Hyeon PARK ( hpark@kdi.re.kr ) Director of Public Investment Evaluation Division

1. WB Conference on Public Investment in Brazil Public Investment Management in Korea Hyeon PARK (hpark@kdi.re.kr) Director of Public Investment Evaluation Division Public and Private Infrastructure Management Center (PIMAC) Korea Development Institute 16 June 2011

2. Organization Chart of PIMAC • 85 staffs in 3 divisions Managing Director PFS Unit 2 • Formulate PPP Annual Plan and develop PPP guidelines • Conduct Evaluation of PPP Projects -Researches on PPP -Financing and refinancing PPP -Capacity building training - Infrastructure DB management • Researches on Methodology of Project Evaluation • Program Evaluation and Performance Management of Public Investment Projects • Appraisal for SOE Projects Policy and Research Division (21) Public Investment Evaluation Division (32) Public-Private Partnerships Division (30) • Conduct and manage PFS and RSF and RDF • Policy research on PIM Finance & Int’l Cooperation Unit PFS Unit 1 RSF Unit PPP Policy Unit PPP Project Unit Policy Research Unit Public Institution Evaluation Unit Program Evaluation Unit

3. Foundation of PIMAC • PIMAC (Public and Private Infrastructure Investment Management Center), is an affiliated body of KDI. • KDI, founded in 1971, has emerged over the past four decades as the leading think-tank in Korea. • PIMAC is an statutory organization established as a merger of PIMA and PICKO by the amendment of ‘The PPP Act’ in January 2005. • The PIMA (Public Investment Management Center) of KDI, founded in Jan 2000, centered on research and management of public investment project • The PICKO (Private Infrastructure Investment Center of Korea) of KRIHS (Korea Research Institute for Human Settlements), founded in April 1999, centered on research and management of PPP projects.

4. 0. Introduction: Review of Pubic Investment in Korea • Evolution of PIM • PIM at ex ante Phase (PSF) • PIM at intermediate Phase (TPCM, RSF, RDF) • PIM at ex post Phase • PIM at Strategic Level • Lessons

5. Introduction: Review of Public Investment in Korea Part-00

6. Trend of Public Investment Expenditure Consolidated Fiscal Expenditure and Net Lending by Central Government by Function Note: redemption of public funds (12 trillion KRW) for year 2004 excluded. Source: Ministry of Strategy and Finance, Korea Consolidated Fiscal Balance, respective year.

7. Trend of Infrastructure Investment Trill. KRW Note: Investment by local government is not included. As of 2010, total infrastructure investment is 2.5% of GDP

8. Economic Development and Infrastructure Development

9. What happened to Public Investment in the 1990s? • In the early 1990s, infra gap particularly in land transport was regarded as a major bottleneck of economic growth. • Because of a unprecedented rapid motorization resulted from income growth, Korea faced a serious congestion problem causing high logistical costs. • The transport Tax Act (1993. 12.) and the PPP Act (1994. 8.) were legislated to fill the infrastructure gap.

10. Transport Tax and Transport Special Account • In 1994, the Transport Special Account was created as a merger of road special account and railroad special account • About 80% of the revenue comes from transport tax which is a fraction of former gasoline excise tax (50 cent / liter, a specific duty). • Extended three times in 2003, 2006, and 2009 by three years respectively • Originally introduced as a sunset tax (1994-2003) • The name has changed into the Transport, Energy, and Environment Tax • And the revenue is shared by local governments

11. Trend of Sectoral Distribution of Public Investment Bill KRW Note: MTLM expenditure only

12. Signs of Over-Investment • Optimism bias in traffic forecasting Source: Kang Soo KIM (2007), KDI. Deviation at the opening year = (Actual-Forecast)/Forecast • Increased construction cost • Land cost increased with real estate boom • Design Standard upgraded • National highway designed with 4 lanes and design speed at 90km/h • Grade separation at all intersections

13. Increase in construction cost Trend of per km road construction costs in blue bar (in mill 1990 KRW) Source: H. Park (2002)

14. Expansion of Infrastructure Stock

15. Financial Crisis 1997-98 and thereafter • Financial crisis in 1997-98 and PIM • In the wake of financial crisis, the issue of fiscal soundness became an important policy agenda. • Considerable increase in government expenditure for social welfare also drew attention • As a government reform initiative, the MPB (Ministry of Planning and Budget) separated from the MOFE (Ministry of Finance and Economy), whose core task is to enhance fiscal efficiency. • New paradigm of PIM has emerged • Asa government reform initiatives in response to the financial crisis of 1997-98, a new PIM started in 1999.

16. Evolution of PIM Part-01

17. Background of PFS (1) • Criticism against feasibility studies in the past • The baseline cost of on the Seoul-Busan High Speed Rail (KTX) project has more than tripled from 5.5 trillion Won ($5.5 billion USD) to 18.5 trillion Won ($18.5 billion USD) • A feasibility review committee investigated the FS. • Thirty-two out of thirty-three projects (1994-98) were evaluated as feasible in FS. • Conflict of interests • Line ministry: Budget maximizing and irreversible decision making behavior • Engineers and professors: Keep up the market • FS as a formality: optimism bias (cost down, benefit/demand up) • No Check & Balance

18. Background of PFS (2) • ‘The Comprehensive Plan to Enhance Efficiency of Public Investment’ was formulated in July 1999 by joint task-force of MOCT (currently MLTM) and MPB (currently MOSF). • New PIM system introduced • Intensified monitoring of project implementation process by MOSF • PFS was ‘invented’ as a resolution despite of resistance from the line ministries. • The MPB tried to take over the FS from the line ministries • Line ministries, esp. MOCT, violently resisted to transferring the ownership of FS. • MLTM introduced Ex-post Performance Evaluation and VE (Value Engineering) • Line ministries evaluate the performance of the project within three years after the construction work is completed. • VE explores how to maximize the value of a project by cut down costs and enhance functions of components of the facility.

19. Project Cost Control Tightened under TPCM • TPCM (Total Project Cost Management System) introduced in 1994, has been established as an effective measure of government expenditure management after the financial crisis. • To scrutinize if the cost overrun can be justified, RSF (Re-assessment Study of Feasibility) was introduced in 1999. • RSF guidelines were developed in 2005 • RDF (Re-assessment of Demand Forecast) was introduced in 2006.

20. Evolution of PIM system (Financial Crisis) 1998 1999 2003 2006 1994 TPCM introduced PFS introduced RSF introduced RSF guidelines developed RSF strengthened PE introduced RDF introduced • TPCM (Total Project Cost Management) • PFS (Preliminary Feasibility Study) • RSF (Re-assessment Study of Feasibility) • RDF (Re-assessment of Demand Forecast) • PE (Performance Evaluation) The National Finance Act legislated • VE introduced in 2000 and reinforced in 2005

21. Skeleton of Integrated Public Investment Management (I-PIM) System in Korea ex post ex ante Intermediate Planning Draft Design Operation/ Maintenance Blueprint Design PFS Feasibility Study Land Acquisition/ Construction TPCM, RSF & RDF VE (Value Engineering) at Design stage EBP (In-depth Evaluation of Budgetary Program) Performance Evaluation * Evaluation works in RED characters are owned by budget ministry

22. PIM at ex ante Phase: PFS(Pre-Feasibility Study) Part-02 21

23. What is PFS? • Short and brief evaluation of a project to produce information for budgetary decision • Owned by the Ministry of Planning and Budget (MPB) and managed by PIMAC • While (detailed) feasibility study analyzes technical aspects of a project in detail, PFS emphasizes broader analysis of a project from a national socio-economic viewpoint. • Meaning of “PRELIMINARY” is two-folded: • Provisional, or short and brief; and • PFS costs about 80~100 million Won, and takes about 6 months; Detailed FS costs about 300 million to 2 billion Won. • Preceding a (detailed) feasibility study • The National Finance Act of 2006 provides the legal basis of PFS.

24. Coverage of PFS • All new large-scale projects with total costs amounting to 50 billion Won (about USD 50 million) or more are subject to PFS. • Local government and PPP (Public-Private Partnership) projects are also subject to PFS if central government subsidy exceeds 30 bill Won. • Initially focused on economic infrastructure, PFS has expanded to social infrastructure and non-infrastructure (e.g. R&D, welfare) programs. • Projects with little benefit of PFS are exempted • Typical building projects: government offices and correctional institutions • Legally required facilities: sewage and waste treatment facility • Rehabilitating projects and restoration from natural disaster • Military facilities and projects related with national security

25. Line Ministry MOSF KDI (PIMAC) Submit PFS Projects Candidate Select PFS Projects Request PFS Organize Teams/ Conduct PFS Make Investment Decision Submit PFS Report Feasibility Study or Stop Announcement & Report to the National Assembly PFS Procedure

26. Economic analysis Balanced regional development analysis Policy analysis • Demand analysis • Cost estimation • Benefit estimation • Cost-benefit analysis • Sensitivity analysis • Financial analysis • Regional backwardness index analysis • Regional economic impact analysis (IRIO Model) • Consistency with higher-level plan and policy directions • Project risk (financing and environmental impacts) • Project-specific evaluation item Flowchart of PFS Analyses Project proposal Background study • Review of statement of purpose • Collect socio-economic, geographic, and technical data • Brainstorming (Other Alternatives) • Issues to be addressed Analytic Hierarchy Process • Overall feasibility • Recommendations

27. Overall Feasibility Economic Analysis Balanced Regional Development Analysis Policy Analysis Consistency with higher level plan Project risk Project-specific factor Structure of AHP in PFS Level 1 Level 2 Attitude toward the project Consistency with higher level plan Preparedness Project-specific item (optional) Financial feasibility Environmental impact assessment Project-specific item (optional) Project-specific item1 (optional) Project-specific item2 (optional) Regional backwardness analysis Regional economic impacts Project-specific item (optional) Level 3 Alternatives Project Implementation Status Quo

28. AHP (Analytic Hierarchy Process) • AHP is a multi-criteria decision making technique to combine quantitative and qualitative elements of evaluation into a decision under a hierarchical structure. • Structures a complex decision problem into a hierarchy by grouping element of decision • Gives weight on each element through pair-wise comparison • The consistency of the weighting can be tested • A group of eight experts are involved in the decision making. • PFS team members (e.g. Team leader (KDI), Demand (Professor), Cost (Engineer)) • Advisory committee members (Staffs of PIMAC, and peer reviewers) • The ranges of AHP weight were set to reflect priority of government-wide policy direction • A project is evaluated as feasible if AHP score is 0.5 points or more out of 1.0 point.

29. Number of PFS by Sector (1999~2009) Unit: number

30. Proportion of Feasible Projects by Sector (1999~2009) Unit: %, number

31. PIM at Intermediate Phase TPCM (Total Project Cost Management) RSF (Re-assessment Study of Feasibility) RDF (Re-assessment of Demand Forecast) Part-03 30

32. Total Project Cost Management System (TPCM) • Overview • TPCM is a device that budget ministry monitors expenditure on public investment to contain cost overrun throughout the project cycle from planning to construction completion. • Principles • Increase in construction size through design modification is not allowed except for inevitable events • The line ministry should consult with MOSF about adjusting TPC. • Coverage • Projects implemented by central government or its agents, or by local governments or private institutions that have central government funding • Projects whose construction period ≥ 2 years • Civil engineering projects whose TPC ≥ 50 bill KRW • Building construction projects whose TPC ≥ 20 bill KRW

33. RSF (Re-assessment Study of Feasibility) • Under TPCM, RSF is conducted if: • TPC has increased by more than 20 percent (excluding price escalation and increase in land acquisition cost) of the cost; or • PFS has not been conducted although it falls under the PFS coverage. • The same methodology and implementation procedure as PFS are applied • Decision making • RSF team makes judgment whether to continue or to stop the project. • Compared with PFS, it is emphasized to find alternatives to cut down project costs.

34. RDF (Re-assessment of Demand Forecast) • Under TPCM, RDF is to verify the adequacy of demand forecast with latest information available, reflecting changes in project environment. • RDF is can be conducted at any phase throughout the project cycle from planning to construction completed when: • a substantial decrease of demand is anticipated due to material changes in the premises on which demand forecast has been made or errors have been found in demand forecast; or • more than five years have passed since the latest demand forecast had been conducted. • When the demand forecast for a project has decreased by 30% or more, the MOSF conduct RSF and decide whether to continue or to stop the project.

35. Performance of TPCM • The amount of requested TPC has dropped significantly after 1999 • The request for TPC increase in % of TPC has dropped from 26.4% (1996~1999) to 4.4% (2000~2003) • The amount of TPC adjusted in % of TPC has also dropped from 11.1% to 1.0 Amount of TPC change before and after 1999 (unit: %)

36. Performance of RSF (2006-2009) Unit: Trill KRW

37. PIM at ex post Phase Part-04 36

38. Performance Evaluation • Coverage of ex post Evaluation Study • Infrastructure projects with total cost ≥ 500 billion won • When is it carried out? • Conducted within three ~ five years of construction completion • Conducting ex post Evaluation Study • Evaluation ownership : MLTM • No designated evaluation agency : Government funded institute or qualified engineering companies

39. Contents of Performance Evaluation • Cost and time overrun • Comparison of forecast and actual demand • Ex post economic feasibility • Problems during the implementation process • Project impacts • Review of evaluation during the period of construction • Degree of acceptance of the project by local residents • Recommendations

40. Government-wide Performance Monitoring • Performance Monitoring • An annual review of program’s goal and performance indicators • Annual performance plan and indicators are reported to MOSF and examined • Simple check of indicators, but the causal relationship between input and output is not considered • Self-Assessment of Budgetary Programs (SABP) • A self-assessment of program by line ministries on the basis of guideline • A kind of program review similar to the PART in USA • Provide information for the central budget office • In-depth Evaluation of Budgetary Programs (IEBP) • Systemic and analytical evaluation of all the aspects of programs • The number of programs being evaluated is limited due to time and cost constraints

41. A Unified Framework for PPP Project Appraisal Project Initiation (Solicited / Non-Solicited) Phase 1 Feasible Project? (PFS) N Y VFM Test Phase 2 N Y Formulation of PPP Alternative Phases 3 GO thru PPP STOP GO thru Government Project 40

42. PIM at a Strategic Level Part-05 41

43. Various implementation plans are established and projects are implemented according to plans. Investment requirements are reflected in the allocation of the special account for transport facilities. Implementation of Mid-term transport Infrastructure Investment Plan Twenty-Year National Intermodal Transport Plan (NITP) • Draft plan prepared by Minister of Land, transport and Maritime Affairs (MLTM) • Reviewed by the transport Policy Committee (chaired by the Prime Minister) Performance Evaluation of Mid-term transport Infrastructure Investment Plan • The transport Policy Committee evaluates the implementation performance of the plan every year and provides feed-back. Five-Year transport Infrastructure Investment Plan • Investment priorities, investment resource funding plan, etc. • Facilities: National and local transport facilities Comprehensive Public Investment Planning Approach 42

44. Before MTEF (bottom-up budgeting) After MTEF (top-down budgeting) Budgeting on next single budget year Limited medium- to long-term planning function MOSF focused on the microscopic spending control Budgeting over next 5 year including the current year Spending ceilings for sectors and programs MOSF focused on the strategic alignment of budget requests with overall policy directions MTEF (Mid-Term Expenditure Framework) Introduction of MTEF in 2004 for Budgeting

45. Lessons Part-06 44

46. Establish Evaluation Ownership • PFS, RSF, and RDF are supported by budget ministry that usually needs reliable information to CUT budget. • New management system mitigated information asymmetry between budget ministry and line ministry that has incentives to MAXMIZE budget- (Check and Balance) • Budget ministry can produce its own information in objective, consistent, and transparent way. • The budget ministry used to rely on selective information provided by line ministry.

47. Multi-disciplinary Evaluation Team • To draw balanced decision-making, incorporate opinions of experts from different fields. • The engineers, or field specialists tend to be more supportive of Projects • The importance of evaluation ownership reinforced. Analysis of decision making behavior reflected on AHP by H. Park & Ko (2001)

48. Independent Evaluation Unit May Help • Objectivity, Consistency and Transparency is required to convince critical stakeholders that PFS is doing a right job. • Well developed evaluation guidelines and continuous revision required • Detailed description of methodology and procedures of PFS implementation • Sector guidelines (road, rail, seaport, airport, water resources, cultural facilities, R&D Program) • Management of DB and consistent approach to similar projects

49. Develop Best Practices • PFS was a stepping stone of the Integrated Public Investment Management (I-PIM) System. • Same/similar methodologies and inquiry process were applied • Other evaluations are spin-off products of PFS • The expansion of PFS • Economic Infra  Social Infra  R&D and Social Program - SOE Projects • Ex ante evaluation  intermediate (RSF and RDF)  ex post evaluation • Budget Ministry  Line Ministries  Local Governments • Government Project Evaluation  PPP Evaluation (VfM test)