Public–Private Partnership Infrastructure Project: Case Studies from the Republic of Korea

Volume 1: Institutional Arrangements and Performance

Jay-Hyung Ki, Jungwook Kim, Sunghwan Shin, Seung-yeon Lee

• Publisher: Asian Development Bank
• Year: 2011
• Print ISBN: 9789290921257
• eBook ISBN: 9789290923039
• Edition: 1
• Topic: Business
• Subtopic: Infrastructure
• Index: Business

The Republic of Korea has rich experience in implementing public–private partnership (PPP) projects for almost a decade. This experience provides valuable lessons for most developing member countries (DMCs) and that merits wider dissemination. This report prepared by the Korea Development Institute (KDI) presents an in-depth assessment of the different components of PPP framework of the Republic of Korea, including comparing and contrasting the success factors of the Korean PPP model with the experience of other countries through invited presentations on PPP frameworks and multisector case studies. This publication aims to support the efforts of DMCs engaged in the development of appropriate institutional PPP framework and regulatory reforms along with a well-defined and transparent financial assistance and risk-sharing framework, for facilitating private sector involvement through PPPs.

Volume 1:

Institutional Arrangements and Performance of Public–Private Partnerships

Introduction

The term public–private partnership (PPP) project means a project to build and operate infrastructure such as roads, ports, railways, schools, and environmental facilities—which have traditionally been constructed and run by the government—with private capital, thus tapping the creativity and efficiency of the private sector.¹ PPP came out of the commercialization and privatization processes initiated in the 1980s in countries, such as the United Kingdom, where increased private sector participation was seen as beneficial because it²

(i) removes conflicts of interest between the government’s role of defining policies, regulating industries, and providing outputs;

(ii) allows the private sector to provide outputs in competitive markets because it has strong incentives to perform work based on the profit motive; and

(iii) reduces the government’s expenditure commitments, which helps support macroeconomic stability, and allows public expenditure to be reallocated toward high priority outputs in sectors such as health and education.

PPP was first introduced in the Republic of Korea with the enactment of the Act on Promotion of Private Capital Investment in Social Overhead Capital in 1994. The act was amended by the Act on Private Participation in Infrastructure in December 1998, further spurring private investment in many social overhead capital (SOC) projects. In another amendment in 2005, a service-type contract, called a build–transfer–lease (BTL), project, was introduced, in addition to the existing user fee-type contract, called a build–transfer–operate (BTO) project. The scope and opportunities for participants in PPP projects have been diversified and expanded ever since.

The PPP market in the Republic of Korea has grown and developed into a stable and highly profitable financial market thanks to the government’s systemic support and management to vitalize the PPP program over the past decade. This effort has solidified the PPP market’s position as a new mode of raising funds to make up for insufficient government funding. The private sector’s interest is rising in the government’s policy to reinvigorate PPP financing, as part of the latter’s efforts to improve its promoting strategy of PPPs. As of the end of 2008, more than 400 PPP projects were under way. Out of those, about 110 BTO projects and 140 BTL projects have been completed and are in operation.

Recently, there has been growing demand in the Republic of Korea to set up a sound fiscal management system for PPP projects. PPP investment has long been treated separately from publicly financed investment and has not been under the direct accounting and regulation of government expenditure. In this aspect, there are a number of issues specific to PPPs, such as determining the government subsidy between the competent authority and the private concessionaire, contracting future payment obligations for 10–20 years, determining whether or not the PPP assets are recognized as assets on the government’s balance sheet, and forecasting future expected or contingent government revenues. There is a need to develop a fiscal guideline to define the proper level of private sector participation, and the investment portion against the budget and suggested criteria for project selection.³ One method being considered is linking the PPP implementation and investment plans to the government budget plan in the medium-term expenditure framework.

This study is divided into two volumes. The first volume explores the institutional framework and the performance of the PPP system in the Republic of Korea, and the recent strategies and initiatives for effective implementation and management of PPPs. The latest policy measures to reinvigorate PPP investment in light of the global financial crisis that began in 2008 are included. The second volume summarizes the cases of PPP port and education facilities projects.

Chapter 2 of this volume will describe the details of institutional settings for public–private partnerships in the Republic of Korea. Topics discussed include the legal framework for PPPs, decision-making organizations, procurement schemes, government support for land expropriation, financial and tax incentives, concession termination conditions, and training and education program for capacity building.

In Chapter 3, the trends and current status of PPP program implementation as of September 2009 are summarized. An alternative PPP approach, the BTL method, which was introduced in 2005, is explained. A total of 173 BTO projects and 242 BTL projects worth W12.2 trillion have been announced and undertaken as of September 2009. This paper calculates and estimates the number of projects—either national or local, solicited or unsolicited—and the government’s fiscal commitment to those projects. Contingent liabilities from the minimum revenue guarantee (MRG) will be addressed as well.

Chapter 4 summarizes the PPP implementation procedures. The PPP Act and the PPP Enforcement Decree regulate general procurement procedures for PPP projects. Other regulatory measures are included in the PPP Basic Plan, managed and revised annually by the Ministry of Strategy and Finance (MOSF), and in the Standard Guidelines managed by the Public and Private Infrastructure Investment Management Center (PIMAC). This chapter examines the detailed implementation process by project type and initiation and defines the roles of associated parties, such as the competent authority, private company, the MOSF, line ministries, and PIMAC at each step. BTO and BTL projects are examined separately.

Chapter 5 provides information about how the Government of the Republic of Korea manages and monitors PPP project performance. PPP projects are managed by each competent authority (for example, the Ministry of Land, Transport and Maritime Affairs; the Ministry of Environment; Seoul Metropolitan Government; Busan Metropolitan City; etc.) and the management structure is stipulated in each concession agreement. This chapter raises several issues in refinancing and renegotiation as well. Refinancing guidelines are well documented.

Chapter 6 examines tangible evidence of cost savings and efficiency gains from PPP projects. Prior to this study, there had been little research done on the performance of PPP projects in the Republic of Korea. This chapter evaluates the economic efficiency of private investment projects through microeconomic empirical analysis. The analysis tries to estimate the efficiency of PPP projects from the perspectives of three parties: users, concessionaires, and the government.

Chapter 7 provides additional evidence of the contribution of PPPs to the national economy. An analysis is conducted to find evidence of PPP effects on economic growth and social welfare in the Republic of Korea. Based on macroeconomic analyses, the coefficient of PPP contribution is estimated and reported. To estimate the contribution of PPPs to social welfare, the study analyzes some PPP-built roads in operation. It is clear that the PPP investment has helped the timely completion and operation of the road projects in comparison with road projects built by the government alone. The study estimates the social benefit that resulted from the timely completion and operation of the PPP roads, a benefit that might have been lost by lengthy delays. Furthermore, several experimental evaluations on some selected BTO and BTL projects are performed to check whether better value for money (VFM) is achieved by the PPP projects.

Chapter 8 deals with the issues of budgeting, reporting, and accounting treatment of PPP projects. In the Republic of Korea, there is a lot of controversy on the PPP budgeting and reporting rules. This chapter shows how the government treats PPPs in the annual budget and reports information on PPPs to the National Assembly. There has been an effort to institute a safeguard ceiling for PPPs to reduce the fiscal risk of such projects to the government. The chapter reviews discussions regarding a safeguard ceiling to manage the aggregate volume of PPPs, including examples from other countries. The chapter examines the possibility of setting a sustainable ceiling proportional to the government budget concerned as a means of establishing a new fiscal rule.

Chapter 9 presents recent PPP revitalization initiatives by the government. The initiation of new PPP projects has declined sharply as a result of the recent global financial crisis that began in late 2008. The volume of PPP contract signings sharply fell in 2008 and 2009, which increases the likelihood that the amount of private investment actually executed will shrink in the future. Accordingly, the government has worked out measures to revitalize PPP projects by helping financially struggling projects and reducing project risks resulting from external factors, including abrupt changes in interest rates. The First Revitalization Initiative was announced in February 2009, and the Second Revitalization Initiative was announced in August 2009.

Chapter 10 provides lessons from PPP experiences in the Republic of Korea and identifies challenges for successful PPP implementation and management.

Institutional Settings for Public–Private Partnerships

Background in Chronology

Following decades of rapid economic growth, the Republic of Korea found itself at the beginning of the 1990s with a serious shortage of infrastructure facilities, such as roads, railways, seaports, and airports. The government, judging there would be limits to its ability to fund the needed construction of infrastructure facilities, had come to feel the need to induce private sector participation in infrastructure investment as an alternative means of replenishing infrastructure. The government began to push for public–private partnership (PPP) projects in earnest with the August 1994 enactment of the Act on Promotion of Private Capital Investment in Social Overhead Capital.

Because of the financial crisis that hit the Republic of Korea in late 1997, however, the promotion of PPP projects fell into a slump. So the government made an across-the-board amendment, called the Act on Private Participation in Infrastructure, in December 1998, which called for, among other things, reinvigorating PPPs through various government policy supports, including the minimum revenue guarantee (MRG) program. The government modified this law again in January 2005, expanding the range of facilities covered from economic infrastructure—such as transportation facilities like roads, railways, seaports, and environmental facilities—to social infrastructure, such as schools, military residences, housing and welfare facilities for the aged, and cultural facilities. It introduced the build–transfer–lease (BTL) method in addition to the existing build–transfer–operate (BTO) method, expanding the scope of participation in PPP financing and diversifying opportunities. In October 2009, the MRG program was ended and was replaced by the support measure of compensation of base (raw) cost, under which the government shares investment risks within the limit of the government’s cost if the project were conducted as a public project.⁴

Chronologically, the changes in the nation’s PPP project characteristics can be roughly divided into four periods, as shown in Table 2-1.

Table 2-1 Chronological Changes and Characteristics of Public–Private Partnership Financing in the Republic of Korea

	Period	Characteristics
Phase I	1968–1994	• Sporadic promotion of public–private partnership (PPP) projects based on individual laws (Road Act, Port Act, etc.)
Phase II	1994–1998	• The Republic of Korea began to induce private capital to build infrastructure facilities through systematic procedures with enactment of the Act on Promotion of Private Capital Investment in Social Overhead Capital
		• Implementation remained sluggish due to immature PPP conditions, government’s failure to play the proper roles, and excessive regulations due to fear of controversies over preferential treatment
		• Formulation of policy package for inducing private participation, across-the-board legal revision through the Act on Private Participation in Infrastructure
Phase III	1999–2004	• Positive government support and division of role for revitalizing private investment
		• Reinvigoration of private sector’s investment and project participation
Phase IV	2005–present	• Revision of the Act on Private Participation in Infrastructure
		• Inclusion of nine residential infrastructure facilities in the scope of PPP projects and the introduction of the build–transfer–lease formula as a new method
		• Introduction of mandatory feasibility study for unsolicited projects (costing W200 billion or more)
		• Revitalization of infrastructure fund through public subscription
		• Abolition of minimum ...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• Tables, Figures, and Boxes
• Abbreviations
• Foreword
• Preface
• Acknowledgment
• Executive Summary
• Volume 1: Institutional Arrangements and Performance of Public–Private Partnerships
• Introduction
• Institutional Settings for Public–Private Partnerships
• Trends and Current Status of Public–Private Partnerships
• Implementation Procedure
• Ex-Post Management, Refinancing, and Renegotiation
• Evidence of Cost Savings and Efficiency Gain from Public–Private Partnerships
• Evidence of Public–Private Partnership Contribution to the National Economy
• Budgeting and Safeguard Ceiling for Public–Private Partnership Fiscal Commitment
• Public–Private Partnerships as an Alternative Method of Fiscal Stimulus to Address the Global Financial Crisis
• Lessons Learned and Challenges Ahead
• References
• Appendixes
• Back Cover