KOREA s PPP and Ex-Post Management

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KOREAKOREA’’ss PPP and ExPPP and Ex--Post ManagementPost Management

Bong Hwan CHO

Director, PPI Planning DivisionMinistry of Strategy and Finance

Republic of Korea

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Ⅰ Introduction of PPP in KoreaIntroduction of PPP in Korea

Ⅱ Performance of PPPPerformance of PPP

Ⅲ Ex-post Management of PPPEx-post Management of PPP

Contents

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Ⅰ. Introduction of PPP in Korea

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(1) History of PPP Act

- Individual Laws

- PPI Act Enactment

- PPI Act Revision (Risk Sharing)

- PPI Act Amendment (BTL)

Dec. 1998Dec. 1998

Jan. 2005Jan. 2005

Before Aug. 1994Before Aug. 1994

Aug. 1994Aug. 1994


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(2) Available Project Types

◦ Available project types : BTO, BOT, BOO, and BTL - BTO and BTL are most popular

-

-

BTOBTORoad, Port, Rail, etc

User Fees, Demand Risk

School, Sewer Pipe, Military Residence, etc

Gov’t Payment, No Demand RiskBTLBTL


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(3) Available Facility Types◦ 44 Types of Infrastructure Facilities in 15 Categories


Road(3)

Port(2)

Rail(3)

Welfare(3)

Forestry(2)

Energy(3)

WaterResources

(3)

Communication(4)

Environment(5) Logistics

(3)

15 Categories Education(1)

Military Housing(1)

Culture & Tourism(9)

PublicHousing

(1)

* Positive listing

Airport(1)

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(4) Major Provisions of Gov’t Support (BTO Type)

① Construction Subsidy : 30~50% of Total Investment

∙ Roads : Less than 30% of Total Investment

∙ Rails : Less than 50% of Total Investment

∙ Ports : Less than 30% of Total Investment

∙ Freight Terminals : No Construction Subsidy (BOO type)

* Government provides access roads and rails


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② MRG on Solicited Projects- Minimum Revenue Guarantee∙ Adopted after Financial Crisis of late 90s→ Induced Private Investment in Infrastructure

- No MRG for projects with < 50% of forecasted revenue

- Led to Inflated demand forecasting

→ Resulted in Increase of MRG SubsidyReduced Level of MRG for Solicited projects & Abolished for Unsolicited projects (2006)


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③ Various Tax Benefits

- Exemption of Acquisition and Registration Tax

- Application of 0% Tax Rate on VAT- 15% Separate Taxation on Interest Income

from Infra Bond- Separate Taxation on Dividend Income from Infra Fund

④ Concession Termination Payment

Force Majeure, Bankruptcy


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Ⅱ. Performance of PPP

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(1) Complement to Public Investment→ Early Delivery of Infrastructure Facilities

’95~’97 ’98 ’99 ’00 ’01 ’02

24.7 12.7 14.3 15.2 16.0 16.0 18.4 17.4 18.3 18.4

0.3

1.2

0.5

3.9

0.8

5.6

1.0

6.6

0.6 1.21.7

2.6 3.2

3.8

7.5

1.2

6.5

9.8

17.4

’03 ’04 ’05 ’06

14.2Government Investment (A)Private Investment (B)Share of Private Investment (B/A, %)


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Total Investment in BTO (’07.12)Total Investment in BTO (’07.12)

90%

10%

Local projects 4.5 Trillion KRW

(89 projects)

National projects41.7 Trillion KRW

(61 projects)

Total investment : 46.2 Trillion KRW (50 projects)


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51%

15%

34%

Operation65 projectsPreparation

28 projects

Construction96 projects

Total Investment in BTLTotal Investment in BTL

Total investment announced : 16.5 Trillion KRW (290 projects)


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(2) Introduction of Efficiency and Creativity of Private Sector to Infrastructure Investment

→ Increases Value for Money on InvestmentCompared to Fiscal Expenditure Projects

PPP Projects Reduce Construction Period

PPP Projects Reduce Project Operation Expense

PPP Projects Reduce Total Project Cost

PPP Projects Revitalize Korean Financial Industry


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Diversification of Financial Instrument

◦ Better Project Management Skills and Financing Mechanisms

* Secured Loans backed by Collateral → Lending based on Project Cash Flow

◦ Introduction of Infrastructure Fund* 10 Infra fund on the market (Invested amt : 3.4 trillion)

∙ Indirect Investment in PPI Projects∙ Long-term Investment Opportunity ∙ Domestic and Foreign investors in Infrastructure


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(3) Competition in PPP

◦ Getting More Competitive

* Average Bidding Rate

1.2 (’01) → 1.3 (’03) → 1.8 (’04) → 3.0 (’05) → 3.5 (’07)

◦ Competition → Increase Efficiency and Creativity

◦ Mechanisms for More Competition :

- Simplify Required Documents for Proposal (’05)

- Compensation on Project Preparation Cost (’07)


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Ⅲ. Ex-Post Management of PPP

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① Re-financing

② Re-negotiation

③ Performance Management

④ Integrated Operation System

⑤ Strengthening Auditing Procedures

Methods of Ex-post Management


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① Re-financing

- Why?∙ Changes in Market Environment (ex. Interest Rates)∙ Construction Risk reduced (lower equity ratio & interest rate)

- How?∙ Establishment of Re-financing Guideline (’07.12) ∙ Concessionaire → Competent Authority → PIMAC →MOSF

- What?∙ Profit Sharing : Reduce MRG and Toll Fees


Why?

How?

What?

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Re-financing Examples

- Re-financed Projects∙ Incheon Airport International Expressway (MRG 90% → 80%)∙ Cheonan ~ Nonsan Expressway (MRG 90% → 82%)

- Re-financing in Progress∙ Daegu-Busan Expressway (Toll Fee and MRG ↓)∙ Seoul Metropolitan Outer-Ring Expressway (Toll Fee and MRG ↓)


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② Re-negotiation- Why?∙ Changes in Business Environment (ex. Costs)

- How?∙ Concessionaire → Competent Authority → PIMAC →MOSF

- What?∙ Changes of Contract Terms : Adjust User Charges, Concession Period (including Termination) or Provide Subsidies to Concessionaire

- Examples∙ Re-negotiated Project : Ehwaryung Tunnel (Terminated)∙ Project under Consideration : Mokpo New Port (MRG)


Why?

How?

What?

Examples

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③ Performance Management- Why?∙ Better and Stable Services and Facilities

- How?∙ BTL : Performance Evaluation System in Progress

Development of Standard Operational Model by Sector∙ BTO : Post Evaluation System under Consideration

- What?∙ BTL : Evaluation on Availability/Safety&Durability/Service

Satisfaction by Performance Evaluation Committee→ Adjustment of Gov’t Payments (Lease + Operating Costs)

∙ BTO : Service Quality Survey → Incentive/Penalty for Better Performance


Why?

How?

What?

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④ Integrated Operation System

- Why?∙ Economy of Size ∙ Lower Operation Cost∙More Efficient and Effective Management

- How?∙ Integrate Operation System for PPP Roads or Schools

- What?∙Maintenance, User Charge Collection System (Toll Booth)


Why?

How?

What?

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⑤ Strengthening Auditing Procedures

- Why?∙ Better Management and Operation (ex. Deficits)

∙ Enforcement of Mandatory Requirements (ex. Equity Rate)

- How?∙Mandatory Reporting of Audit, Compliance Reports to MOSF

∙ Administrative Penalties


Why?

How?

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(2) Improve Quality of Facility and Services Provided

Rational Selection

Strengthen Feasibility Test

Transparent Management

Performance Evaluation

•Reduce Expenditure •Innovation and Efficiency

•Improve VFM Test and Feasibility for PPP Projects

•Constant development of Guidelines and Standard Models

•Everyone is Happy!


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Closing Remarks

- Private Sector : Competition in Good Faith, Creative Ideas, Participation in Long-term Perspective

- Public Sector : Continuous improvement on PPP policies, Deregulation, More Competition, Ex-Post Management

Success of Public-Private Partnerships

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