Lessons from PPP Fiscal Stimulus in Korea

Transcription

1 Lessons from PPP Fiscal Stimulus in Korea Jay-Hyung Kim Public and Private Infrastructure Investment Management Center (PIMAC) Korea Development Institute (KDI) APEC Finance Ministers Process Conference on The Framework and Options for Public and Private Financing of Infrastructure June 22-23, 2011, Washington DC

2 1. Global Financial Crisis and Fiscal Stimulus 2. Fiscal Stimulus and PPP 3. PPP Revitalization Initiatives 4. Lessons Learned

3 1. Global Financial Crisis and Fiscal Stimulus Economic Recovery in Korea Korean economy is showing signs of a continued recovery, pulling out from the serious recession caused by the global financial crisis. GDP and Manufacturing Sector Growth Rates (at 2005 Constant Prices) Source: KDI, Monthly Economic Trends (March, 2011) 1

4 1. Global Financial Crisis and Fiscal Stimulus Fiscal Stimulus Package Appears to Contribute the Recovery Estimated size of fiscal stimulus package An official report from the Ministry of Strategy and Finance (April, 2010) confirmed that the size of fiscal stimulus package was 38.8 trillion KRW (3.6% of GDP) in It also announced that additional 17.1 trillion KRW (1.5%) would be used in The fiscal stimulus package consists of various fiscal items but seems to concentrate more on social-overhead-capital (SOC) investment and support for SMEs and the self-employed. These are the items known to have bigger or more persistent multiplier effects. Simultaneous implementation of the expanded fiscal expenditure appears to have contributed to a recovery of the economy. 2

5 1. Global Financial Crisis and Fiscal Stimulus Trends of Construction Investment During the period of financial crisis in , other construction investment including civil construction by the government increased sharply, while private building construction decreased abruptly. Trends of Construction Investment Source: KDI, Monthly Economic Trends (March, 2011) 3

6 2. Fiscal Stimulus and PPP Trends of PPP investment to government investment Proportion of PPP investment to government investment in infrastructure was merely 0.5% in 1997, but dramatically increased to 18.4% in In 2009 after Global Financial Crisis, the proportion decreased to15.4%, and is expected to be around 16.3% in Footnote: 2010 estimate is the government forecasted figure. Source: Ministry of strategy and Finance 4

7 2. Fiscal Stimulus and PPP Status of PPP Projects (BTO and BTL, as of September 2010) Total PPP Projects: 628 publicly announced projects with total investment amount of 95.9 trillion KRW. Concession Awarded: 556 projects that reached concession agreement with total Under Operation Under Construction Preparing Construction Negotiating National Projects 45 (233,301) 29 (198,054) 9 (78,501 ) 19 (112,366) Inviting Participants - TOTAL 102 (622,222) BTO Local Covernment Projects 86 (38,133) 14 (12,066) 5 (5,460) 15 (18,192) 5 (5,870) 125 (79,721) * PPP projects that were publicly announced as of end of September 2010 BTO projects: 227 worth 70 trillion KRW BTL projects: 401 worth 25.7 trillion KRW under operation: 345 worth 35.7 trillion KRW under construction: 162 worth 30 trillion KRW investment amount of 76.3 trillion KRW. preparing construction: 49 worth 10.5 trillion KRW PPP Projects by Implementation Scheme and Phase BTO Total BTL TOTAL 131 (271,433) 43 (210,120) 14 (83,961) 34 (130,558) 5 (5,870) 227 (701,943) 214 (85,252) 119 (91,078) 35 (21,082 ) 22 (50,165) 11 (9,514) 401 (257,091) number of projects (amount in 100 million KRW) 345 (356,685) 162 (301,198) 49 (105,044) 56 (180,722) 16 (15,384) 628 (959,034) 5

8 2. Fiscal Stimulus and PPP Public Announcement of PPP Projects by Year Total 628 PPP projects were publicly announced 17 PPP projects in 1999 (implementation as unsolicited projects was first introduced), which increased to 20 and to 25 in 2000 and 2001, respectively. Number of PPP projects increased drastically to 92 in 2005 (implementation as BTL projects was first introduced) and to 136 in 2006, but are in decrease since Public Announcement of PPP Projects Introduction of BTL Number of Projects Introduction of unsolicited project proposal Total Public Announcement BTO Project Announcement * PPP projects that were publicly announced as of end of September 2010 BTL Project Announcement 6

9 3. PPP Revitalization Initiatives The First Revitalization Initiative in February 2009 (Ⅰ) To ease the financial burdens from the Global Financial Crisis, the first revitalization initiative, which revised the PPP Basic Plan, was announced in February Reducing Financial Burdens : Ease the financial burdens on concessionaires by lowering the equity capital requirement ratio. Expand the upper limit of the payment guarantee provided by the Infrastructure Credit Guarantee Fund by 50% to help ease difficulties in debt financing. Ease regulation in case of change in composition of equity investors: projects that do not have MRG provisions are now exempt from refinancing profit sharing obligation in the case of simple changes in composition of equity investors. Lowering Required Equity Capital Rato Classification Before After Build-Transfer-Operate (BTO) 25% 20% (when financial investors account for 50% or more) (20%) (15%) Build-Transfer-Lease (BTL) 5% - 15% 5% 7

10 3. PPP Revitalization Initiatives The First Revitalization Initiative in February 2009 (Ⅱ) Easing Burdens from Abrupt Changes in Interest Rates: For BTO projects, when there is a change of 0.5 percentage point or more in the base interest rate, the government can make up for the change. The level of compensation depends on the extent of interest rate fluctuation. For BTL projects, the government has reduced the period for readjusting the benchmark bond yield from 5 years to 2 years, while replacing or redeeming 60%-80% of excesses or shortages based on the interest rate gap of 50 basis points between government bonds and bank bonds. Shortening of the Project Implementation Periods: To prevent delay in the negotiation period, competent authorities are required to complete the settlement of various points of contention and civil petitions through consultation with related agencies. 8

11 3. PPP Revitalization Initiatives The Second Revitalization Initiative in August 2009 (Ⅰ) The government further announced in August 2009 measures to create an enabling environment for active private investment through PPPs. Improvement of PPP Project Structure: Revitalize supplementary and ancillary projects. The private concessionaire needs to be provided with a motive to maximize the use of supplementary and ancillary projects in connection with the main projects so that user fees can be lowered. Permit special cases of estimating compensation for termination of agreement. Introduction of new investment sharing method with abolishment of minimum revenue guarantee (MRG). Under the new risk-sharing structure, the government shares investment risk with the private company by compensating the base cost of the project, calculated as the sum of private investment cost and the amount of shortfall in the actual operational revenue compared to the share of investment risks by the government. 9

12 3. PPP Revitalization Initiatives The Second Revitalization Initiative in August 2009 (Ⅱ) Improvement of Conditions for Funding : Improve investment environment at financial institutions and others by reducing burdens caused by diverse regulations and restrictions of financial institutions. Regulation of refinancing is eased in order to facilitate financing. As a temporary measure, refinancing gains will not shared with the government if the following conditions are satisfied: ⅰ) the expected ROI after refinancing is smaller than ROI in the financial model of concession agreement, ⅱ) no MRG is provided ; and ⅲ) the level of user fee is lower than 1.2 times that of government procured projects. Enhancement of Reliability To reduced MRGs through refinancing, a system for requesting refinancing by the competent authority needs to take place. Expand Eligible Infrastructure Types for Green-Growth Fields: renewal energies, etc. 10

13 3. PPP Revitalization Initiatives The Third Revitalization Initiative in December 2010 After the First and the Second Revitalization Initiatives, the government worked out the Third Initiative to further promote private financing for PPPs. Easing the regulations on termination payment, equity capital ratio, and refinancing: Along with a temporary arrangement for termination payment as one of the special cases in the Second Initiative, the Third Initiative adjusted calculation method of termination payment from the declining balance depreciation to the straight line depreciation. To further ease the regulation on equity capital requirement, the government allowed the concessionaire to submit construction performance bond in place of equity within the limit of 5%. To ease the regulation on refinancing profit sharing (50:50), public share shall be less than 50% in cases of projects without MRG. Diversifying the Type of Infrastructure Fund: Expand the type of infrastructure fund from mutual fund to investment trust type. Establishing the Dispute Mediation Committee for PPP projects: PPP Act revision is currently under review by the National Assembly. 11

14 4. Lessons Learned (Ⅰ) The effects of fiscal stimulus packages have contributed to moderating the serious contraction in the economy. The active role and policy support of the government, shown in a series of PPP Revitalization Initiatives, have demonstrated a strong commitment to the PPP program, thus strengthening the private sector s confidence in participation. Still some decline in new PPP announcements and delay in financial closure. Trends of New PPP Projects and Concession Awards Unit: number of new project announcements (number of concession awards) BTO 9(16) 11(12) 18(17) 14(15) 13(10) 14(0) BTL 83(8) 125(66) 76(104) 60(64) 46(89) 11(37) Total 92(24) 136(78) 94(121) 74(79) 59(99) 25(37) 12

15 4. Lessons Learned (Ⅱ) Less trouble in financing was found in BTL (low-risk, low-return) than in BTO (high-risk, high-return) procurement. Interest rates and access to financing were identified as the main channels through which the financial crisis has affected or is expected to affect PPP projects. A new model of PPP scheme, such as a combination of BTO and BTL type, is currently under review to provide better value for money. 13

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