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Korea PPP Experiences Young-Sik Kim ICT/e-Government Advisor, NIPA, Korea PIMAC June 12, 2012 Chisinau, Moldova.

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Presentation on theme: "Korea PPP Experiences Young-Sik Kim ICT/e-Government Advisor, NIPA, Korea PIMAC June 12, 2012 Chisinau, Moldova."— Presentation transcript:

1 Korea PPP Experiences Young-Sik Kim ICT/e-Government Advisor, NIPA, Korea PIMAC June 12, 2012 Chisinau, Moldova

2 Overview of Korea PPP System Part-01

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

4 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 Legal Framework of the PPP System Legal Framework for PPP 4

5 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 The PPP Basic Plan and PRC 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 PPP Basic Plan Project Review Committee 5

6 6 Process of Solicited PPP Projects Competent Authority Review by PIMAC Competent Authority Selection of PPP Project Designation as the PPP Project Announcement of RFPs Submission of Project Proposals Evaluation and Selection of Preferred Bidder VFM Test 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 → Preferred Bidder Concessionaire → Competent Authority Concessionaire

7 7 Process of Unsolicited PPP Projects Submission of Project Proposal VFM Test Notification of Project Implementation PIMAC Private Sector → Competent Authority 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 Construction and Operation Competent Authority Private Sector → Competent Authority Competent Authority → Preferred Bidder Concessionaire → Competent Authority Concessionaire

8 8 Total Completed Under Construction Under Preparation Total Number Amount85 B$47.7 B$23.9 B$14.5 B$ BTO Number Amount61.4 B$ (72.2%)37.3 B$13.0 B$11.1 B$ BTL Number Amount23.6 B$ (27.8%)10.4 B$11.5 B$1.6 B$ Current Status of PPP Implementation As of Dec. 2011

9 BTL Projects Government Support (1): Construction Subsidy 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. Type Number of Projects Total Project Cost (amount) Total Private Investment Project Cost (amount) Financial Subsidy for construction (amount)(ratio, %) Central Government Managed Projects Road Railways Seaport Logistics Airport Environment Subtotal Local Government Managed Projects Roads Parking lot Environment Others Subtotal (unit: US B$, %) (Source: PIMAC, End of June. 2008) 9

10 Government Support (2): Former Risk-Sharing Scheme by MRG Jan 1999 May 2003 January 2006 Oct.2009 Solicited*Unsolicited SolicitedUnsolicited PeriodWhole operating period15 Years10 Years Abolished 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% ConditionNone No MRG applied if Actual Revenue < 50% of Forecasted Revenue Same as Left 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 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. 10

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. 11

12 Government Support (4): Infrastructure Credit Guarantee Fund Scope of Guarantee  Loans and borrowings from financial institutions by concessionaires for private investment project expenses.  Infrastructure Bond issued pursuant to the Act on PPP. Guarantee Limit  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). Types Contents Guarantee rate (%) Facility fund guarantee Guarantees against concessionaire’s debt on construction fund0.3~1.3* Government subsidy guarantee A ceiling on the guarantee is established in preparation for concessionaire’s operation fund shortage resulting from delayed subsidy payment 0.3 Refinancing guarantee Guarantee support on refinancing where the current high interest loan is changed to new interest loan or SOC Bond 0.3~1.3* Operating revenue guarantee A ceiling on the guarantee is established in preparation for concessionaire’s operation fund shortage resulting from reduced operational revenue guarantee 0.5 Infrastructure bond guarantee Guarantee for Infrastructure Bond issued to procure funds necessary for concessionaire in project implementation 0.3~1.3* Guarantee Fee & Types  Maximum annual fee rate: 1.5% * 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) 12

13 Features of the Korea PPP system Part-02

14 Investment Trends of PPP Public & Private Infrastructure Investment Trends ’98’00’01’02’03’04’05’06’07’08’09’10’11 Private Investment (A) Gov’t Investment (B) A / B (%) A : Public works completed B : Annual budget in transportation and regional development sector, The Five-year National Fiscal Management Plan Unit: US B$, % In 2011, PPP investment in the SOC sector amounted to U$ 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 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 Both BTO and BTL types are Common PPP Projects by Procurement Scheme (As of Sep. 2009) Type Step BTO BTLTotal National Projects***Competent Authority Projects Under Operation29 (18.4) 81 (3.8)142 (5.3)252 (27.5) Under Construction32 (22.1)12 (0.5)92 (6.5)136 (29.1) Preparing to construct10 (8.9)9 (0.9)8 (0.4)27 (10.2) Under Negotiation15 (9.5)9 (1.3)79 (3.8)*103 (14.6) Under Review-6 (0.7)45 (3.7)*54 (4.4) Subtotal86 (58.8)120 (7.3) 366 (19.7) 569 (85.8) Total203 (66.1) 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 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. Eligible Facilities in the PPP Act Road (4) Port (3) Railway (3) Welfare (4) Forestry (2) Energy (4) Water Resources (3) Communication (5) Environment (5) Logistics (2) 15 categories (48 facility types) Education (1) Military Housing (1) Culture & Tourism (8) Airport (1) Public Housing (1) 16

17 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) Unsolicited projects’ Vitalization Number of Solicited and Unsolicited BTO projects 17

18 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 Unsolicited projects’ Vitalization '05'06'07'08'09Total BTO Number of VFM Tests conducted Deliver value for money Not deliver value for money Rate of project turn-down45%13%35%31%32%31% 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  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 Objectivity, Consistency and Independence Implementations in Transparency, Objectivity and Consistency as well as Professional expertise are key elements Independent PIMAC has developed PPP Implementation Guidelines and updated reflecting changes and market conditions 20

21 PIMAC-KDI Part-03

22 22 History of PIMAC Establishment of KDI Mar Establishment of Public Investment Management Center(PIMA) within KDI Jan Dec. 1970Promulgation of law establishing KDI (Law No. 2247) Promulgation of Presidential Act establishing KDI (Presidential Act No. 5527) Feb Establishment of Private Infrastructure Investment Center of Korea(PICKO) within Korea Research Institute for Human Settlements Apr 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) 23

24  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. Organization of PIMAC Policy Research Unit Public Institution Evaluation Unit Program Evaluation Unit Executive Director PFS Unit 1RSF Unit PPP Policy Unit PPP Project Unit Finance & Int’l Cooperation Unit Policy and Research Division Public Investment Evaluation Division Public-Private Partnerships Division PFS Unit 2

25 25 As of April 2012 Areas of Expertise of PIMAC Staff Members Areas of ExpertiseHead-Count Economics23 Finance / Business / Accounting15 Law5 Transport14 Engineering (civil, architecture, environment, etc) 14 International Cooperation4 Others (eg. Urban planning, real estate, tourism, etc)12 Total87

26 26 1) Researcher Support for formulation of the Basic Plan for PPP Theoretical and policy studies on PPP programs Development of implementation guidelines 2) 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 3) PPP Market Promoter Training programs and seminars on PPP for public officials International cooperation Data accumulation and management The Role of PIMAC in PPP System

27 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 28  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) International Cooperative Activities of PIMAC


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