Seoul to fight losses from Macquarie-style deals

By Kim Rahn

Seoul City will hold researchers of subcontractors directly accountable if they make poor and inaccurate estimates regarding traffic volume for future construction projects such as toll tunnels that need private investment, so the metropolitan government will not have to pay compensation if such forecasts prove to be false.

City officials said Tuesday that they will ensure such researchers are bound to greater legal responsibility when conducting research by stating civil and criminal responsibilities on contracts issued.

The actions are designed to prevent “a second Mt. Umyeon Tunnel incident,” in which the Seoul Institute wrongly estimated the traffic volume of a toll tunnel in southern Seoul. Now, the city has had to compensate Macquarie Korea Infrastructure Fund (MKIF) for losses using taxpayers’ money.

“So far, when trouble arises due to differences between traffic volume forecast and actual volume, the city government and private investors have to take responsibility for it even though the contract was made based on an inaccurate projection by the subcontracting research agencies,” an official said.

For the Mt. Umyeon Tunnel case, the city consulted legal experts about whether it could demand the researchers to pay compensation, but this proved problematic because a long time has passed since the study was conducted and it would be difficult to prove that they estimated the traffic falsely on purpose.

“The new measure will help make subcontracting researchers manage studies with greater responsibility. We’ll soon come up with detailed measures, including the amount of compensation that such research agencies should make,” the official said.

To enhance the accuracy of traffic volume forecast in such long-term construction projects, the city will also have researchers conduct a second study mid-way or after completion of a project by taking changed factors into account.

“Estimated traffic volume can change because of external factors. For example, a researcher can estimate huge traffic volume in a region based on another nearby urban development project, but volume will be reduced if this project is cancelled. A second study will help prevent the city from being misled by the first wrong forecast,” he said.

Regarding the Mt. Umyeon Tunnel which opened in January 2004, the Seoul Institute predicted at the end of 2003 that daily traffic volume would be 51,745 cars per day. Based on this, the city renewed its contract with the MKIF under a minimum revenue guarantee (MRG) agreement, which would force the city to compensate the investor’s losses if the real traffic volume was below 79 percent of the estimated figure.

“But 13,667 cars actually used the tunnel when it opened, so the city government had to pay huge compensation. Now the number still remains around 27,000, about 67 percent of the original estimation. Under the contract, we have to compensate the losses until 2033,” he said.