Korea PPP System - Ha Jung Yoon 2015. 10. 13 국토연구원 KRIHS
Contens 1. Korea PPP System 2. Governmental Supports 3. PPI Performance Result during 10 years 4. Status and Prospects on PPI in Korea 5. Case Study 6. Policy Issues KRIHS
I. Korea PPP System KRIHS
l. Korea PPP System PPP (Public Private Partnership) is a concept which induces private participation to providing infrastructure and public services.(also known as PPI.) By combining such responsibilities of design, building, financing and operating in a single contract and transferring part of the risks and responsibilities to the private sector, PPP projects realize VFM(Value for Money) with less project costs and improved service quality compared to conventional public procurement. PPP encourages the private sector to utilize its skills, creativity and innovation which can be extended to the public sector. 1
l. Korea PPP System Legal Framework of the PPP System Hierarchy of legal and administrative framework of PPP System PPP Act PPP Act Enforcement Decrees PPP Basic Plan PPP Implementation Guideline The PPP Act and the PPP Act Enforcement Decree are the principal components of the legal framework for PPP 2 They clearly define eligible infrastructure types, procurement procedures, implementation process, conflict resolution and termination mechanism, and the roles of the public and private parties.
l. Korea PPP System 1.2 과업의범위 Legal Framework of the PPP System PPP Basic Plan and Implementation Guidelines(annually updated) The PPP Act directs the MOSF and PIMAC to issue the PPP Basic Plan The Basic Plan provides PPP policy directions Details in PPP project implementation procedure Financing and re-financing direction Risk allocation mechanism Payment scheme of government subsidy Documentation direction 3 PIMAC has developed PPP Implementation Guidelines Guidelines for value for money(vfm)test Guidelines for value for RFP preparation Guidelines for value for standard output specification by facility Guidelines for value for tender evaluation Guidelines for value for standard concession agreement Guidelines for value for refinancing
l. Korea PPP System History of the PPP act PPP was first introduced in Korea with the enactment of the Promotion of Private Capital into Social Overhead Capital Investment Act in 1994. The Act was amended to the Act on Private Participation in Infrastructure (PPI Act) in 1998, after the onset of Asian financial Crisis in 1997. Enactment of The Act on PPP, Jan. 1999 Centered on unsolicited projects Risk sharing Minimum revenue guarantee (MRG) Incentives for reducing project costs Feasibility study for selection of private investment project Establishment of PICKO(KRIHS) 4
l. Korea PPP System History of the PPP act Amendment of The Act on PPP, Jan. 2005 Introduction of BTL Scheme Expansion of facility type Diversification of investor profiles Amendment of PPP Basic Plan, Oct. 2009 Abolition of MRG Scheme Introduction of Investment risk sharing Introduction of VFM revalidation Expansion of Incentive for Early Completion 5
l. Korea PPP System 2.1 49 Types Legal of Framework facility in of 12 the categories PPP System are eligible for PPP Requirements : The project is in accord with mid- to longterm Infrastructure plans and national investment priorities The project has such profitability to attract private sector participation Land Infrastructure And Transport(15) Gender Equality and Family (1) Welfare (4) Forestry (2) Education (1) National defense (1) Amendment of of the Act in 2014 : Communication (4) Eligible infrastructure facility types, which have been stipulated by the Act, can also be stipulated by the Enforcement Decree. Oceans and Fisheries (3) Energy (5) Security and Public Administration Environment (1) (6) Culture & Sport (6) 6
l. Korea PPP System Legal 49 Types Framework of facility of in the 12 PPP categories System are eligible for PPP Sector Education (1) Pre-school and school facilities Infrastructure Types 7 National defense (1) Land Infrastructure And Transport(15) Culture and Sports, Tourism (6) Communications (4) Welfare (4) Forestry (2) Energy (5) Security and Public Administration(1) Gender Equality and Family(1) Oceans and Fisheries(3) Environmental (6) Military residential facilities Road and ancillary facilities, railway, urban railway, airport facilities, multi-purpose dams, urban park, river-affiliated ancillary structures, distribution complex and cargo terminals, passenger terminals, nonroad parking facilities, pre-school and school facilities, ubiquitous city infrastructure, railway facilities Tourist site or complex, youth training facilities, public/professional sports facilities, libraries, museum and art galleries, international conference facilities, culture centers, science museum Telecommunication facilities, information communication system, information super-highway, map information system Senior homes and welfare medical facilities and facilities for remarried seniors, public health and medical facilities, childcare facilities Natural recreational resorts, arboretums Electric source facilities, gas supply facilities, collective energy facilities, new renewable energy Bicycle Facilities Youth training facilities Port facilities, fishing port facilities, eligible facilities for new port construction Excreta treatment facilities and public livestock waste-water treatment facilities, waste disposal facilities, waste-water treatment facilities, recycling facilities, sewage and sewage treatment facilities
l. Korea PPP System Procurement Schemes BTO(Build-Transfer-Operate) Scheme Both solicited unsolicited projects are eligible Roads, seaports, and railway projects, etc User-fees Private Sector (SPC) Provides Services Pays User Fee Transfers Ownership Grants Operational Rights End-user Government 8
l. Korea PPP System Procurement Schemes BTL (Build-Transfer-Lease) Scheme Only solicited projects are eligible School, dormitory, military housing, etc Government payments (Lease rent +operating costs) Low risk-low return Government Provides Services End-user Pays Transfers User Fee Ownership (If necessary) Grants Operational Rights/ Pays Government Payment Private Sector (SPC) 9
l. Korea PPP System New PPP Model (2015) BTO-rs (Build-Transfer-Operate-risk sharing) Scheme Improving business profitability and reduce the fees by sharing the business risk between the government and the private sector (50:50) Changing the high profit and risks of the business to medium profit and risks by sharing the facility investment and operation costs between the government and the private the ratio can be adjusted according to nature of the business) government loss 20% government profit 10% Private profit 10% enforcement Agreement 100% Private loss 20% residual income 60% residual income 120% 10 Case 1. decrease of Operating Income Case 2. increase of Operating Income
l. Korea PPP System New PPP Model (2015) BTO-a (Build-Transfer-Operate-adjusted) Scheme The government takes the risk equivalent to the minimum business operating costs (70% of private investment, interest to 30% of the private investment, operating costs), and shares any excess earning government profit 14% Private profit 6% Non-guaranteed invested costs 30% Private loss 30% Private loss 20% government loss 10% Minimum business operating costs 70% (government guarantee) residual income 60% residual income 80% residual income 120% enforcement Agreement Case 1. decrease of Operating Income Case 2. decrease of Operating Income Case 3. increase of Operating Income 11
l. Korea PPP System Characteristics of BTO, BTO-rs, BTO-a Schemes BTO BTO-rs BTO-a Private risk High risk Middle risk Low risk profit and loss Private 100% profit case and Loss case : Private 50%, Government 50% In the event of loss: the first 30% of losses private, financial support if in excess of 30% In the event of profit: shared between the government and the private (about 7:3) government guarantee - government guarantee of investment and operating costs 70% of private investment, interest to 30% of the private investment, operating costs Rate of return to investment Apply business 7~8% 5 ~ 6% 4 ~ 5% Road, Port railway, urban railway Environment Fee rates Agreement fee + prices Agreement fee+ prices Public enterprise fee 12
l. Korea PPP System Procurement Procedure Both the government and a private company can initiate a PPP project Solicited Projects A solicited project is that the competent authority identifies a project for private investment and announces a RFP Competent authorities develop a potential project after considering related plans and demands for the facility. They weight the procurement options in order to determine whether the PPP procurement is more efficient than the conventional procurement 13 Unsolicited Projects For an unsolicited project, a private company (project proponent) submits a project proposal, and then the competent authority examines and evaluates the contents and value for money of the private proposal, and designates it as a PPP project
l. Korea PPP System Procurement Procedure BTO(Solicited Project) Competent Authority Competent Authority Review by PIMAC Competent Authority Selection of PPP Project VFM Test Designation as the PPP Project Announcement of RFPs Submission of Project Proposals Evaluation and Selection of Preferred Bidder Negotiation and Contract Award (Designation of Concessionaire) Application for Approval of Detailed Implementation Plan Construction and Operation Competent Authority Private Sector Competent Authority Competent Authority Competent Authority Preferred Bidder Concessionaire Competent Authority Concessionaire 14
15 l. Korea PPP System Procurement Procedure BTO(Unsolicited Project) Submission of Project Proposal Private Sector Competent Authority VFM Test Notification of Project Implementation PIMAC Competent Authority Proponent Announcement of RFPs Submission of Project Proposals Evaluation and Selection of Preferred Bidder Negotiation and Contract Award (Designation of Concessionaire) Application for Approval of Detailed Implementation Plan Competent Authority Private Sector Competent Authority Competent Authority Competent Authority Preferred Bidder Concessionaire Competent Authority Construction and Operation Concessionaire
l. Korea PPP System Procurement Procedure BTL Selection of BTL Project Competent Authority VFM Test & Application of Investment ceiling Competent Authority, Review by PIMAC Determination of Aggregate Investment Ceiling for BTL Project MOSF Submission to National Assembly MOSF National Assembly 16 Same as Procedure for BTO Solicited Project Designation as the PPP Project Announcement of RFPs Submission of Project Proposals Evaluation and Selection of Preferred Bidder Negotiation and Contract Award (Designation of Concessionaire) Application for Approval of Detailed Implementation Plan Construction and Operation Competent Authority Competent Authority, Review by PIMAC Private Sector Competent Authority Competent Authority Competent Authority Preferred Bidder Concessionaire Competent Authority Concessionaire
l. Korea PPP System Major Players MOSF(Ministry of Strategy and Finance) Major players in the PPP program include MOSF, concerned line ministries, and the private sector MOSF is responsible for managing the PPP Act, Enforcement Decree, and the Basic Plan for PPP MOSF is also responsible for preparing the draft budget for PPPs. MOSF plays a central role in budgeting as well as in preparing and implementing PPP investment plans. Main budgeting decisions are made in bilateral negotiations between MOSF and the spending ministry. 17
l. Korea PPP System Major Players PRC(PPP Review Committee) Organized and managed by the MOSF. Deliberates the matters concerning the establishment of major PPP policies and key decisions in the process of implementing large scale PPP projects. Main responsibilities of PRC are deliberation on: Establishment of major PPP policies Establishment and modification of the Basic Plan for PPP Designation and cancellation of a large (total project cost with KRW 200 billion or above) PPP project Formulation and modification of the RFP for a large PPP project Designation of a Concessionaire of a large PPP project Other matters which MOSF proposes for the active promotion of the PPPs. 18
l. Korea PPP System Major Players 19 PIMAC(Public and Private Infrastructure Investment Management Center) In order to provide comprehensive and professional support for the implementation of PPP projects, PIMAC was established under the PPP Act The mission and roles of PIMAC are prescribed in the PPP Enforcement Decree: Supporting MOSF in the formulation of the Basic Plan for PPP Supporting the competent authorities and ministries in the procurement process Assessment of feasibility and value for money for potential PPP projects Formulation of the request for proposal Designation of the concessionaire Evaluation of project proposals by private companies Negotiation with potential concessionaire, etc Promoting foreign investment in PPP projects through consultation services Developing and operating capacity-building programs for public sector practitioners
l. Korea PPP System Major Players SPC(Special Purpose Company) Private sector participants who intend to implement a PPP project shall establish a PPP project company, a legal entity which is to be designated as concessionaire upon PPP contract award. In general, construction companies, financial investors, and professional operators form a special purpose company (SPC) for the associated PPP project. In many cases, a project proponent is a would-be company when it submits a project proposal. In such case, it shall include a corporate establishment plan in the project proposal and, when designated as a potential concessionaire, establish the company which is to conduct the designated PPP project. 20 The SPC shall not engage in businesses other than those acknowledged by the competent authority at the time of designation of the concessionaire except insignificant businesses approved by the competent authority.
l. Korea PPP System VFM(Value for Money) What is Value for Money? The best available outcome after taking account of all benefits, costs and risk over the whole life of the project (HM TREASURY) Not lowest price Why it is Used? Seek the best use of available resources Efficient and effective public service delivery The competent authority uses VFM reports as basic material to make a judgment on whether to move forward with the PPP project proposed by the private proponent according to the Article 7, Paragraph 3 of the Enforcement Decree of the PPP Act 21
l. Korea PPP System 22 VFM(Value for Money) VFM is often a comparative assessment Requires a benchmark cost : PSC (Public Sector Comparator) PSC is a benchmarking and evaluation tool : a Key tool Benchmarks the cost of government service delivery Evaluates whether VFM is delivered from bids A procurement principle Applied on a project or program basis Innovation, asset utilization, risk sharing, competition, service integration are key drivers of VFM Presence of VFM drivers confirms suitability for PPP
l. Korea PPP System 23 VFM(Value for Money) 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. Phase 4: Award bonus points to the initial proponent Bonus points (10% max.) awarded to the initial proponent are estimated based on the results of VFM tests and the quality of the proposal.
II. Government Support II. Government Support KRIHS
ll. Government Supports 24 Acquisition of land by the concessionaire Granting of land expropriation rights to the concessionaire National or public property in designated areas may be sold to the concessionaire Concessionaire are allowed to use national or public property without charge or at lower price Financial support Construction subsidy : The government may grant construction subsidy to the concessionaire, if it is inevitable to maintain the user fee at a reasonable level Tax incentive Exemption from acquisition and registration taxes on real estate for BOT projects 0% VAT on construction services Tax reduction for infrastructure bond
ll. Government Supports MRG(Minimum Revenue Guarantee) 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 36 out of 145 signed contracts include minimum revenue guarantee clauses at the end of 2008. MRG risk sharing scheme was completely abolished in Oct 2009 Solicited Jan 1999 Unsolicited May 2003 Solicited January 2006 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 25
ll. Government Supports haring New Scheme Risk Sharing Scheme 26 Risk-sharing By the Government Government pays the amount of shortfall when the actual operation revenue is less than the share of investment risk* by the government. by the government share of investment risk: the sum of private sector s invested capital and the interest rate of government bonds, calculated on an annual basis If the actual operation revenue exceeds the share of investment risks, it will be redeemed within the limit of the amount previously paid. Subsidies provided only when the actual operation revenue is greater than 50% of the share of investment risk. Applied only for solicited projects with significant public benefits.
ll. Government Supports 27 Compensation for Proposal Cost Purpose : Compensate the unsuccessful bidder for a portion its project proposal cost for the purpose of promoting the competition in projects. Calculation : The maximum amount of compensation as follows. Only 1 unsuccessful bidder: 25% of basic design cost 2 or more unsuccessful bidder: 30% of basic design cost for 2nd contender and 20% of 3rd contender (*Basic design cost : applying the basic design rate for the government project as set forth in the budget compilation guideline) Exclusion : Unsuccessful bidders who earned the engineering score under certain level (eg. average C level from A~E 5 level evaluation), Unsuccessful bidders who submitted the project proposal containing service quality significantly below the required level. Notice : The competent authority is to provide the details in the RFP. such as whether the compensation is available, the size of compensation, criteria and procedures of compensation, and due period of compensation.
III. PPP performance Result during 10years KRIHS
lll. PPP Performance Result during 10 years Expansion and Saving of SOC Budget Early supply of SOC facilities Increasing of Social benefit Risk Sharing Macro-Economic effect 28
lll. PPP Performance Result during 10 years Early supply of SOC facilities Efficiently management of construction risk such as increased cost, expansion working period etc. compared to investment by government 13.3% extended working period of investment by government 10.5% shortened working period of BTL project 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% Government Investment BTL 29
lll. PPP Performance Result during 10 years Increasing of Social Benefit Calculating benefits on expansion of private SOC investment Estimated reduction effect of financial burden due to PPP is about 2.0 trillion, since 2014 Early and high quality service supplied by BTL scheme As of 2014, Announced of 440 projects(27.7 trillion won) Early and high quality service supplied by BTO scheme As of 2014, Announced of 222 projects(71.7 trillion won) 30
lll. PPP Performance Result during 10 years Risk Sharing Increasing the reliability of SOC facilities supply LCC(Life cycle cost) is more profitable then investment by government Maintenance cost of private project are lower then investment by government Minimization of project cost by observance of construction period PPP scheme that private sectors get disadvantaged If construction period in agreement is exceeded 31
lll. PPP Performance Result during 10 years Macro-Economic Effect Output Effect PPP project (9.6 trillion won) Output Effect (19.7 trillion won) Employment Effect Transportation Facilities 13.4 persons/billion won Seaports Facilities 9.3 persons/billion won Railways Facilities 12.1persons/billion won Environment Facilities 13.0 persons/billion won 32
IV. Status and Prospects on PPP in Korea KRIHS
lv. Status and prospects on PPP in Korea Number & Investment of PPP projects by Procurement Scheme (Unit : Number(trill. KRW)) steps project type BTO BTL Total Under Operation 159 393 552 Under Construction 40 15 55 Preparing to construct 23 32 55 Number of Project 222 440 662 Total Investment 71.7 27.7 99.4 Source : KDI(2014) 33
lv. Status and prospects on PPP in Korea Number & Investment of PPP projects by Facility Type (Unit : Number,% (trill. KRW)) Type Number of Projects Total Investment Type Number of Projects Total Investment Education 223 (33.7) 9.7 (9.8) Railways 13 (2.0) 17.3 (17.4) Environment 176 (26.6) 12.8 (13.0) Airport 13 (2.0) 0.7 (0.7) Roads 84 (12.7) 42.3 (42.6) Welfare 12 (1.8) 0.3 (0.4) National defense 71 (10.7) 5.6 (5.6) Distribution 6 (0.9) 1.3 (0.3) Culture 41 (6.2) 1.9 (1.9) Communication 5 (0.8) 0.3 (0.3) Seaports 18 (2.7) 6.9 (7.0) Total 662 (100.0) 99.4 (100.0) Source : KDI(2014) 34
lv. Status and prospects on PPP in Korea 35 Rate of Return(Real) In 2000~2008, Average return of SOC projects are 7.9%, Reduction of return Before 2005, average return of SOC projects are 9.01% Since 2005, average return of SOC projects are 6.9% (Unit : %) 2000 2001 2002 2003 2004 2005 2006 2007 Road 9.52 9.52 7.86 8.94 8.16 7.21 5.49 5.34 Railways 10.43 10.43 9.10 9.10 8.86 8.45 7.76 7.76 Seaports - 8.76 8.76 8.62 8.63 8.24 6.75 6.35 Source : PIMAC(2010)
lv. Status and prospects on PPP in Korea 36 Operating Period Operating period varies from 11 years (airports) up to 50 years (seaports) Roads and railways 30 years; seaports 50 years The typical operating period for social PPP project is 30 years (Unit : trill. KRW, years, number) Total investment Period Number of projects Road 42.39 30 84 Railways 17.31 30 13 Seaports 6.95 17~50 18 Airports 0.71 11~30 13 Source : KDI(2014)
lv. Status and prospects on PPP in Korea te Investment in PPP Trends of Private Investment in PPP Pubic & Private Investment Trends (Unit : trill. KRW, %) Total Investment in SOC(A) Gov t Investment Private Investment(B) Ratio of Private Investment (B/A, %) Source : KDI(2014) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 19.1 21.2 21.3 21.5 24.3 29.3 27.8 26.6 25.8 26.7 26.4 17.4 18.3 18.4 18.4 20.5 25.4 25.1 24.4 23.1 25.0 23.7 1.7 2.9 2.9 3.1 3.8 3.9 2.7 2.2 2.7 1.7 2.7 9.8 16.2 15.9 16.8 18.5 15.4 9.3 9.0 11.7 6.8 11.4 37
lv. Status and prospects on PPP in Korea Long term Government Expenditure 38 100% 80% 60% Economic Welfare 40% Education Defense 20% 0% Local Govt Admin 2005 2010 2015 2020 2025 2030 Local Gov t Admin Defense Education W elfare Economic 2005 2015 2030 OECD AVG Welfare (%) 26.6 35.6 46.7 51.7 Economic (%) 19.7 13.8 10.6 9.5
V. Case Study KRIHS
V. Case Study Incheon Bridge Concept Groundbreaking Ceremony marking the commencement of construction of the Incheon Bridge, second connecting bridge to Incheon International Airport, was held on June 16, 2005. Opening of Incheon Bridge is connect the 2nd and 3rd Gyeongin (Seoul-Incheon) Expressway with Seohaean West Coast Expressway which is expected to cut travel time to the airport from Seoul metropolitan areas southern districts by more than 40 minutes. 39
V. Case Study Incheon Bridge Project Outline Type : Cable-Stayed Total length : 21,400m including the connecting road(12,000m over sea) Cost : 2,085.8 billion won Method : BTO Concession period : 30 years (2009 completion) Project Company : KODA Development 40 (AMEC, Incheon Municipal Government, private investors)
V. Case Study Incheon Bridge Location of Incheon Bridge 41
V. Case Study Incheon Bridge The Route Map of Incheon Bridge 42
V. Case Study Incheon Bridge The Night View of Incheon Bridge 43
Vl. Policy Issues KRIHS
Vl. Policy Issues Developing a Model for Public Involvement in PPI By developing public involvement model that induces potential users to step in the procurement process of BTL projects, we try to improve endusers satisfaction and to contribute to community development Promoting to Construct Integrated Compound Facilities To satisfy community s various needs, more than a single infrastructure facility can be built on one site and create synergy effect by making them function properly For example, community schools may contain senior care facilities and sports center, which maximize facility usage after school hour and also provide students with an opportunity to interact with elderly people 44
Vl. Policy Issues Developing PPP Advisory Market The public sector needs to hire specialists who help them in the process of PPP procurement. By developing PPI advisory market, the public sector s efficiency in procurement process is expected to enhance. Developing the Sector Standard Models for Major Facility Types By developing the sector standard models from output specifications to standard contracts, the trial and error may be minimized and the procurement process would be more effective. 45
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