The state-run rail operator KORAIL is under pressure from the government to withdraw from the nation’s single largest but money-losing project to redevelop Yongsan, at the heart of Seoul, into an international business district.

Government officials said the Ministry of Land, Infrastructure, and Transport had instructed KORAIL to open an exclusive account for the Yongsan development project, separate from its accounting business on rail operation.

The instruction is tantamount to a call for giving up the project in order for KORAIL not to be critically affected by the already defaulted plan.

Ministry officials expressed concerns that KORAIL’s involvement in the Yongsan plan may impede its railroad operation.

“The ministry’s purpose is no more than to make sure that KORAIL remains faithful to its key function,” an official said.

The ministry had earlier said that it will not directly interfere in the controversial Yongsan project, seemingly letting KORAIL take the initiative.

Though it is entitled to carry on with its plan without government approval, the rail operator refrained from making official comments.

“We will first figure out the true intention of the ministry, before making further responses,” said a KORAIL official.

Should KORAIL accept the ministry’s instruction and separate its accounts, the disputed Yongsan project is most likely to go bankrupt as it is heavily reliant on KORAIL’s financial backing.

In that case, private investor firms such as Samsung C&T would have no way to retrieve their capital, which amounts to 1 trillion won ($900 million).

Dream Hub, the project financing vehicle of the project, plunged into loan default last month as it failed to pay back the interest on its asset-backed commercial paper.

The largest shareholder KORAIL nevertheless pledged to carry forward the plan by taking additional loans and scaling back the massive construction plan.

After the default on the project was announced last month, KORAIL has sought to scale down the project and draw other investors to keep it alive.

The 31 trillion won Yongsan project kicked off in 2007 and was further boosted by the city government, but its financing soon dwindled away, causing backlash from the residents and conflicts among the stakeholders.

By Bae Hyun-jung (tellme@heraldcorp.com)