Management of Public Investment Projects in Korea Korea Development Institute Public and Private Infrastructure Investment Management Center Hyeon Park

2 1. Introduction Contents 3. PFS Implementation 2. PFS (Pre-Feasibility Study) Overview 5. Case Study 1: PFS on Dang-jin ~ Cheon-an Freeway Construction Project 7. Further Issues in PFS 6. Case Study 2: PFS on Light Rail Transit Project in Kang-Nam Gu, Seoul 4. PFS Methodology

3 1. Introduction Establishment of Integrated Public Investment Management  A Pre-feasibility study (PFS) was introduced in April 1999 as a public sector reform initiative in the wake of the financial crisis of 1997 and Since the 1970s, line ministries have implemented Feasibility Studies to get government budget funding. Criticism of feasibility studies for the Seoul-Busan Express Rail project and other large-scale construction projects.  A Total Project Cost Management (TPCM) System was established in During the design and construction phases of a project, the change in construction costs is monitored by the Ministry of Planning and Budget. If the total costs of a project increase by more than 20%, the feasibility study is re- inspected. In April 2005, re-inspection guidelines were established  Performance evaluations for several road construction projects have been recently conducted.

4 1. Introduction (2) Planning PFS (Pre-Feasibility Study) Draft Design Operation/ Maintenance Blueprint Design Feasibility Study Land Acquisition/ Construction Ex Ante Intermediate Ex Post Total Project Cost Management Re-inspection of Project Feasibility Performance Evaluation Public Investment Management Process

5 2. PFS Overview Purpose of PFS  PFS aims to enhance fiscal productivity by launching large-scale public investment projects based on transparent and objective ex ante project evaluations. Coverage of PFS  All new infrastructure projects with total costs amounting to 50 billion Korean Won ($50 Million USD) or more are subject to PFS.  Local government and private investment projects are subject to PFS if central government subsidies exceed 30 billion Won.  Exemptions from PFS  Legally necessary facilities  Rehabilitating facilities  Military facilities

6 PFS Procedure 2. PFS Overview(2) Submit PFS projects candidate Line Ministry Ministry of Planning & Budget KDI Select PFS Projects Request PFSs Organize Teams/ Conduct PFS Submit PFS Report Announcement Make Investment Decision Feasibility Study or Stop

7 2. PFS Overview(3) PFSFeasibility Study DefinitionAn overview survey preceding a detailed feasibility study aimed at budget planning and setting priorities Detailed analyses of economic and technical feasibility before beginning construction of the projects that have already met the criteria of the preceding PFS Economic Analysis Broad analyses to decide whether the next phase of detailed feasibility study is necessary. Finding alternative way to achieve the project goal. Precise and detailed analyses to decide whether construction should be started. Analysis focuses on a given alternative. Policy AnalysisExamination of macro aspects of the project, such as necessity of the project in a national-economy perspective, correspondence with higher level plans, and balanced regional development. Not applicable except for detailed environmental impact assessment and analyses of some related issues that have significant expected impacts Technical feasibility analysis Detailed analysis is not required. Replaced by expert's consulting. Various detailed analyses including soil analysis and analysis of engineering techniques. Evaluation Ownership Ministry of Planning and BudgetSpending Agency (Line Ministries) Research fund/duration 80 – 100 million won Approximately 6 months 300 million - 2 billion won Depending on the project Comparison of PFS and Feasibility Study

8 2. PFS Overview(4) Number of PFS Conducted Evaluation Results  About half of the projects were evaluated as being ‘Not-Feasible.’.

9 3. PFS Implementation Pillars of PFS Implementation  Objectivity, consistency, and transparency Development of Evaluation Guidelines  Detailed description of methodology and procedures of PFS implementation  PFS guidelines by sector: Roads, rail, seaports, airports, dams, and cultural facilities Using the same dataset for different projects in the same sector  Continuous revision of guidelines through academic research

10 3. PFS Implementation (2) Multi-disciplinary Research Team  Three or more organizations are involved including KDI e.g. KDI (Project manager), University professors (Transportation demand analysis), and Engineering firms (Cost estimation)  Induce balanced decision-making PFS Committee  Members: Staff from the MPB and line ministries, PIMAC, the PFS team, and field specialists  Open discussion on mid-term and PFS final reports

11 4. PFS Methodology [Figure 1] PFS Flowchart Policy Analysis Balanced Regional Development Regional Economic Impact Consistency with Higher-level Plan Environmental Impact Assessment Regional Preference Financial Feasibility Project Proposal Background Study Review of statement of purpose Collect Socio-economic, geographic, and technical data Brainstorming Raising issues concerning PFS Economic Analysis Demand Analysis Cost Estimation Benefit Estimation Cost-Benefit Analysis Financial Analysis Multi-Criteria Decision Analysis (AHP) Overall Feasibility

12 4. PFS Methodology (2) Economic Analysis  Methodology: cost-benefit analysis Criteria: B/C, NPV (Net Present Value), IRR (Internal Rate of Return) Social Discount Rate: 6.5% Duration: Roads, rail and seaports (30 yrs), Dams (50 yrs) Tax is excluded but salvage value is included  Benefit of road project Valuation of changes in route, and travel speeds due to the project Savings in travel time, vehicle operation costs, traffic accidents, and environmental costs (air and noise pollution)

13 4. PFS Methodology (3) AHP (Analytic Hierarchy Process)  A multi-criteria decision-making approach Combines quantitative and qualitative criteria for decisions under a hierarchical structure A group decision support system  Characteristics Hierarchical structuring Pair-wise comparison

14 4. PFS Methodology (4) [Figure 2] AHP Structure of PFS (Prototype) Pre-Feasibility Economic Analysis Policy Analysis Project-specific Criteria Common criteria Balanced Regional Development Funding Source Availability Regional Preference Regional Economic Impact Environmental Impact Assessment Consistency with H-L Plan PSC 1 PSC 2 PSC 3 PSC 4

15 Dang-jin ~ Cheon-an Freeway Construction  Objectives  To relieve traffic congestion  To improve accessibility to Cheong-ju International Airport  Project Scope  Length: 45.0 km (4 lane)  Estimated Total Cost: 900 Billion Won  Construction Period: 2008~ Case Study 1

16  Site Map 5. Case Study 1 (2)

17  Route Map 5. Case Study 1 (3)

18  Demand Forecast  10,000~40,000 vehicles/day (2014) 5. Case Study 1 (4)

19  Estimate of Benefits  Estimating changes in choice of route and travel speeds  Savings in travel time, vehicle operating costs, traffic accidents and environmental costs (air and noise pollution)  Estimate of Costs  Estimating Construction Costs, Land Acquisition Costs, Accessory Costs, Contingency Costs, Operating Costs  Economic Analysis 5. Case Study 1 (5) Benefits (Billion won, Not Discounted) Costs (Billion won, Not Discounted) B/C NPV (Billion won) IRR (%) Route 137,23311, Route 232,96611,

20  Policy Analysis  AHP  Weights on economic analysis & policy analysis results  Final results 5. Case Study 1 (6) Economic AnalysisPolicy Analysis Average Person Person Person Person FeasibleNon-Feasible Average Person Person Person Person

21 6. Case Study 2 Light Rail Transit (LRT) Project in Kang-Nam Gu, Seoul  Construction of a Light Rail Transit (LRT) System in the Kang-Nam Gu Area, a sub- center in southern Seoul. Objectives - Relieve traffic congestion and mitigate air-pollution emission - Provide public transportation to manage travel demand - Enhance high-tech image of the international business district Length: 4.9km; No. of Stations: 13 System: Seat-type monorail / AGT (Automated Guideway Transit) Cost Estimate: 300 Billion Won / 240 Billion Won

22 6. Case Study 2 (2) Route Map of LRT

23 6. Case Study 2 (3) Seated-Type Monorail

24 6. Case Study 2 (4) AGT (Automated Guideway Transit)

25 6. Case Study 2 (5) Travel Demand  thousand daily passengers Summary of Economic Analysis (Billion Won) SystemBenefitsCostsB/CNPV Monorail AGT

26 6. Case Study 2 (6) Conclusion  This project is not economically feasible (B/C <1).  The major beneficiaries of this project would be local residents in Kang-Nam Gu, which is the wealthiest local government in Korea and already has a well-developed subway system. Hence, central government subsidies for this project would widen regional disparities between Kang-Nam Gu and other areas in Seoul as well as the rest of Korea.  The research team recommends ‘not to provide’ a central government subsidy for this project.

27  Expansion of PFS Coverage  Continuous Standard Guidelines Revision  Database Building 7. Further Issues in PFS