Experiences in Developing Infrastructure and Lessons of Korea

Transcription

1 Macquire Asia Infra Conference (8-9.Dec.Macao, China] Experiences in Developing Infrastructure and Lessons of Korea 8~9 Dec Former Deputy Prime Minister and Minister of Finance and Economy Okyu KWON

2 New Challenges in Infrastructure investment Importance of infrastructure investment - to drive economic growth - to improve quality of life New challenges in infrastructure investment - shortage of financial resources - inefficiency in public sector Ensuring sufficient infrastructure investment - to mobilize private capitals - to enhance efficiency in investment 2

3 contents Ⅰ. Ⅱ. Characteristics of Infrastructure Investment in Korea New Infrastructure Investment Strategy of Korea 1. Active Utilization of PPPs 2. The Privatization of Public Corporation 3. Free Economic Zones Ⅲ. Future Outlook IV. Concluding Remarks

4 Ⅰ. Characteristics of Infrastructure in Korea 4

5 1 Brief History (1960s~1970s) Under 5-year economic development plans - Expanding insufficient industrial production infrastructure - Constructing roads & port facilities (1990s) SOC investment highly increased - Dealing with a rise in distribution costs & traffic congestions (2000s) Relatively decreased due to the surge in demand social welfare fo The share of SOC investment in GDP 1970s 2% * including by private sector 1990s 6% 2000s 4% 5

6 2 Major Characteristics 1 Monopolized by the state corporations - Raising funds by collecting charges from beneficiaries & loaning from abroad * Major state corporations : Korea Expressway Corporation, Port Authorities, Korea Electric Power Corporation, Korea Airports Corporation, Korea Railroad, Korea Water Resource Corporation, and Korea Industrial Complex Corporation 2 Made preemtive investment in infrastructure - Under the strong political leadership, the EPB could intensively allocate resources for infrastructure. - Through mid- and long-term comprehensive land development plans, Korea has built infrastructure systematically. 6

7 2 Major Characteristics - Healthy & robust fiscal situation and loans from international financial organizations such as the World Bank 3 Showing cost effectiveness in infrastructure investment - High performance of state corporation by providing good compensation for their employees - Intensive inspections to prevent corruption, securing transparency and effective competition * Electronic bidding system based on advanced IT technologies - Underpricing practice gradually turned to market prices 7

8 3 Change toward Use of Private Capital Government policies dramatically changed in While the priority of financial resources for economic development degraded, a demand for social integration and welfare expenditure highly increased. - Increasing inefficiency of public sector due to retarded technology take-ups and political pressure Needed a new alternative, including direct participation by private companies A paradigm shift for government s role formed : Private business should be widely allowed to participate in areas where market function can be utilized. 8

9 Ⅱ. New infrastructure investment strategy of Korea 1. Active Utilization of PPPs 2. Privatization of Public Corporations 3. Free Economic Zone Development Programs 9

10 1. 1 Active Utilization of PPPs The Introduction of PPPs Program Reducing the size of financial burden of SOC Maintaining necessary levels of SOC investment by utilizing affluent capital and creativity of the private sector - The amounts of PPP projects have grown substantially. <the Number of PPP Projects by Procurement Scheme (unit : number(trill.krw))> Type Step BTO National Projects Competent Authority Projects BTL Total Under Operation 19(9.6) 66(3.1) Under Construction 32(27.5) 17(1.2) Preparing to construct 10(4.6) 7(0.2) Under Negotiation 16(12.7) 1(0.05) Under Review 2(0.9) Subtotal Total 79(55.3) 170(59.9) 91(4.6) 288 (16.5) 458 (76.4) 10

11 2 Types of PPPs 1 Build Transfer Operate (BTO) & Build Transfer Lease (BTL) 2 BTL system adopted in Designed to induce private investment for early construction of public infrastructure * such as school facilities, military housing and hospitals, etc. - Government refunds the investment for 10~30 years. 3 Solicited project and unsolicited project - Projects designated by the government and projects proposed by the private businesses - Both are required to conduct evaluation of VfM. - BTL Projects are only carried out as solicited projects. 11

12 2 Types of PPPs <Procurement Steps of Unsolicited Projects> Submission of Project Proposal Review of Proposal/ VfM Test Designation of PPP Projects Announcement of RFP Designation of Preferred Bidders Negotiation Conclusion of Concession Agreement Approval of DEDPI Construction Operation <Procurement Steps of Solicited Projects> Conducting Pre- Feasibility Study Review of VfM Designation of PPP Project Request for Proposal Submission of Project Proposal Tender Evaluation/Selec tion of Preferred Bidder Negotiation Approval of DEDPI Construction Operation 12

13 3 The Conductor of PPPs : PIMAC PIMAC(Public and Private Infrastructure Investment Management Center) at KDI was established according to the PPP law. The steps and types of VfM study - The feasibility study for 1 evaluating the order of priority, 2 harmony with superior concept plans, 3 and B/C analysis - The VfM test for finding out less financial burden between carrying out the feasible project as a PPP project or a government project After VfM test, the government selecting and concluding a contract with preferred bidder through competitive bids 13

14 4 Government s Supports for Finance and Risk-sharing (Financial support) : Including construction subsidies (30~50% of total costs of project), support for land acquisition and tax benefits (such as exemption of acquisition tax, registration tax and VAT) (Risk-sharing) : Minimum Revenue Guarantee system only for solicited projects (65~75% of the income predicted) - Government steadily carrying out programs of improving accuracy of demand projection * Revision of database of the Korea Transport Institute <Profile of Minimum Revenue Guarantee> Jan 1999 Solicited Unsolicited May 2003 January 2006 Solicited Unsolicited Period Whole operating period 15 Years 10 Years Guarantee Level (Max) 90% 80% First 5 Years 90% Next 5 Years 80% Last 5 Years 70% First 5 Years 75% Next 5 Years 65% Abolished Condition None No MRG applied if Actual Revenue < 50% of Forecasted Revenue Same as Left 14

15 5 Managing Financial Burden Caused by PPPs Government created internal management criteria in the Mid- Term Public Finance Operation Plan for 2007~ Financial burden caused by PPPs not to exceed 2% of the aggregated net budget (budget of central gov t + budget of local gov t) Considering the present BTO level (5.1 trillion won) and new BTL projects (5.0 trillion won) every year, - the government s financial burden is expected to keep 1.7~1.8% of the aggregated net budget after

16 2. The Privatization of Public Corporations Korea is currently pursuing renovation in public sector. - (Principles) Small government and large market, augmentation of people s benefits, and minimization of social costs - (Targets) Public organizations with strong marketability among 305 organizations Announced plans for privatizing and rationalizing 108 Public organizations 1 Incheon Int l Airport : Selling its stakes up to 49% (including strategic alliances up to 18%), and privatizing some of 14 domestic airports 2 Entire privatization : Korea Culture Promotion Inc., Korea Asset Investment Trust, Korea Real Estate Investment Trust, Kyongbuk Tourism Development Corp., Korea Construction Management Corp. 16

17 2. The Privatization of Public Corporations 3 Selling parts of assets through realignment of functions - Selling non-core businesses (eg : golf courses, duty free stores and sports centers, etc.) : Korea Tourism Organization, Korea National Oil Corp., Korea Resources Corp., Seoul Olympic Sports Promotion Foundation, Korea Electrical Safety Corp. 4 Adopting competition system in the monopolized market - Allowing entry of competitors against Korea Gas Corp. and Korea Broadcast Advertising Corp. The scope of privatization involved with SOC is not large. - Strong concerns raised about the area of electric power, gas, water supply, medical insurance. - The government is initially seeking way of improving efficiency in management of these corporations. 17

18 3. Free Economic Zones Designated strategic areas as free economic zones and provided benefits for foreign investors such as deregulation, tax breaks, better education and medical services - Incheon, Busan/Jinhae, Gwangyang Bay (2003) - Hwanghae, Saemangeum, Daegu (2008) Incheon Free Economic Zone progressing relatively faster - Foreign developers (including U.S.-based Gale Int l) are constructing international business area, 151-story Incheon Tower, convention center and int l schools. - The construction of Incheon Bridge (1.6 billion-dollar project) is now underway by Amec. 18

19 3. Free Economic Zones Total amount of FDI of Incheon Free Economic Zone arleady reached 55.2 billion U.S. dollars in 26 projects. - Now in talks with foreign investors including a theme park of MGM studio, research organizations, a distribution center and resort complex While Korea s Free Economic Zones are still in fledgling stages, it is said to achieve relatively satisfactory results - Thanks to the government s clear vision, establishment of institutional instruments and excellent geographical conditions. 19

20 Ⅲ. Future Outlook Ⅲ. Future Outlook 1. Necessity for Infrastructure Investment 2. Entry into the FTSE s Developed Market 3. Capital Market Integration Law 4. Potential for Regional Financial Hub 20

21 1 The Necessity for Infrastructure Investment in Korea Needed additional investments for railroad sector, Incheon Int l Airport, and a new airport A variety of large scale regional development projects going on - free economic complexes, Saemangeum project and Sun belt in south coast, etc. Korea expected to be an attractive destination of investment - Institutional instruments to encourage FDI in SOC and regional development programs are set in place - Korean government s strong commitment continued. 21

22 2 Korea s Entry into the FTSE s Developed Market (Aspect of portfolio investment) Additional funds of 8~16 billion U.S. dollars are expected to be invested in Korea on mid-and longterm basis. Amount of funds flowing in by being included in developed market index Amount of funds flowing out by being excluded from advanced emerging market index 20 bil.~22 bil. U.S. dollars 6 bil.~12 bil. U.S. dollars Amount of net inflow 8 bil.~16 bil. U.S. dollars (Aspect of FDI) As the domestic capital market is further matured, FDI will be expected to increase. 22

23 3 The Capital Market Integration Law The Capital Market Integration Law (comes into effect in Feb. 2009) will energize infrastructure investment businesses by vitalizing investment bank s functions. The Law also will expand foreign financial company s participation in domestic market as well as domestic company s in overseas market. - Domestic capitals will move from sell-side trade to buy-side businesses such as M&A deals etc. Need to pursue a balanced growth of commercial banks and IB s by renovating financial regulations while complementing soundness 23

24 4 Potentials for Regional Financial Hub 1 Secured abundant funds from domestic source - national pension fund of 228 trillion won - corporate pension fund of 4 trillion won - fund trust of 298 trillion won - foreign exchange reserve of 201 billion U.S. dollars - insurance premium of 108 trillion won 2 Robust real sector with large number of excellent global manufacturers 3 Highly educated people Operational funds of nearly 1 trillion U.S. dollars within 5~6 years will call for building a regional financial hub in Northeast Asia 24

25 IV. Concluding Remarks Infrastructure investment played a key role in economic development of Korea. Infrastructure investment should be undertaken preemtively considering that - it takes a long period of time to complete; and - recent global financial crisis needs to boost domestic demand. We need to develop a variety of new mechanisms and explore advanced models 25

26 Thank you Thank you 26