KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Strategies for Refining the Jeonse Deposit Return Guarantee System

Jeonse, a housing lease model unique to Korea, has long served as a cornerstone of housing security for many families. However, recent significant fluctuations in housing prices have highlighted concerns such as underwater jeonse and reverse jeonse, amplifying calls for reform. A crucial step in addressing these challenges and ensuring the stability of the jeonse system is to expand the scope of the Guarantee for a Return of Jeonse Deposit. In pursuit of this, it is important to accurately reflect risks in return guarantees and to consolidate jeonse guarantees under the unified framework of the Guarantee for a Return of Jeonse Deposit.

- As a uniquely Korean housing rental system, jeonse has enhanced housing stability for ordinary families, but recent fluctuations in the housing market have exposed the risk of tenants not getting their deposits back.

- Approximately 8 million general households in Korea reside in properties owned by others under lease contracts. Of all jeonse and wolse transactions, jeonse takes up nearly half, underscoring its sustained significance for the foreseeable future.

- Jeonse prices started to decline in the latter half of 2022, a trend expected to persist through 2024, accompanied by increasing concerns about reverse jeonse.

- While the jeonse-to-price ratio based on the publicly disclosed value decreases as the property value increases, multi-household units consistently show higher ratios than apartments, implying that the former households are at a greater risk of not recovering jeonse deposits.

- The deposit return guarantee system ensures that if leaseholders fail to meet their return obligations, a guarantor agency will refund the deposit. Presently, guarantees from public guarantor agencies amount to around 170 trillion won.

- Due to a marked rise in guarantee-related incidents from 2022 onwards, the application requirements for the refund guarantee were tightened in May 2023.

- Low-priced houses are mostly excluded from the deposit refund guarantee due to stricter eligibility requirements.

- Regrettably, the jeonse deposit return guarantee system does not adequately shield vulnerable tenants from the risk of not retrieving their deposits, as the guarantee fee rate does not accurately reflect the actual risks involved.

- The Guarantee for a Refund of Jeonse Deposit (HUG) has a lower guarantee fee rate compared to other products, especially against the actual incidence rate of guarantee defaults. Hence, guarantee fee rates should be recalibrated to accurately represent risks, taking into account the actual default rates.

- Since recalibration of guarantee fee rates might increase the rates for lower-priced houses, short-term remedies targeting vulnerable households are necessary.

- As the Guarantee for Jeonse Deposit Loan can drive up jeonse prices by expanding jeonse loans, mitigation is necessary by mandating the purchase of deposit refund guarantees during jeonse loan acquisition process.

- A hybrid guarantee system that utilizes escrow not only ensures the protection of the tenant’s deposit but also allows for the application of LTV regulations, typically exclusive to home mortgages, across all housing types.

- In addressing the inherent weaknesses of the jeonse model, all related guarantee products should be consolidated within one unified framework while adjusting and differentiating guarantee fee rates.

- It is essential to expand the scope and availability of market price data for jeonse properties and strengthen the duties and responsibilities of realtors.

Summary

KDI FOCUS Remedies to Korean SOE Debt Problem

□ Benefitting from implicit government guarantees, Korean state-owned enterprises (SOEs) can readily expand their debt at an interest rate as low as sovereign bonds regardless of their ability to repay. In this scenario, Korean SOEs stand vulnerable to ‘double moral hazards’: SOEs have little incentive to improve their financial structure, and the government has a large incentive to assign popular but unprofitable projects to SOEs. In recognition of this, the government should formally acknowledge SOE debt as the ‘national guaranteed debt’ in order to ensure official supervision and regulation. In addition, the government needs to improve SOE debt structure by introducing capital regulation and bail-in bonds.

- KNOC slipped into a state of capital shortfall in 1H 2020.

- In the era of low birth rates and population aging, the financial structure of other SOEs expects a deteriorating trend to persist as well.

- This study reveals that ‘implicit guarantees’ by the government lead to heavier debt for SOEs and recommends remedies to improve the Korean SOE debt problem.

- Compared to their counterparts in the major countries, Korean SOEs have exceptionally high levels of debt.

- For financing public projects, Korea is more reliant on SOE debt than on its government debt.

- Korea’s public enterprises raise debt mainly by issuing bonds.

- Unlike bank loans requiring collateral, SOEs can issue bonds only with good credit ratings, which makes it an accessible tool to expand the debt.

- Public corporations on the brink of default can still debt-finance at a large scale at an interest rate as low as government bonds, thanks to the possibility of sovereign support.

- Owing to implicit guarantees by the government, SOEs can benefit from an interest rate lower than private ones in issuing bonds, and the resulting discount rate effect is around four trillion won per year.

- No matter how weak their fundamentals are, Korea’s public enterprises can borrow money at an interest rate 0.20%p lower than leading domestic private companies.

- Implicit guarantees by the government could lead to double moral hazard on the sides of public enterprises and government.

- First, public enterprises lack incentives to better know their fundamentals.

- Second, occasionally the government assigns infeasible projects to SOEs and mandates their execution by debt financing at a low-interest rate.

- Consequently, public enterprises end up accumulating debt on the one hand and debt capacity exhausted on the other.

- Government-guaranteed obligations need to incorporate SOE debt predominantly incurred by their bond issues, and there should be a fee for the service of a riskbased guarantee.

- Capital regulation on SOEs should be introduced to maintain financial soundness systematically.

- The disciplines on SOEs should be restored by introducing bail-in bonds where creditors share losses in case of emergencies.

Summary

Research Monograph KOR Analysis of Public Procurement Contracts: Effectiveness of the APAS

The Korean government implemented the Average Price Auction with Screening (APAS) in 2016 for construction contracts of a certain size or larger that are ordered by the public sector, including central government offices and public enterprises. The APAS takes into account both price and non-price scores which are tallied using the Average Price Auction (APA), and not the more common First Price Auction (FPA) method. The FPA awards the highest score to the lowest bidder while the APA calculates the average price, and awards the highest score to the closet bid. As such, the APA regulates the bidding competition, and forces bidders to place similar offers. Before being replaced by the APA in 2016, the FPA received harsh backlash for inciting aggressive competition, and awarding contracts to incapable bidders which resulted in frequent contract changes and cost overruns.

This study empirically analyzes whether the APAS produces meaningful effects that achieve the intended goals in regard to price and non-price scores. The outline of the major findings are as follows. Firstly, the bid-hit ratio increased by a statistically significant 6% after the adoption of the APAS. This is in line with expectations that the transition from the FPA to APA keeps competitions in check and raises the bidding ratio. Secondly, no improvements were observed in the resolution of fallouts such as contract changes and cost overruns. In sum, these results indicate that the APAS is not effective, and could place a bigger fiscal burden on the government authorities awarding the contracts.

Summary

Research Monograph KOR Strengthening the Financial Soundness of Korean SOEs

Korean SOEs have the highest debt level in the world, and it is expected that low birth rates and an aging population will raise it even further. Due to an implicit guarantee that the government will repay SOE debt if the SOEs are not able to repay the debt by themselves, SOEs are able to expand their debt with ease. However, the existing guarantee system needs to be improved. The vast majority of bonds issued by SOEs are not included in the “official” guaranteed debt category, placing them in the blind spot of the government’s official management and control. Even if classified as such, no regulatory actions are being taken to impose guarantee fees, among others, that are essential for improving the efficiency and soundness of guaranteed debt.

This study highlights the problem of implicit guarantees based on existing theoretical frameworks and shows, through empirical analysis, that existing government rules and regulations and market discipline have been ineffective in solving the problem although the implicit guarantees can actually have a significant effect on the financing of SOEs. Based on these results, this study formulates and suggests a SOE-customized bail-in system and the risk-adjusted guarantee fee system as a way to maintain the balance between publicness and financial soundness.

Summary

Research Monograph KOR Reinventing the Government to Foster Innovation Ecosystem

Innovation ecosystem is the driver of economic development in the age of the Fourth Industrial Revolution, and government reform for the purpose of establishing the innovation ecosystem is a very important and urgent task of the nation comparable to reigniting the engine of growth. As a concept encompassing both R&D and innovation, the innovation ecosystem represents a system in which researchers, entrepreneurs, investors, and public officials continuously compete and cooperate to constantly generate new products, platform, and industries based on high-risk and high-return R&D. Korea must break away from the fast-follower model of the past as soon as possible, which relies on government regulations, interventions, and controls, and must reform roles, organizations, and functions of the government so that it can focus on providing indirect support for establishing the first-mover innovation ecosystem.

This report is consisted of eight chapters from these perspectives. Chapter one presents overall research purpose and background of this report. Here, suggestions are made about transforming the current government into one that is strategic, innovative, and cooperative while also making emphasis on the urgency of establishing the innovation ecosystem and appropriateness of the government reform. This chapter is co-authored by professor Ju-Ho Lee and professor Changyong Choi at KDI School of Public Policy and Management who were also project manager of this research. Chapter two, which investigates integrative restructuring of government organizations, is co-authored by professor Changyong Choi and professor Sangook Park at Soongsil University. Chapter three about strategic and planning function of the central government and strengthening independence and competency of intermediate organizations is authored by professor Heungsuk Choi at Korea University. As for chapter four that handles the topic of reforming governance structure of government-funded research institutes, it is written by professor Jin Park at KDI School of Public Policy and Management. Chapter five presents empirical results regarding geographical distribution of innovation and is co-authored by professor Ju-Ho Lee, Ho Young Oh who is a senior research fellow at Korea Research Institute for Vocational Education and Training, and Sang Hoon Jee who is a researcher at KDI School of Public Policy and Management. Chapter six on reorganizations of support and evaluation systems for R&Ds of government- funded research institutes and universities is written by professor Yeon Seob Ha at Yonsei University. Chapter seven about restructuring national support system for industrial innovations is authored by professor Jin Young Kim at Konkuk University. Finally, chapter eight on the topic of constructing indirect support system for establishing innovation ecosystem is co-authored by professor Seongwuk Moon and professor Joonmo Ahn at Sogang University

Summary

Research Monograph KOR A Study on Reforming Public Service System

This study started from a very simple observation that the openness of the organization affects the incentive system of the organization. If the organizational openness is high, employment and promotion can not be guaranteed, and so efforts in the job and human capital accumulation should be exerted otherwise low-performing human resources can only be replaced. Therefore, the open organization's performance is likely to be high.

On the other hand, if the organizational openness is low, the employment is guaranteed and the promotion is guaranteed over the period, so promotion or the increase of wages is not an incentive to work and it is difficult to make employees invest in human capital accumulation. Therefore, the closed organization's performance and efficiency are likely to be low.

If the organization is a public organization, it is particularly problematic that policy decisions are unclear for the survival and protection of the organization, public funds are opaque, and even if there is a supervisory body, corruption is rampant and government expenditure is wasted. For this reason, the closedness of the public service system causes social inefficiency. The relationship between the openness of the public service system, the human capacity of the public servants, and the efficiency of the government in this context is as follows.

The capacity of Korean civil servants is somewhat lower than that of Germany and Japan, but is similar to that of OECD countries, and is higher in all ages and genders than in the domestic private sector. The higher the level of mass formal examination for civil servant recruitment, the higher the level of civil servants' capacity. This implies that if the closedness of government organizations increases, the capacity of public officials will increase.

On the other hand, the higher the job security of public officials, the lower the discretionary decisions of public officials in executing their job. High job security means retirement is guaranteed. In this case, a public official is promoted after a certain period of time, so that promotion or wage increase does not attract incentive to work or accumulate human capital. In such a situation, public officials don’t have need or incentive to create a situation where they should be held accountable. This means that they do not exercise their discretion even if they have discretion in their job.

The increase in the openness of public office in one country is analyzed to be linked to the overall efficiency improvement of the government sector. The efficiency improvement was greater in countries with lower levels of public openness than in countries with higher levels of openness. In order to compare the civil servants of the developed countries with those of the civil servants in Korea, we examined the system of public servants of the Netherlands, New Zealand, Singapore, England, Australia, Japan, Germany and France. We examined the centralization of human resource management, the guarantee of retirement, the existence of mass formal examination, the existence of long-term education and training opportunity, and the existence of a separate civil servant pension.

The main characteristic of the Korean civil service system is that due to retirement security, there are more people than the number of people required for the job. This can be confirmed by the fact that the ratio of education, training, dispatch increases as the rank goes up. In addition, some officials say that they do not want a quick promotion. The reason is that if you are promoted too fast, you have to go to senior civil service and in this case you have to retire sooner than the cohorts. What this means is that promotion is not an incentive to accumulate human capital or work hard, and second, it is more advantageous for public officials to fill retirement years than promotion. In such a situation, it will be difficult to expect the public officials to perform their duties properly.

The most important determinants of openness of public office are retirement guarantee and existence of separate civil servant pension, and the former is more critical. This is because through competition in securing human resources with the private sector, promotion in the public sector actually provides incentives to accumulate human capital or to work on the job. It is also possible to expand the openness of public service and improve government performance and public service integrity by introducing a position classification system that allows the introduction of performance-based payments, the dismissal of low-performing workers, effectively abolishing retirement guarantees, and the incorporation of separate civil servant pension into the national pension scheme.

Summary

Policy Study KOR Governance of commercial SOEs in Korea: Main issues and a proposal for reform

This monograph summarizes the policies of the successive administrations on the governance of large commercial SOEs in Korea since the early 1980s, explains the forces behind major changes in the policies in the last three decades, analyzes the properties of the current policies that are based on the Act on the Management of Public Institutions of 2007. It also identifies the major problems that exist in the current policy and proposes a set of measures that could potentially lead to the improvement in the internal efficiency of large commercial SOEs in Korea as well as in the allocative efficiency of the relevant industries.

Successive administrations since the early 1960s generally perceived commercial SOEs as policy instruments of the line ministries rather than commercial enterprises. However, during 1993 ~ 2002, two successive administrations attempted to privatize large commercial SOEs or to install a profit oriented governance structure in them. The efforts of the Kim Young-Sam administration to prepare large commercial SOEs for eventual privatization while at the same time expose them to the market principles culminated in the passing of the Special Act on Privatization of 1997, which paved the way to eventual mass privatization of commercial SOEs during the Kim Dae-Jung administration. However, the movement for privatization, efficiency, and competition in the SOE sector in Korea halted in 2003. Further, the Act on the Management of Public Institutions enacted in 2007, which provides details of the governance structures of commercial SOEs as well as a host of non-commercial public institutions, treats commercial SOEs as policy instruments of the line ministries and gives politicians and bureaucrats a near absolute power to intervene in the affairs of SOEs.

Current governance structure gives CEOs, board members, and employees of SOEs a weak incentive to pursue efficiency while giving them a strong incentive to take actions that would significantly undermine the firm value in order to meet the demands of the government. The monograph ends with a set of recommendations for a group of commercial SOEs that could potentially improve their efficiency as well as the allocative efficiency of the industries they belong to, including a proposal to establish a holding company for commercial SOEs. The proposal can be applied to other commercial SOEs in Korea.

Summary

Research Monograph Citizen Participation, Transparency, and Public Trust in Government: Participatory Budgeting in Local Governments of Korea

The purpose of this book is to develop an integrated evaluation model of the success factors of effective participatory budgeting and understand the impacts of effective participatory budgeting on transparency and public trust in government in the context of the Republic of Korea. Testing the research propositions developed in the book would enhance the knowledge of what specific factors of individual, managerial, institutional, political, and cultural dimensions are relatively more significant than the others for implementing effective participatory budgeting in local governments of Korea. Drawing on a comprehensive literature review on antecedents of transparency and public trust in government, the book also offers a participatory budgeting model of transparency and public trust in government by emphasizing the roles of community values as mediator.

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