Published on March 6, 2014
Developing PPP - Where to begin ? - Kangsoo Kim Executive Director Public and Private Infrastructure Investment M anagement Center (PIM AC) 7 th Annual meeting of senior PPP officials OECD Conference center, Paris February 2014
PPP Track Record of Korea The infrastructure investment of Korea through PPP dramatically increased from 1999 to 2007, since then the trend has been stabilized Number bil USD (*) All the figures are contract basis and thus real investment balance may be different 2
Social consensus on ‘user- pay principle’ and ‘PPP’ Since the ‘Toll Road Act’ was legislated in 1963, major backbones(* ) were built under ‘user- pay principle’, which concept became familiar to local drivers And, the ‘Asian Financial Crisis in late 90s initiated a social consensus on the needs for inviting private capital into public infrastructure (PPP) Toll Road by Ownership Km (* ) ‘The First H an Riverside Road’ was completed in 1967 as the first toll road, and since then, other major turnpikes such as Kyung- In, Kyung- Bu, H oN am Express Ways were constructed 3
What happened during the late 90s in Korea? M ost of the PPP prerequisites are equipped in late 90s, since then Korea saw a rapid increase in PPP PICKO was established (‘99) PIMAC was found in merge of PICKO & PIMA (‘05) PPP u n i t Korea Credit Guarantee Fund for PPP was established (‘94) Fi n an c i al m ar k et KDB’s PF commencement (‘95) MRG support Enactment (‘94): ‘The Act on Promotion of Private Capital into Social Overhead Capital Investment’ Ri s k Sh ar i n g Revision (‘99): ‘The Act on Public-Private Partnerships in Infrastructure’ L eg al Fo u n d at i o n s 4
Legal Foundation (1) The PPP Act has undergone 2 important revisions since enactment in 1994 In overall, the direction is to facilitate the procurement process, to promote private participation, and to improve transparency and VFM Through revision of the PPP Act in 2005 the focus of PPP implementation which had mainly been on transportation infrastructure shifted to include social infrastructure Enactment Aug. 1994 The Act on Promotion of Private Capital into Social Overhead Capital Investment In tro d u ctio n of PPP leg al fram ew o rk Revision Amendment Jan. 1999 The Act on Public-Private Partnerships in Infrastructure Jan. 2005 The Act on Public-Private Partnerships in Infrastructure Go vern m en t su p p o rt m easu res sh arin g m ech an ism (Min im u m Reven u e Gu aran tee) Un so licited p ro p o sals allo w ed Risk In tro d u ctio n of BTL m eth o d (ed u cation facilities, m ilitary resid ences, en viro n m ental facilities, etc.) Bro ad en ran g e o f PPP p ro ject facility typ es 5
Legal Foundation (2) The PPP Act and its Enforcement Decree comprehensively regulate PPP projects, while the Basic Plans for PPP gives direction to government policy Implementation procedures, rights and obligations, risk sharing mechanism are clearly defined in the Act to effectively reduce potential business risks for private sector participants The ‘PPP Act’ precedes other Acts, exempting PPP projects from other regulations, and thus provided basis for PPP development Hierarchy of PPP legal and administrative framew ork 1. PPP Act 2. Enforcement Decree on PPP Act 3. Basic Plans for PPP 4. Implementation Guidelines 6
Risk Sharing Scheme “ Proper risk sharing” and “ Government supports” are the integral parts for PPP facilitation Risk sharing items Construction period Operation period Financial viability Construction subsidy - Investment risk - N ew investment risk sharing scheme (* ) Tax - Tax exemption Termination Land Funding Termination payment Land acquisition work by government agent Free use of state owned land Infrastructure credit guarantee fund (* ) Introduced in substitution for M RG(M inimum Revenue Guarantee), and eligible for only solicited BTO project 7
Financial M arket(1) – Korea Development Bank Korea Development Bank (KDB) pioneered project financing in PPP at the early stage to unpin financial market as a quasi- government financial agent KDB made the first PF underwritings in local market : ‘E- Wha- Ryong Tunnel’(N ov. 95) and ‘InCheon N ew Airport highway’ (Dec. 95) Local commercial investment banks and investment funds began to join PPP after observing initial success of KDB, resulting in long- term financial market development (Source : KDB Annual Report) 8
Financial M arket(2) - Korea Credit Guarantee Fund Korea Credit Guarantee Fund played a critical role in financial market to make project financing viable for PPP Guarantee : PF Loans to concessionaire for project expenses, and Infrastructure Bonds issued pursuant to the Act on PPP Up to 300 mil USD for single project M aximum premium : 1.5% per annum (Currently 0.5% in average) (Source : KO DIT homepage) 9
Professional PPP Unit - PIM AC PIM AC is responsible for comprehensive and systematic management of both traditional public investment and PPPs PICKO (Private Infrastructure Investment Center of Korea) was found in 1999 PIM AC was Established as a merger of PIM A and PICKO in 2005 Areas of Expertise Head Economics 23 Finance/ Business/ Accounting 15 Law 5 Transport 14 Engineering (civil, architecture, environment, etc.) 14 International cooperation 4 Others (urban planning, real estate, etc) 12 Total 87 (87 staff members in 3 divisions) 10
Integration of PIM (Public Investment M anagement) and PPP Integrated budgeting process for PIM and PPP was needed to achieve not only consistency in project assessment but also efficiency in human resource management PIM AC was Established as a merger of PIM A (which covered Public Investment M anagement) and PICKO (which managed PPP), and thus integrated both functions into one institute The PICKO was under M inistry of Land and Transportation, but PIM AC is currently independent think tank which works closely with budgetary function (M inistry of Strategy and Finance) Initial PPP projects (under the ‘Act on Promotion of Private Capital into Social Overhead Capital Investment’) were managed sporadically by each line ministries, but currently all PPP projects are managed by M inistry of Finance and Strategy within whole budget management process Integration of PPP into whole budget management/ planning process Each line ministries & Municipal governments Ministry of Finance and Strategy The Act on Promotion of Private Capital into Social Overhead Capital Investment The Act on Public- Private Partnerships in Infrastructure Independent / closely cooperate PICKO (PPP) PIMA (PIM) PIMAC (PIM & PPP) 11
Lessons Learned User- pay principle was familiar and thus acceptable to local drivers in Korea Fiscal deficit during the Asian financial crisis promoted the social consensus for introducing PPP M inimum prerequisites for PPP vitalization are … Legal Foundations, Risk Sharing scheme, Professional PPP unit, and Financial market, which were developed in late 90s in Korea PPP Capability building is not a one- off job! Continuous improvement with strong government will is needed International cooperation may be efficient for developing countries ‘Learning- by- doing’ approach works Small pilot program can provide success story, providing inertia to whole PPP market development Integrated budgeting process for PIM and PPP is needed to achieve consistency in project assessment and efficiency in human resource management 12
Website: www.pimac.org Contact: email@example.com 13/ 12
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