The state-run rail corporation has developed a contingency plan in preparation for the possible bankruptcy of the 31 trillion won ($29 billion) Yongsan development project in which the company holds a 25 percent stake, a company official said on Wednesday.

“If the troubled development project goes bankrupt, KORAIL will face full-scale capital erosion as money attained in return for the land offer will disappear in the accounting book,” the official said.

The Yongsan project is the nation’s largest property development plan to transform a massive plot of KORAIL-owned land near Yongsan Station, central Seoul, into an international district by 2016. But the mammoth scheme has been tumbling as shareholders of Dream Hub, the project developer, including KORAIL, have clashed over how to develop the project, including financing methods, since the second half of last year.

“The financial crisis, however, will be temporary as land and tax on the land transaction will return to KORAIL later,” said the official.

“The company is making last-ditch efforts to get the project back on track, but we also have developed a contingency plan in case of the project collapse.’’

KORAIL extended a lifeline to the project by proposing a normalization plan to the board of Dream Hub last Thursday, which includes a “conditional” capital increase plan up to 4 trillion won. In the plan, KORAIL insisted other private investors have to be responsible for a 1.4 trillion won capital increase, while it would inject the remaining 2.6 trillion won.

Despite the board’s approval of the plan, the short timeline is problematic. Other shareholders of Dream Hub have to decide on the additional capital injection plan by March 12, the deadline for the 5.9 billion won debt payment. Dream Hub cannot meet the deadline due to a lack of capital without the additional fund injection.

Industry watchers said if the project fails, second-tier builder Lotte Tour Development, the second-largest shareholder with a 15.1 percent stake, will be hit hard as well, pushing toward the edge of a bankruptcy.

“The project seems to be stuck in the mud. Although the project is lucky enough to survive, it is likely to face other problems. For instance, if the project increases capital under the plan of KORAIL, the project will turn to a public project as the shareholding of KORAIL will rise up to 57 percent.

“The project has to be led by an experienced developer rather than the state-run rail operator,” an industry source said.

By Seo Jee-yeon  (jyseo@heraldcorp.com)