1. Presented to ACET Seminar Accra, Ghana January 25, 2012 Okyu Kwon KAIST Graduate School of Finance Public-Private Partnerships in Infrastructure of Korea

2. I Overview on PPPs II Government Support Table of Contents III Success Factors of Koreas PPP 1 IV Concluding Remarks

3. I. Overview on PPPs 2

4. 3 1. Major Functions of PPP In 1994, the Act on Promotion of Private Capital into Infrastructure Investment enacted. Expected Functions of Public-Private Partnership (PPP) Effective alternative to financially constrained government To utilize private sectors know-how and creativity Long-term investment opportunity for private investors Partnership between government and private sector Government role was to plan, evaluate, approve execution, and support implementation. Private partners role was to design, finance, build, and operate facilities.

5. 4 2. Evolvement of PPP Act - PPP Act introduced with components of market contract. - Started from Total Project Cost Management System. - Basic Plan for PPP drawn. Revision of PPP Act in 1998 Execution agreement between Ministries and concessionaires Supporting measures: minimum revenue guarantee, request for government buyout, credit guarantee, supporting agency Further reforms undertaken since 2003: Introduced infrastructure fund and compensation scheme for dropouts. For effective competition, price factor taking more than 50% weight

6. - BTO Build - Transfer - Operate Construction by the private sector Ownership transferred to government Operation by the private sector IRR is determined through negotiation(9~15%) - Build - Transfer - Lease Construction by the private sector Ownership transferred to government Lease and payment by the government IRR = Reference rate (government bond) + α(80~100bp) BTL 3. Implementation Method 5 Others : BOT, BOO, etc. delivers Service Pays usage fee Transfers Ownership Grants operating rights Transfers Ownership Lease payments delivers Service Tax or Fees Government Private Participant (SPC) User Government Private Participant (SPC) BTO BTL

7. There are 46 types of infrastructure facilities in 15 sectors specified by the PPP Act Road (3) Port (3) Rail (3) Welfare (4) Forestry (2) Energy (3) Water Resources (3) Communication (5) Environment (5) Logistics (2) 15 Categories Education (1) Military Housing (1) Culture & Tourism (9) Public Housing (1) * Positive listing Airport (1) Available Facility Types 6 BTO BTL

8. Road : 30 years (20~40 years) Railway : 30 years Seaport : 50 years (30~50 years) BTL : 20 years Decided at concession agreement between the authorities in charge (govt) and the concessionaire (private participant) 7 Operation Period Within 50 years under the PPP guideline

9. 8 4. Achievements of PPP in Korea Private Investment Fast Growing Private played a key role, complementing public investment. The proportion of private investment over public investment From 3.9% in 1998 to 15.4% in 2009 At the end of 2009, 461 projects PPP contracts approved. 106 BTO and 145 BTL projects were completed to provide services to the public. Share of PPP in Government Infrastructure Investment (KRW trillion, %) 19982003200520072009Sum Private investment by PPP 0.51.03.06.09.670.9 BTO0.51.02.93.03.151.1 BTL--0.13.06.519.8 Share in government investment3.95.616.117.019.7-

10. II. Government Support 9

11. Government Support Tax Benefits Construction Subsidy Land Acquisition Support Risk-Sharing Structure Termination Payment Infrastructure Credit Guarantee Fund Financial Support Risk Sharing Measures, etc. 10

12. 11 1.Costruction Subsidy Construction Subsidy Land Compensation : 100% Government Subsides Roads : Up to 30% of Total Investment Railways : Up to 50% of Total Investment Ports : Up to 30% of Total Investment * Foreign exchange loss compensation scheme was abolished. Land Compensation : 100% Government Subsides Roads : Up to 30% of Total Investment Railways : Up to 50% of Total Investment Ports : Up to 30% of Total Investment * Foreign exchange loss compensation scheme was abolished.

13. 12 2. Risk-Sharing Structure Construction Subsidy Risk-Sharing Structure *Available for solicited projects only* - Under the new risk-sharing structure, government guarantees redemption of the minimum costs* of the project (costs for PSC at maximum) * Minimum Costs= (Private investment cost + interest on government bonds) *Available for solicited projects only* - Under the new risk-sharing structure, government guarantees redemption of the minimum costs* of the project (costs for PSC at maximum) * Minimum Costs= (Private investment cost + interest on government bonds)

14. 13 Risk-Sharing Structure (Introduced in PPP Revitalization Plan to ease credit crunch - Aug. 2009) Risk-sharing By the Government - Government pays the amount of shortfall when the actual operation revenue is less than the level of risk-sharing revenue* * Risk sharing revenue: The amount of operation revenue that guarantees the IRR comparable to the government bonds rate of return. - When the actual operation revenue exceeds the risk-sharing revenue, Government subsidies are redeemed on the basis of realized payments. Revenue Redemption n Revenue n+1n+2n+3 Subsidies No Subsidies Risk-Sharing revenue Prospective revenue 50% of Risk-Sharing revenue - Subsidy is only provided when the actual operation revenue is greater than 50% of the risk-sharing revenue. - Uncertain guarantee of IRR (Internal Rate of Return) Risk sharing of Private Participants

15. 13 3. Tax Benefits Construction Subsidy Various Tax Benefits Exempt from Acquisition and Registration Tax Application of 0% VAT Separate Tax on Interest Income from Infra Bond (14%) Separate Tax on Dividend Income from Infra-Fund (14%) Dividends from SPC are tax-exempt ( if more than 90% of the profit was distributed) Exempt from Acquisition and Registration Tax Application of 0% VAT Separate Tax on Interest Income from Infra Bond (14%) Separate Tax on Dividend Income from Infra-Fund (14%) Dividends from SPC are tax-exempt ( if more than 90% of the profit was distributed) Risk-Sharing Structure

16. 14 4. Termination Payment Termination Payment Construction Subsidy Various Tax Benefits Increased Coverage for Payment Upon Termination i.e. If the project has to terminate for unavoidable reasons, the amount of compensation is increased (50~55% of investment cost 80~85%) (PPP Revitalization Plan to ease credit crunch ) Risk-Sharing Structure

17. 15 5. Credit Guarantee Scheme Termination Payment Construction Subsidy Various Tax Benefits Infrastructure Credit Guarantee Fund ` Credit guarantee for concessionaires to obtain bank loan - Guarantee limit per project is increased from KRW 200 billion to KRW 300 billion - Guarantee for subordinate debts is increased from 4.5 to 20% of the total guaranteed amount ( PPP Revitalization Plan to ease credit crunch ) Credit guarantee for concessionaires to obtain bank loan - Guarantee limit per project is increased from KRW 200 billion to KRW 300 billion - Guarantee for subordinate debts is increased from 4.5 to 20% of the total guaranteed amount ( PPP Revitalization Plan to ease credit crunch ) Risk-Sharing Structure

18. Acquisition of Equity * minimum equity ratio of project company has decreased: - BTO : 25% 20% (20% 15% if financial investors participation exceeds 50%) - BTL : 5~15% 5% Granting loans Underwriting infrastructure bond A. Direct investment 16 6. Two Ways to Invest

19. By establishing or participating in infra-fund * Macquarie Korea Infrastructure fund invested in 15 Projects worth 1.8 billion USD (30%FDI), which ismanaged by Macquarie Capital Fund Limited (Europe) B. Indirect investment 17

20. Equity acquisition of loan for PPP projects Minimum required capital : 10 billion KRW (8.5 million USD) * To decrease from 10 billion 1 billion KRW (850,000 USD) by the end of this year (PPP Revitalization Plan to ease credit crunch ) 18 Infrastructure Funds Advantages : No limit in investment portfolio Debt allowed up to 30% of equity Current status : 10 funds, as of 2010, (1 public equity fund, 9 private) Advantages : No limit in investment portfolio Debt allowed up to 30% of equity Current status : 10 funds, as of 2010, (1 public equity fund, 9 private)

21. III. Success Factors of Koreas PPP 19

22. 1. Sound Legal Framework: PPP Act 20 Prime regulator: Ministry of Strategy and Finance (MOSF) Draw the Basic Plan for PPP Prepare directions of government policy Workable, clear and detailed legal framework Procedures, rights, obligations, risk sharing mechanism Reduce potential business risks for private sector The PPP Act [MOSF] Enforcement Decree on PPP Act [MOSF] Basic Plans for PPP [MOSF ] Request for Proposals [Competent Authority] ActEnforcement Decree General Guidelines Basic plans of Individual Project

23. 2. Creation of Supporting Agency: PIMAC 21 Established PICKO to provide professional supports for PPP projects. Expanded to PIMAC, which - consists of experts from economics, finance, accounting, law, engineering, urban planning, etc., - performs feasibility studies, VFM tests, request for proposal (RFP), evaluation, etc., and - provides education programs for government officials, and cooperation with international organizations and foreign countries. PIMAC contributed to designing efficient PPP implementation conditions and enhancing transparency on bidding process.

24. 3. Reasonable Level of Incentives 22 A reasonable level of incentives to attract investors is necessary. Private sector risk: high up-front cost, delayed ROI, economic uncertainties, limited financial resources Over-incentives hazardous and undesirable will cause fiscal burden. * Koreas the six government support schemes seem to be well designed. -support for land acquisition, credit guarantee, termination payment, risk-sharing structure, tax benefit, and construction subsidy * However, overly protective incentives are not desirable due to potential moral hazard and future fiscal burden. -minimum revenue guarantee, a general government's buyout scheme, foreign exchange rate risk sharing

25. 23 4. Foreign Investors Participation Equally treated with domestic investors Entitled to additional benefits For more than US$10 million to build PPP facilities in a Foreign Investment Area, tax breaks were granted For foreign exchange losses, government could offer subsidies or long-term loans Positions of foreign investors, holding significant portion of a project, are better respected: language and provisions in conflicts resolution in the agreement InstrumentProjects Equity Busan New Pore Phase 1(25%), Incheon Bridge(23%), Yongin LRT(26%), Busan New Port Phase 2,3(18.5), Daejeon Riverside Expressway(67%), Songdo-Mansu Sewage Treatment Facility(80%), Busan Aquarium(100%) DebtBusan New Port Phase 1(43%), Daejeon Riverside Expressway(83%), Daegu-Busan Expressway(10%), Seoul Beltway(11%), Busan Aquarium(100%)

26. 5. Existence of Developed Construction Industry And Soft Infrastructure 24 Construction companies have participated in overseas construction works vigorously - with skilled workers, work discipline, and low wages. - In 1982, construction orders received exceeded US$13 billion. Learned advanced technologies, construction management skills, and financial know-hows. Contributed to successful adoption of PPP in 1990s as well as efficient domestic infrastructure development. Soft infrastructure, such as legal, accounting, taxation, finance, etc., also helped fair contract and negotiation.

27. IV. Concluding Remarks 25

28. 26 Preemptive, sufficient and steady investment necessary A top-down approach is essential considering weak capacity of private sector. Foreign capital with local partnership should be encouraged. A transparency in bidding procedure as well as strict construction supervision is essential. 1. Infrastructure development plays a leading role.

29. 26 PPP provides solutions to inefficiency of government monopoly supplier and capital shortages. Outright privatization may not be a good option. Need not to wait until the country reaches middle income level. Foreign suppliers with domestic partners will provide opportunities to learn. 2. PPP needs to be widely adopted.

30. 27 3. A strong coordination function is necessary. Government: interested in infrastructure growth and effective public policy Private sector: interested in maximizing the ROI. Regulators: interested in ensuring transparency and interests balancing. Consumers: seek to realize their value for money. Need to establish a good framework to coordinate stakeholders interests.

31. 27 4. A good framework for coordination includes; Policy making role given to the most competent Government Ministry. Regulatory framework should be clearly stipulated by laws. A transparent and efficient process of PPP should be put in place. A reasonable level of incentives to attract investors is necessary.

32. 28 5. Foreign capital inducement should be encouraged. Including loans from international financial organizations Complements domestic capital shortages. Provides momentum to adopt international standard in infrastructure development. Essential for domestic companies to have opportunities to learn.

33. 28 6. To avoid political pressure, a transparent and professional decision- making process is necessary. PPP Act clearly stipulates a strict compliance to the law. Use professional organizations like PIMAC. Civic groups surveillance activities could be a great help.

34. T h a n k Y o u !