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Korea PPP Experiences

Korea PPP Experiences . Young - Sik Kim yskim4u@gmail.com ICT/e-Government Advisor, NIPA, Korea. June 12, 2012 Chisinau, Moldova. PIMAC. Overview of Korea PPP System. Part-01 . Legal Framework for PPP.

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Korea PPP Experiences

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  1. Korea PPP Experiences • Young-Sik Kim yskim4u@gmail.com • ICT/e-Government Advisor, NIPA, Korea June 12, 2012 Chisinau, Moldova PIMAC

  2. Overview of Korea PPP System Part-01

  3. Legal Framework for PPP • Since the formal PPP program was first introduced with the enactment of the PPP Act in 1994, the act has gone through several revisions. Enactment Aug. 1994 『The Private Capital Inducement Promotion Act』 『The Act on Private Participation in Infrastructure 』 · Unsolicited proposals, Minimum Revenue Guarantee Revision Jan. 1999 『The Act on Private Participation in Infrastructure 』 · Diversified Facility Types (35 -> 44) · Introduction of BTL Scheme Amendment Jan. 2005 • Unsolicited proposals and MRG in 1999 • BTL in 2005 : promoted its use in educational facilities, military residences, environmental facilities, etc. • Dispute Resolution committee in 2011 3

  4. Legal Framework for PPP Legal Framework of the PPP System • Hierarchy of legal and administrative framework of PPP System • PPP Act • PPP Act Enforcement Decrees • Annual PPP Basic Plan • PPP Implementation Guidelines • The Legal Status of the PPP Act • The PPP Act and the PPP Act Enforcement Decrees are the principal components of the legal framework of PPP • Eligible Infrastructure types, Procurement Types, Procurement Process, the roles of the Public and Private parties, etc • The PPP Act is a special Act that precedes other Acts • Exempts PPP projects from strict regulation in national property management • Allows a SPC to play a role of competent authority 4

  5. The PPP Basic Plan and PRC PPP Basic Plan • The PPP Act directs the MOSF and PIMAC to issue the PPP Basic Plan. • The PPP Basic Plan can be updated and adjusted more often reflecting relevant changes, market conditions and the government needs. • The Basic Plan provides: • PPP policy directions • Details in PPP project implementation procedure • Documentation direction Project Review Committee • Chaired by the minister of strategy and finance, convenes whenever needed to make important decisions on PPP policies and major projects. It consists of members from procuring ministries and private sector experts. • When deemed necessary, the PRC is able to postpone or block part of the expenditures for PPP projects 5

  6. Selection of PPP Project Competent Authority Competent Authority Review by PIMAC VFM Test Competent Authority Designation as the PPP Project Announcement of RFPs Competent Authority Submission of Project Proposals Private Sector → Competent Authority Evaluation and Selection of Preferred Bidder Competent Authority Negotiation and Contract Award (Designation of Concessionaire) Competent Authority → Preferred Bidder Application for Approval of Detailed Implementation Plan Concessionaire → Competent Authority Construction and Operation Concessionaire Process of Solicited PPP Projects 6

  7. Submission of Project Proposal Private Sector → Competent Authority VFM Test PIMAC Competent Authority → Proponent Notification of Project Implementation Announcement of RFPs Competent Authority Submission of Project Proposals Private Sector → Competent Authority Evaluation and Selection of Preferred Bidder Competent Authority Negotiation and Contract Award (Designation of Concessionaire) Competent Authority → Preferred Bidder Application for Approval of Detailed Implementation Plan Concessionaire → Competent Authority Construction and Operation Concessionaire Process of Unsolicited PPP Projects 7

  8. Current Status of PPP Implementation As of Dec. 2011

  9. Government Support (1): Construction Subsidy BTL Projects • The government may grant construction subsidy to the concessionaire, if it is inevitable to maintain the user fee at an appropriate level. • Subsidy shall be determined in the individual concession agreement. (unit: US B$, %) (Source: PIMAC, End of June. 2008)

  10. Government Support (2): Former Risk-Sharing Scheme by MRG • Minimum Revenue Guarantee (MRG): A certain fraction of projected annual revenues may be guaranteed when the actual operating revenue falls considerably short of the projected revenue prescribed in the contract. • Applicable only to solicited projects • Not applicable to projects that earn less than 50% of projected revenue Profile of Minimum Revenue Guarantee • 36 out of 145 signed contracts include minimum revenue guarantee clauses at the end of 2008. • Criticisms about MRG • Government took most of the risks, but provided unreasonable high returns to private participants. • Project company may show moral hazard behavior by not trying its best to increase the revenue.

  11. Government Support (3): New Risk-Sharing Scheme • In October 2009, a New Risk-Sharing Scheme has been announced for substituting MRG. • New Risk-Sharing Scheme applicable for Solicited Projects only • Government takes its portion of investment risk within the limit of government’s costs in case the project was conducted as a public project. • Government payment is made of the amount of shortfall in the actual operation revenue compared to the share of investment risks* by the government. * share of investment risk = the amount of operation revenue that guarantees the internal rate of return comparable to the government bond’s rate of return. • When the actual operation revenue exceeds the share of investment risks, government subsides are redeemed within the limit of the amount previously paid.

  12. Government Support (4): Infrastructure Credit Guarantee Fund • Loans and borrowings from financial institutions by concessionaires for private investment project expenses. • Infrastructure Bond issued pursuant to the Act on PPP. Scope of Guarantee • For a single company up to U$ 100 M( Exceptions: the director of the managing organization deems it unavoidable, in which case the limit shall be U$ 200 M). Guarantee Limit • Maximum annual fee rate: 1.5% Guarantee Fee & Types * The guarantee rate is applied in the degree of risks involved in the guarantee and the corporate credit rating. (Source: 2007 Basic Plan for Private Participation in Infrastructure)

  13. Features of the Korea PPP system Part-02

  14. Investment Trends of PPP Public & Private Infrastructure Investment Trends Unit: US B$, % A : Public works completed B : Annual budget in transportation and regional development sector, The Five-year National Fiscal Management Plan • In 2011, PPP investment in the SOC sector amounted to U$ 2.2 Billion, about 9% of the total public and private investment in SOC; In 1995, it was merely 0.4 B$ when the PPP program was first introduced. 14

  15. Both BTO and BTL types are Common • Both the concession-type (BTO) and the service purchase-type (BTL) projects are implemented in Korea • Concession-type (BTO) is popular in developing countries, while service purchase-type(BTL)are common in developed countries PPP Projects by Procurement Scheme (As of Sep. 2009) Unit: number (U$ Billion) *:as of Dec.2007 *** Large-scale projects whose total costs are 200M$. or more are monitored by the PPP Review Committee organized by the MOSF 15

  16. Public Housing (1) Welfare (4) Forestry (2) Road (4) Railway (3) 15 categories (48 facility types) Education (1) Port (3) Military Housing (1) Communication (5) Water Resources (3) Culture & Tourism (8) Energy (4) Airport (1) Environment (5) Logistics (2) Eligible Facilities in the PPP Act • Korea government adopted the positive stipulation for eligible facilities, implying facilities that aren’t stipulated in the act can’t be implemented. • Related with the strong government support or incentives for PPP projects. • Reflection of consideration of the PPP Act’s legal status; The PPP Act is a special act that precedes other acts. 16

  17. Unsolicited projects’ Vitalization • Acceptance of the unsolicited proposals was one of key measures for inducing the private investment. • The proportion of unsolicited projects compared to solicited projects is high, which is rare for developed countries. (Most developed countries do not accept the unsolicited proposals) Number of Solicited and Unsolicited BTO projects 17

  18. Unsolicited projects’ Vitalization • Although solicited projects are more desirable in that the government can initiate PPP projects based on its overall investment plans and priorities, unsolicited projects have advantages in that they encourage private sector creativity and innovation. • The unsolicited proposals can accelerate the project delivery as well as indicates market interest in public service delivery. However, transparency issues exist and they may not be identified within government’ budget or policies • VFM tests and the competitive bidding process are also applied to unsolicited projects Turn-Down Rate of Unsolicited Projects 18

  19. Phase 1: Feasibility study (Decision to Invest) The cost- benefit analysis is conducted to determine feasibility of the project from a national economy perspective. Phase 2: Value for Money Assessment (Decision on PFI) The government payment of PSC (Public Sector Comparator) is compared against that of PFI (Private Finance Initiative) to assess whether the PFI achieves VFM. Phase 3: Formulation of PFI alternatives Based on the results of phase 2, an appropriate PFI alternatives are formulated The level of project cost, user fee, subsidy scale, etc. are suggested from the government. Bonus points (10% Phase 4: Award bonus points to the initial proponent max.) awarded to the initial proponent are estimated based on the results of VFM tests and the quality of the proposal. Elaborated VFM Test 19

  20. Objectivity, Consistency and Independence • Implementations in Transparency, Objectivity and Consistency as well as Professional expertise are key elements • Guidelines for Value for Money (VFM) test • Guidelines for RFP preparation • Guidelines for Standard Output Specification by facility • Guidelines for Tender Evaluation • Guidelines for Standard Concession Agreement • Guidelines for Refinancing • Independent PIMAC has developed PPP Implementation Guidelines and updated reflecting changes and market conditions 20

  21. PIMAC-KDI Part-03

  22. History of PIMAC Dec. 1970 Promulgation of law establishing KDI (Law No. 2247) Promulgation of Presidential Act establishing KDI (Presidential Act No. 5527) Feb. 1971 Establishment of KDI Mar. 1971 Jan. 2000 Establishment of Public Investment Management Center(PIMA) within KDI Establishment of Private Infrastructure Investment Center of Korea(PICKO) within Korea Research Institute for Human Settlements Apr. 1999 Establishment of Public and Private Infrastructure Investment Management Center(PIMAC) - Integration of PIMA and PICKO Jan. 2005

  23. Organization of KDI KDI is a policy-oriented research institute funded by the government (managed by the National Research Council for Economics, Humanities and Social Sciences under the PM’s Office)

  24. Organization of PIMAC • Enables comprehensive and systematic management of both traditional public investment and PPP • - VFM and investment criteria applied to traditional public investment and PPP can be aligned and unbiased. Executive Director Policy and Research Division Public Investment Evaluation Division Public-Private Partnerships Division PFS Unit 2 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

  25. Areas of Expertise of PIMAC Staff Members As of April 2012

  26. The Role of PIMAC in PPP System • Researcher • Support for formulation of the Basic Plan for PPP • Theoretical and policy studies on PPP programs • Development of implementation guidelines • Advisor & facilitator for PPP Procurement • Development of PPP projects • Execution and Review of VFM test • Support for formulation of RFPs • Review of RFP and concession agreement • Assistance in tendering and negotiation • PPP Market Promoter • Training programs and seminars on PPP for public officials • International cooperation • Data accumulation and management

  27. Implementation Guidelines • PIMAC develops implementation guidelines in consultation with MOSF • Guidelines for VFM assessment for BTO/BTL projects • Guidelines for RFP formulation • Standard output specifications(sector-specific guidelines) • Guidelines for bid evaluation management • Standard concession agreement • Standard financial models • Guidelines for refinancing

  28. International Cooperative Activities of PIMAC • Bilateral Cooperation • Indonesia, Vietnam, Kazakhstan, etc. • International Conference with WB, IMF, ADB, ASEM, etc • Training Programs for foreign government officers • Legal framework of PPP System in Korea • Sectorial Project Development • Value for Money Test • Project Financing and Understanding Financial Model • Fiscal and Policy Issues of PPPs • Site tour and case study • Technical Assistance • Regional TA project with ADB, WB • – “Knowledge Sharing on Infrastructure PPPs in Asia” • - Publication of “Public-Private Partnership Infrastructure Projects: Case Studies from the Republic of Korea”(2011)

  29. Thank you

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