI is deemed “value for money” if its present value of government payments is less than that of the PSC.

On Discount Rate Assumptions

The financial discount rate used in Value-for-Money (VfM) analysis serves to convert the life-cycle costs of both the Public Sector Comparator (PSC) and the Private Finance Initiative (PFI) options into present values, covering both construction and operational phases. This rate is determined by comprehensively considering factors such as the investment’s risk profile and the investor’s financing capacity.

For lease-type private investment projects, a nominal discount rate is applied by adding the inflation rate to a fixed real base rate of 2.5 percent.

In the PSC model, the government makes a large initial investment to build the infrastructure. In contrast, the PFI model features delayed government cash outflows, which begin only after a significant period following private-sector investment and are spread out over the medium to long term during the operational period.

Accordingly, a higher discount rate in VfM analysis leads to an understatement of the government’s long-term payment obligations under the PFI model, which results in a more favorable evaluation for the private alternative.

In the 2025 BTL Ceiling Proposal, however, the VfM analysis reports for three military housing and barracks projects submitted by the Ministry of National Defense applied discount rates ranging from 5.03 percent to 5.39 percent.

Discount Rates in VfM Analyses (Unit: %)

Source: Korea Development Institute (KDI)

This financial discount rate is higher than the 5-year government bond yield (2.924 percent), which is typically used as a benchmark for project returns in standard VfM analysis reports, and it also exceeds the yield on 20-year government bonds (2.903 percent).

Government Bond Yields (2024.10.17)

The Ministry of Economy and Finance contends that BTL discount rates reflect risk and cannot be directly compared to risk-free government bond rates.

However, (1) the Korea Development Institute (KDI), in its 2018 Guidelines for Feasibility Analysis of Lease-type Private Investment Projects, states that although the discount rate applicable to PFI varies depending on the nature of government payments, it is generally appropriate to use a risk-free interest rate when the government commits to fixed payments under contract. The report explains that in BTL projects, the PFI cash flows represent fixed government payments determined by contract.

In addition, (2) Article 65-2 of the Basic Plan for Private Investment Projects, issued by the Ministry of Economy and Finance, stipulates that for lease-type PPP projects, the real discount rate should be set at 2.5 percent. In practice, VfM analyses apply this 2.5 percent real rate and add expected future inflation to account for price-level risk. However, there is a need to clarify the basis for the 2.5 percent real rate, and to critically assess the validity of incorporating inflation rates influenced by the post-COVID liquidity surge into the present value calculations of government expenditures projected over the next 20 to 30 years.

Gap Between Project Return and Discount Rate

In some privately proposed BTL projects, the project internal rate of return (IRR), which serves as the basis for estimating government payment obligations, is set significantly lower than the discount rate used to convert those payments into present value terms. This discrepancy tends to favor the private investment alternative over the public comparator, potentially biasing the Value-for-Money analysis. Therefore, the validity and justification of such adjustments should be carefully examined.

For example, according to the Value-for-Money (VfM) analysis report for the Daegu Sewer Pipeline BTL Project, included in the 2025 Lease-Type Private Investment Project Ceiling Proposal by the Ministry of Environment, the project was initially pursued as a privately proposed initiative. The project internal rate of return (IRR) presented in the private proposal was 4.27 percent, while the financial discount rate applied for present value calculations was 4.50 percent, resulting in a gap of 0.23 percentage points.

However, during the course of the VfM analysis, the Korea Development Institute (KDI) revised the project internal rate of return (IRR) from 4.27 percent, as stated in the private proposal, down to 3.29 percent, while simultaneously raising the financial discount rate from 4.50 percent to 5.24 percent. As a result, the interest rate gap between the two parameters widened to 1.95 percentage points.

Example: Daegu Sewer BTL (MoE)

Result: Discount rate raised while IRR reduced, increasing perceived VfM for PFI.

The Ministry of Economy and Finance has stated that, in accordance with the “Private Investment Eligibility Assessment Indicators for Privately Proposed BTL Projects” (Korea Development Institute, 2018), the reference interest rate used to calculate the project internal rate of return (IRR) is based on the weighted average of 5-year government bond yields over the five years prior to the quarter immediately preceding the official request for review. Likewise, the inflation rate component of the financial discount rate is calculated as the weighted average of the annual consumer price index growth rate over the five years prior to the month of the request for review.

However, the project IRR reflects the rate of return required by private investors to recover their total investment in infrastructure over a 20-year operation period through government payments in the form of facility lease fees. A lower IRR reduces the nominal value of these lease payments made quarterly during the operation period.

Conversely, the financial discount rate is applied to calculate the present value of future government payment obligations. As described earlier, a higher discount rate reduces the present value of lease payment obligations.

Accordingly, lowering the project IRR while raising the financial discount rate improves the assessed cost-effectiveness of the private finance initiative (PFI) in VfM analysis, potentially biasing the results in favor of private investment. It is therefore necessary to carefully examine the substantive validity of such adjustments.

In addition, the project IRR and the financial discount rate are conceptually distinct: the former reflects the cost of capital for private investors, while the latter corresponds to the cost of capital for the government. Considering that the government typically enjoys a higher credit rating and thus lower borrowing costs than private entities, it is questionable whether it is reasonable for the IRR to fall significantly below the discount rate. This issue also warrants further review.

Inconsistencies in Bid/Cost Application Rates

A key driver of VfM results is the difference in bid rates (PSC) and application rates (PFI), which determine construction costs.

Specifically, the Ministry of Economy and Finance and the Korea Development Institute (KDI) apply preset bid rates to the Public Sector Comparator (PSC) in accordance with the 2018 Guidelines for Feasibility and Eligibility Analysis of Private Investment Projects. In contrast, for the Private Finance Initiative (PFI), which uses a concept similar to the bid rate known as the application rate, the same guidelines merely state that “the average application rate of recently concluded private investment projects may be used.” As a result, application rates are often determined differently by facility type, without a clear or uniform standard.

In the case of the Daegu Sewer Pipeline Improvement BTL Project, a privately proposed initiative included in the 2025 Lease-Type Private Investment Project Ceiling Proposal, the bid rate for construction costs under the PSC was set at 93.57 percent, while the application rate under the PFI was set at 83.6 percent. Based on this difference, the construction cost—a major component of the total project cost—was assumed to be KRW 46.12 billion lower under the private investment alternative compared to the public comparator.

Example: Daegu Sewer Pipeline Project

PSC uses standard bid ratios from 2018 KDI guidelines.
PFI uses flexible, loosely defined application rates based on past contracts.

The uniform application of bid rates calculated by the Korea Development Institute (KDI) in 2018 to the Public Sector Comparator (PSC), while allowing the application rate for the Private Finance Initiative (PFI) to be set differently based on past project outcomes without clear standards, raises concerns about the objectivity and credibility of the Value-for-Money (VfM) analysis in lease-type private investment (BTL) projects. Setting the application rate for PFI significantly lower than the bid rate for PSC under such vague provisions undermines analytical consistency.

Furthermore, the assumption that substantial cost savings in design and construction can be achieved simply by transferring procurement responsibility from the public to the private sector calls into question the professionalism and effectiveness of public procurement practices. If such assumptions become institutionalized, there is a need for fundamental reforms to ensure transparency and fairness in cost estimation practices.

Regarding bid rates, the Ministry of Economy and Finance has stated that its current methodology is based on a study of turnkey and alternative design projects in the road, rail, port, and environment sectors, conducted by the Public Procurement Service between 2001 and 2016. The Ministry also indicated that an updated analysis is currently underway and will be used to supplement the existing approach.

Conclusion

The VfM analysis framework for BTL projects requires better consistency in:

• Discount rate assumptions
• Return-on-investment benchmarks
• Cost application methods

Without this, VfM results may be biased in favor of PFI models, weakening the credibility of project evaluations and fiscal transparency.

Utilization of Analysis Results

Inclusion of Ineligible Projects in Ceiling Proposal

Some projects listed in the 2025 BTL ceiling proposal were found to be ineligible based on VfM analysis conducted by the Korea Development Institute (KDI). Despite this, they were still included in the proposal.

Since 2005, the Ministry of National Defense has promoted the construction of military barracks and officer housing through Build-Transfer-Lease (BTL) projects, based on the Directive on Private Investment Projects for National Defense and Military Facilities. Under this framework, new BTL projects are included in the ceiling proposal each year.

In the 2025 Lease-Type Private Investment Project Ceiling Proposal, three military housing facilities were included:

Defense Ministry Projects Included in the Ceiling

Source: 2025 BTL Ceiling Proposal

However, according to the review comments in the feasibility analysis report provided by the Korea Development Institute for the Gyeryong officers’ housing, when the VfM analysis based on total project cost and annual operating expenses yields a project rate of return of 4.56 percent, the present value of total cash outflows under the Public Sector Comparator (PSC) is KRW 98.58 billion, whereas that of the Private Finance Initiative (PFI) is KRW 99.44 billion. This higher present value for the PFI alternative indicates that it is not eligible.

Similarly, for the second phase of the Jangseong education facility, the Korea Development Institute calculated the present value of cash outlays as KRW 94.79 billion for the PSC, compared to KRW 95.596 billion for the PFI. Again, the higher present value under the PFI alternative suggests that it is ineligible.

VfM Comparison by Facility(Unit: KRW million)

Source: Korea Development Institute (KDI)

Therefore, the Ministry of Economy and Finance and relevant ministries should ensure that any facilities included in the Build-Transfer-Lease (BTL) ceiling proposal have undergone a thorough feasibility review. Facilities that do not meet the eligibility criteria based on the Value-for-Money (VfM) analysis should only be incorporated into the ceiling proposal after eligibility has been clearly verified.

Overstatement of Ceiling Based on PSC Instead of PFI Estimates

In several cases, including the Daegu sewer pipeline project, the ceiling was calculated based on PSC costs, despite PFI-based estimates being used for VfM justification.

The Ministry of Economy and Finance and the Ministry of Environment included a total of KRW 959.5 billion in the 2025 Lease-Type Private Investment Project (BTL) Ceiling Proposal for sewer pipeline infrastructure projects in Daegu City, Samcheok City, and Cheongdo County. Of this total, KRW 578.9 billion was allocated to Daegu City, KRW 202.5 billion to Cheongdo County, and KRW 178.1 billion to Samcheok City.

Sewer Infrastructure Projects — 2025 Ceiling Allocation

Source: Ministry of Environment (MOE)

However, according to the Value-for-Money (VfM) analysis report for the Daegu sewer pipeline BTL project, the total project cost under the Public Sector Comparator (PSC) was KRW 578.907 billion, whereas under the Private Finance Initiative (PFI), the total project cost was KRW 539.728 billion.

Daegu Sewer Project Cost Breakdown(Unit: KRW million)

Source: VfM Analysis, Ministry of Environment

While PFI was shown to be more efficient in the VfM analysis, the PSC cost was used for the official ceiling, effectively overstating the budget request.

The Ministry of Economy and Finance explained this as a buffer against post-agreement cost changes. However, Article 7-2 of the PPP Act allows for contingency ceilings (up to 20%) to manage such uncertainties, and these should be recorded separately and submitted transparently to the National Assembly.

*MOE(Ministry of Environment) noted that it bases ceiling requests on PFI costs for privately proposed BTLs, underscoring inconsistent practices between ministries.

2.C. Issues in Post-Implementation Management of BTL Projects

Issues with Government Payment Accounting

Reallocation of Sewer BTL Rental Payments to a New Budget Account

In the 2025 budget proposal, the Ministry of Environment shifted the funding for BTL rental payments from the Environment Improvement Special Account to the Balanced Regional Development Special Account (Regional Support Division), without clear justification despite annual costs exceeding KRW 300 billion.

The Ministry of Environment’s “BTL Project for Sewer Pipeline Improvement Lease Payments” is a Build-Transfer-Lease (BTL) initiative aimed at improving sewage treatment efficiency through sewer infrastructure upgrades, utilizing private capital, technology, and innovation alongside traditional public funding.

In the 2025 budget proposal, KRW 357.04 billion was allocated under the Regional Balanced Development Special Account (Support Division), instead of the Environment Improvement Special Account, which previously covered this program.

Unit: KRW million — Source: Ministry of Environment

Until 2024, the government had been funding annual lease payments for BTL sewer pipeline improvement projects—amounting to over KRW 300 billion each year—through the Environment Improvement Special Account. However, starting with the 2025 budget proposal, this responsibility was transferred to the Regional Support Division within the Regional Balanced Development Special Account. According to the Ministry of Economy and Finance, this reallocation was intended to expand fiscal investment under the regional account and strengthen national support for local areas.

Nonetheless, lease payments for BTL projects represent follow-up obligations for previously implemented projects, and thus, it is difficult to interpret this shift as a genuine increase in regional support.

Moreover, unlike the Environment Improvement Special Account, which is funded by legally mandated revenues such as environmental charges, the Regional Balanced Development Special Account has no dedicated revenue sources. Therefore, transferring BTL lease payment obligations to this account raises concerns about the lack of fiscal oversight and the potential for unchecked expansion of government payment commitments. In this regard, the appropriateness of this budgetary reallocation should be carefully reconsidered.

Violations of Statutory Subsidy Ratios

Some local BTL projects breach legally mandated matching ratios under the Subsidy Management Act.

The Ministry of Environment’s “BTL Project for Sewer Pipeline Improvement Lease Payments” is a local subsidy program that supports municipal governments in covering lease payments and operating costs for environmental facilities constructed through Build-Transfer-Lease (BTL) arrangements for sewer infrastructure improvement.

The subsidy rate for this program is governed by Article 9 of the Framework Act on the Management of Subsidies and Annex 1 of its Enforcement Decree. Based on this legal framework, the Ministry of Environment calculates the BTL payment budget each year according to the standard subsidy rates specified in the annex, as applicable to each individual facility at the time of agreement.

For example, in the case of the 2009 BTL project in Anseong City, the Ministry applied a standard subsidy rate of 70 percent, in accordance with the Enforcement Decree. As of the 2025 budget, the Ministry plans to support KRW 5.285 billion in lease payments and KRW 676 million in operating expenses through a combination of national and local government funding. The Ministry also stated in its program explanation materials that it has continued to apply the 70 percent subsidy rate each year in accordance with the legal standard.

Example: 2009 Anseong BTL Project

However, local government reports show that KRW 788M of local costs were covered by a central government water basin fund, pushing the effective central subsidy to 84.9%, which violates the legal limit.

Source: MOE 2023 Budget Report for Anseong BTL

In response, the Ministry of Environment explained that, in certain municipalities, BTL sewer pipeline facilities are located within water source protection zones and are therefore eligible for additional financial support through the Water Source Management Fund. As a result, part of the local government’s share of lease payments is subsidized with national funds.

However, Article 4 of the Enforcement Decree of the Framework Act on the Management of Subsidies defines the standard subsidy ratio as the proportion of national subsidies relative to the total project cost, including national subsidies, local funding, government loans, and user contributions. Accordingly, any additional national subsidies provided through the Water Source Management Fund that raise the total beyond the standard subsidy ratio constitute a violation of the Enforcement Decree.

Therefore, the Ministry of Environment should strengthen project oversight to ensure that the final national subsidy ratio for each local government does not exceed the legal threshold prescribed under the Enforcement Decree.

Improper Use of Rental Funds Due to Contract Extension

The Ministry of Economy and Finance and the Ministry of National Defense extended the original operation period of a private investment project that was initially scheduled to end in late 2020. Through this extension, they preserved the status of the existing project operator for an additional four years. During this process, a portion of the facility lease payments, which were originally intended to be disbursed within the ceiling of private investment, was reclassified and paid as operating expenses, deviating from the original purpose.

The Ministry of National Defense’s “BTL Project for the National Defense Broadband Integrated Network” was designed to prepare for future network-centric warfare and to improve the poor information and communication infrastructure of field units. The project established a high-speed, high-capacity integrated broadband network under a Build-Transfer-Lease (BTL) model, with quarterly government payments made to the private operator.

Since the completion of the network on April 7, 2011, the Ministry has made quarterly lease payments to the private operator, calculated based on the total private investment (including total project cost, construction interest, and inflation adjustment) and the agreed project rate of return over the designated operation period. At the time of completion, the final confirmed amount of total private investment was KRW 256.1 billion, and lease payments were scheduled to be made in equal installments over a 10-year period, ending in December 2020. The original operation period, as defined in the project agreement, was from January 2011 to December 2020.

However, in the “First 2019 Private Investment Review Committee Meeting,” the Ministry of Economy and Finance approved an amendment to the implementation agreement for the BTL project, announcing that the operation period would be extended by three additional years during the preparatory phase for the next-stage project, thereby maintaining the existing operator’s role.

As a result, the Ministry of National Defense reduced the facility lease payment allocated under this project from KRW 24.836 billion in 2019 to KRW 11.054 billion in 2020, representing a decrease of KRW 13.782 billion.

According to the Ministry of National Defense, the reduction in 2020 lease payments was due to the nature of private investment projects, where continued lease payments are required to maintain the operational contract with the existing special purpose company (SPC). The Ministry explained that a portion of the 2020 facility lease payments was withheld and later rescheduled for installment payments over three years, with the final payment to be made by the end of 2023 (based on budget execution timing, by the first quarter of 2024).

Repayment Schedule for the Defense Broadband Integrated Network BTL Project (2020–2024)(Unit: KRW million, VAT excluded unless stated)

Source: Ministry of National Defense
2020–2024 BTL Lease Payment Status

In July 2023, the Ministry of Economy and Finance, during the 3rd Private Investment Project Review Committee, approved an extension of the operation period for the existing operator. This was due to delays in the completion of the next-phase project for the defense broadband network, originally expected by the end of 2023. To prevent operational disruption, the operator’s contract was extended by nine months.

As a result, the Ministry of National Defense reduced lease payments by KRW 1.439 billion (VAT excluded) that were scheduled for Q3 and Q4 of 2023, and rescheduled the difference for payment by Q4 2024.

However, despite this adjustment, the Ministry did not return the unspent portion of the KRW 6.49 billion lease payment budget for 2023. Instead, it reallocated KRW 1.62 billion to operating expenses and paid it to the project operator.

The Ministry explained that this adjustment was necessary due to aging infrastructure and equipment in the existing broadband network, which required ongoing maintenance and partial replacement.

Nonetheless, even under this rationale, ownership of BTL infrastructure lies with the government, and any additional infrastructure needs should have been addressed through separate funding mechanisms, not through reclassification of BTL lease payments. This payment could therefore be interpreted as a deviation from the original budget purpose, raising the need for a recovery of misallocated funds and preventive measures to avoid recurrence.

Legal Basis for Ancillary Businesses in Private Investment Projects

Article 14(4) of the Act on Public-Private Partnerships in Infrastructure stipulates that a private investment project company may not engage in any business other than those approved by the competent authority at the time of designation as a project operator. However, the proviso clause permits minor activities recognized by the authority after designation:

Article 14 (Establishment of Private Investment Project Companies), Paragraph 4
A company established under Paragraph 3 shall not engage in any business other than those recognized by the competent authority at the time of designation as a project operator.
Provided, that the company may carry out minor businesses recognized by the competent authority after the designation (hereinafter referred to as “ancillary businesses”).

Despite this provision, neither the Act nor its Enforcement Decree provides any rules or procedures regarding the operation or revenue reconciliation of such ancillary businesses.

By contrast, the Act contains a separate provision regarding “complementary businesses” in Article 21, which states:

Article 21 (Implementation of Complementary Businesses), Paragraph 1
The competent authority may permit a project operator to implement complementary businesses in connection with the main private investment project, where deemed necessary for investment cost recovery, smooth operation, reduction of user fees, or easing of the government’s fiscal burden.

Based on this provision, Article 18-2 of the Enforcement Decree requires that profits from complementary businesses must be used to reduce user fees or government support, taking into account total project cost, reasonable rate of return, and the duration of free use or ownership:

Article 18-2 (Use of Profits from Complementary Businesses)
In accordance with Article 21 of the Act, the competent authority shall use profits from complementary businesses to reduce tolls, lease fees, or government subsidies, based on factors such as the total project cost, appropriate rate of return, and duration of ownership or free use.
Specific arrangements shall be stipulated in the implementation agreement, as prescribed by the Minister of Economy and Finance.

Given the nature of Build-Transfer-Lease (BTL) projects, which are funded through public financial support, both complementary businesses and ancillary businesses should be subject to transparent and consistent income and expenditure management. In principle, the profits generated from such activities should be used to reduce user fees, alleviate government financial support, and serve the broader public interest.

However, Article 62-2, Paragraph 6 of the Basic Plan for Private Investment Projects, a separate guideline issued by the Ministry of Economy and Finance, states:

“If the actual net income from an ancillary business falls short of the estimated profit specified in the implementation agreement, the shortfall shall be borne by the project operator. If actual income exceeds the estimated profit, the excess shall be shared between the competent authority and the project operator according to a predetermined ratio.”

This provision may lead to insufficient reconciliation of actual profits, especially if implementation relies solely on assumed figures rather than actual operating data.

For example:

1. The Ministry of National Defense has constructed five military barracks and officer housing facilities under BTL contracts, and has allowed project operators to run ancillary businesses (e.g., convenience stores, internet cafés) during the operation period.

2. Each quarter, the Ministry assumes that the estimated profit specified in the implementation agreement has been realized, and deducts this estimated amount from the lease payments made to the operator.

3. If actual profits exceed the agreed estimate, only 50 percent of the excess profit is used to reduce lease payments, with the remaining 50 percent retained by the operator as a contribution reward.

This practice creates a structural risk of overstating government support obligations, since actual net profits are not fully reconciled and are only partially reflected in lease payment reductions.

Example 1: Military Housing BTL Projects (2024)

Moreover, in some BTL projects, the net profit from ancillary businesses—initially estimated in the implementation agreement—is deducted from lease payments as a fixed amount, but no quarterly or annual reconciliation of actual profits is conducted to adjust the government’s lease payment obligations.

For instance, in the Changwon Science Center BTL Project, initiated in 2007 and still included in the 2025 budget proposal for facility lease and operating costs, the implementation agreement stipulates in Article 59 that lease payments are to be calculated using the equal principal and interest method, and that the estimated annual net profit from ancillary operations, as provided in Annex 8, is to be deducted from the calculated lease payment:

Changwon Science Center BTL Implementation Agreement (October 2007)
Article 59 (Calculation of Lease Payments)
(2) Lease payments shall be calculated using the equal principal and interest formula specified in Annex 9 (Method for Calculating Lease Payments). However, the estimated annual net profit from ancillary operations, as presented in Annex 8, shall be deducted when determining the final lease payment amount for the facility.

Therefore, the government should clarify the principles for reconciling actual net profits from ancillary businesses to ensure that revenues generated from infrastructure-related operations are effectively used to reduce public financial support.

More fundamentally, it is necessary to consider institutional reforms, including the legal codification of principles stipulating that profits from ancillary operations within BTL facilities should be used for reducing fiscal subsidies or, where appropriate, revert to the national treasury.