Hyeon PARK (hpark@kdi.re.kr)

Director of Public Investment Evaluation Division Public and Private Infrastructure Management Center (PIMAC)Korea Development Institute

16 June 2011

Public Investment Manage-ment

in Korea

WB Conference onPublic Investment in Brazil

2

Organization Chart of PIMAC• 85 staffs in 3 divisions

Policy Re-search Unit

Public Institution Evaluation Unit

Program Eval-uation Unit

Managing Director

PFS Unit 1 RSF Unit PPP Policy Unit

PPP Project Unit

Finance & Int’l Cooperation Unit

Policy and Research Division(21)

Public Investment Evaluation Divi-sion (32)

Public-Private Partnerships Divi-sion (30)

- Conduct and manage PFS and RSF and RDF

- Policy research on PIM

- Researches on Methodology of Project Evaluation

- Program Evaluation and Performance Management of Public Investment Projects

- Appraisal for SOE Projects

- Formulate PPP Annual Plan and develop PPP guidelines

- Conduct Evaluation of PPP Projects -Researches on PPP-Financing and refinancing PPP-Capacity building training - Infrastructure DB management

PFS Unit 2

3

Foundation of PIMAC

• PIMAC (Public and Private Infrastructure Investment Management Center), is an affiliated body of KDI. KDI, founded in 1971, has emerged over the past four decades as the leading

think-tank in Korea.

• PIMAC is an statutory organization established as a merger of PIMA and PICKO by the amendment of ‘The PPP Act’ in January 2005.

The PIMA (Public Investment Management Center) of KDI, founded in Jan 2000, centered on research and management of public investment project

The PICKO (Private Infrastructure Investment Center of Korea) of KRIHS (Ko-rea Research Institute for Human Settlements), founded in April 1999, centered on research and management of PPP projects.

4

0. Introduction: Review of Pubic Investment in Korea1. Evolution of PIM2. PIM at ex ante Phase (PSF)3. PIM at intermediate Phase (TPCM, RSF, RDF)4. PIM at ex post Phase5. PIM at Strategic Level6. Lessons

5

Introduction: Review of Public Investment in Korea

Part-00

Trend of Public Investment Expenditure

6

Consolidated Fiscal Expenditure and Net Lending by Central Government by Function

Function 1980 1990 2000 2008general public servicesdefensepublic order and safetyeducationhealthsocial protectionhousing construction and community

amenityrecreation, culture, and religioneconomic affairs

fuel and energyagriculture, forestry, fishing, and hunt-

ingmining, manufacturing, and construc-

tiontransportation and communicationother economic affairs

other expenditures

4.030.64.6

14.61.05.72.50.7

26.02.15.97.46.73.9

10.4

4.220.04.3

17.01.78.1

10.10.5

20.40.6

10.22.06.11.4

13.7

5.211.44.6

15.30.7

15.35.30.8

25.20.76.22.69.95.8

16.2

6.914.96.421.21.328.28.41.326.03.36.81.610.63.722.1

Total 100.0 100.0 100.0 100.0

Note: redemption of public funds (12 trillion KRW) for year 2004 excluded. Source: Ministry of Strategy and Finance, Korea Consolidated Fiscal Balance, respective year.

Trend of Infrastructure Investment

7

Note: Investment by local government is not included.As of 2010, total infrastructure investment is 2.5% of GDP

'94 '95 ‘96 ‘97 ‘98 ‘99 ‘00 '01 '02 '03 '04 '05 '06 ’07 ‘08 ‘09 ‘100

5

10

15

20

25

30

35

TotalGovt InvPPP Inv

Trill. KRW

8

Economic Development and Infrastructure Development

Economic Development Infrastructure Development1960s • President Park Chung-hee (1961-1979) was

committed to economic development and formu-lated a series of “Five-year Economic Develop-ment Plan.” •Developing light MFCT industries• Export drive economic development policy•Infrastructure development was an integral part of economic development planning

• The infrastructure development was linked to the economic development plan. Government identified infrastructure needs to support the economic development plan •275km rail construction and several highways• Investment priority shifted from rail to highway• Seoul-Busan express highway (428km) during 1968-1970

1970s • Economic restructuring into heavy and chemical industries along the south-eastern coast

• New deep water seaports developed along the coast.• The First Comprehensive Territory Develop-ment Plan (1972-81) formulated• Develop the country's airports, seaports, high-ways, railways to serve new industries in a sys-tematic way.

1980s • The economic growth rate reached double-digit levels and absolute amounts of spending on infra-structure rose rapidly.•

• Additional expenditure on infrastructure was needed to host international sport events such as ’86 Asian Games and ’88 Seoul Olympic Games.

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What happened to Public Investment in the 1990s?

In the early 1990s, infra gap particularly in land transport was regarded as a major bottleneck of economic growth.

Because of a unprecedented rapid motorization resulted from income growth, Korea faced a serious congestion problem causing high logistical costs.

The transport Tax Act (1993. 12.) and the PPP Act (1994. 8.) were legislated to fill the infrastructure gap.

1970 1975 1980 1985 1990 1995 2000 2005 20101,000 Vehi-

cles 130 190 530 1,110 3,390 8,470 12,060

15,400

17,940

V(t+1)/Vt - 1.5 2.8 2.1 3.1 2.5 1.4 1.3 1.2

10

In 1994, the Transport Special Account was created as a merger of road special ac-count and railroad special account About 80% of the revenue comes from transport tax which is a fraction of former gasoline

excise tax (50 cent / liter, a specific duty). Extended three times in 2003, 2006, and 2009 by three years respectively

Originally introduced as a sunset tax (1994-2003) The name has changed into the Transport, Energy, and Environment Tax And the revenue is shared by local governments

Transport Tax and Transport Special Account

Sectoral Allocation of Transport Special Account (trill. KRW, %)’94 ’97 ’01 ’04 '08 '09 '11

Total in trill KRW 4.5 8.3 12.5 13.6 13.2 17.0 14.5Road 62.6 62.3 64.6 58.3 52.7 52.8 50.6 Rail 7.3 9.0 14.9 16.8 17.0 19.6 26.3 Urban Metro 14.2 10.0 7.6 6.6 10.3 10.3 7.8 Airport 7.1 7.4 2.7 2.7 1.7 0.5 6.0 Seaport 8.8 11.2 8.1 12.4 13.1 10.5 9.3 Inter-jurisditional - - 2.0 3.3 5.2 6.2 -Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

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Trend of Sectoral Distribution of Public Investment

1970 1975 1980 1985 1990 1995 2000 2005 2010 -

5,000

10,000

15,000

20,000

25,000

RoadRailMetroSeaportAirportWaterSum

Note: MTLM expenditure only

Bill KRW

Signs of Over-InvestmentOptimism bias in traffic forecasting

Source: Kang Soo KIM (2007), KDI.Deviation at the opening year = (Actual-Forecast)/Forecast

Increased construction cost

Land cost increased with real estate boom

Design Standard upgraded

National highway designed with 4 lanes and design speed at 90km/h

Grade separation at all intersections

Deviation of Actual traffic volume from Forecast (%)1994 or before 1995-1998 1999-2001 2001 or after

Average 41.2 27.6 -20.4 -55.5s.d. 50.8 134.7 37.9 20.8

Increase in construction cost

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Km

()

당단

가백

만원

-30%

-15%

0%

15%

30%

45%

60%

Km 당 단가 1,648 1,647 2,031 1,996 2,760 3,694 5,544 5,150 6,889 7,303 5,422 상승율 -0.11% 23.34% -1.73% 38.31% 33.82% 50.10% -7.10% 33.75% 6.02% -25.76%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Trend of per km road construction costs in blue bar (in mill 1990 KRW)

Source: H. Park (2002)

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Expansion of Infrastructure Stock

Type ’90(A) ’05(B) (B)/(A)

Four or More Lane Road (km) 4,823 19,375 4.01

Express Highway (km) 1,559 2,972 1.91

Dual Carriage Rail (km) 847 1,343 1.59

Port Capacity (Mill.ton/year) 190 514 2.70

Airport Capacity 1,331 2,012 1.51

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Financial Crisis 1997-98 and thereafter

Financial crisis in 1997-98 and PIM In the wake of financial crisis, the issue of fiscal soundness became an important pol-

icy agenda.

Considerable increase in government expenditure for social welfare also drew atten-

tion

As a government reform initiative, the MPB (Ministry of Planning and Budget) sepa-

rated from the MOFE (Ministry of Finance and Economy), whose core task is to en-

hance fiscal efficiency.

New paradigm of PIM has emerged As a government reform initiatives in response to the financial crisis of 1997-98, a new

PIM started in 1999.

Part-01 Evolution of PIM

• 17

Background of PFS (1)

Criticism against feasibility studies in the past

The baseline cost of on the Seoul-Busan High Speed Rail (KTX) project has more than

tripled from 5.5 trillion Won ($5.5 billion USD) to 18.5 trillion Won ($18.5 billion USD)

A feasibility review committee investigated the FS.

Thirty-two out of thirty-three projects (1994-98) were evaluated as feasible in FS.

Conflict of interests

Line ministry: Budget maximizing and irreversible decision making behavior

Engineers and professors: Keep up the market

FS as a formality: optimism bias (cost down, benefit/demand up)

No Check & Balance

• 18

Background of PFS (2)

‘The Comprehensive Plan to Enhance Efficiency of Public Investment’ was formulated in July 1999 by

joint task-force of MOCT (currently MLTM) and MPB (currently MOSF).

New PIM system introduced

Intensified monitoring of project implementation process by MOSF

PFS was ‘invented’ as a resolution despite of resistance from the line ministries.

The MPB tried to take over the FS from the line ministries

Line ministries, esp. MOCT, violently resisted to transferring the ownership of FS.

MLTM introduced Ex-post Performance Evaluation and VE (Value Engineering)

Line ministries evaluate the performance of the project within three years after the construction

work is completed.

VE explores how to maximize the value of a project by cut down costs and enhance functions of

components of the facility.

• 19

Project Cost Control Tightened under TPCM

TPCM (Total Project Cost Management System) introduced in 1994,

has been established as an effective measure of government

expenditure management after the financial crisis.

To scrutinize if the cost overrun can be justified, RSF (Re-

assessment Study of Feasibility) was introduced in 1999.

RSF guidelines were developed in 2005

RDF (Re-assessment of Demand Forecast) was introduced in 2006.

• 20

Evolution of PIM system

• TPCM introduced • PFS introduced

• RSF strengthened• RSF introduced • RSF guidelines

• developed

• RDF introduced

• The National Finance Act legislated

• 1994 • 1999 • 2003 • 2006

TPCM (Total Project Cost Management)

PFS (Preliminary Feasibility Study)

RSF (Re-assessment Study of Feasibility)

RDF (Re-assessment of Demand Forecast)

PE (Performance Evaluation)

• PE introduced

• (Financial Cri-sis) 1998

VE introduced in 2000 and

reinforced in 2005

• 21

Skeleton of Integrated Public Investment Management (I-PIM) System in Korea

• Planning

• PFS

• Draft Design• Operation/• Maintenance

• Blueprint De-sign

• Feasibility Study

• Land Acquisi-tion/

• Construction

ex ante Intermediate ex post

• TPCM, RSF & RDF• VE (Value Engineering)

at Design stage

• EBP (In-depth Evaluation of Budgetary Program)

• Performance Evaluation

• * Evaluation works in RED characters are owned by budget ministry

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PIM at ex ante Phase:PFS(Pre-Feasibility Study)

Part-02

• 23

What is PFS?

Short and brief evaluation of a project to produce information for budgetary decision Owned by the Ministry of Planning and Budget (MPB) and managed by PIMAC

While (detailed) feasibility study analyzes technical aspects of a project in detail, PFS emphasizes broader analysis of a project from a national socio-economic viewpoint.

Meaning of “PRELIMINARY” is two-folded: Provisional, or short and brief; and

PFS costs about 80~100 million Won, and takes about 6 months; Detailed FS costs about 300 million to 2 billion Won.

Preceding a (detailed) feasibility study

The National Finance Act of 2006 provides the legal basis of PFS.

• 24

Coverage of PFS

All new large-scale projects with total costs amounting to 50 billion Won (about USD 50 million) or more are subject to PFS. Local government and PPP (Public-Private Partnership) projects are also subject to PFS

if central government subsidy exceeds 30 bill Won.

Initially focused on economic infrastructure, PFS has expanded to social infrastruc-ture and non-infrastructure (e.g. R&D, welfare) programs.

Projects with little benefit of PFS are exempted

Typical building projects: government offices and correctional institutions

Legally required facilities: sewage and waste treatment facility

Rehabilitating projects and restoration from natural disaster

Military facilities and projects related with national security

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PFS Procedure

• Line Ministry • MOSF • KDI

(PIMAC)• Submit PFS• Projects Candidate

• Feasibility Study• or Stop

• Select PFS• Projects

• Request PFS

• Make Investment• Decision

• Announcement &• Report to the

National Assembly

• Submit• PFS Report

• Organize Teams/• Conduct PFS

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Flowchart of PFS Analyses

• Project proposal

• Review of statement of purpose • Collect socio-economic, geo-

graphic, and technical data• Brainstorming (Other Alterna-

tives)• Issues to be addressed

• Background study

• Consistency with higher-level plan and policy di-rections

• Project risk (financing and environmental im-pacts)

• Project-specific evalua-tion item

• Policy analysis• Demand analysis• Cost estimation• Benefit estimation• Cost-benefit analysis• Sensitivity analysis• Financial analysis

• Economic analysis

• Overall feasibility• Recommendations

• Analytic Hierarchy Process

• Regional backwardness index analysis

• Regional economic im-pact analysis (IRIO Model)

• Balanced regional de-velopment analysis

• 27

Structure of AHP in PFSOverall Feasibility

Economic Analysis Balanced Regional De-velopment AnalysisPolicy Analysis

Consistency with higher level plan

Project risk Project-specificfactor

Attitude toward the project

Consistency with higher level

plan

Preparedness

Project-specific item (op-

tional)

Financial feasibility

Environmental im

pact as-sessm

ent

Project-specific item (op-

tional)

Project-specific item2 (op-

tional)

Project-specific item1 (op-

tional)

Project-specific item (op-

tional)Regional econom

ic impacts

Regional backwardness analy-

sis

Project Implementation Status QuoAlternatives

Level 1

Level 2

Level 3

• 28

AHP (Analytic Hierarchy Process)

AHP is a multi-criteria decision making technique to combine quantitative and qualitative elements of evaluation into a decision under a hierarchical structure. Structures a complex decision problem into a hierarchy by grouping element of decision

Gives weight on each element through pair-wise comparison

The consistency of the weighting can be tested

A group of eight experts are involved in the decision making. PFS team members (e.g. Team leader (KDI), Demand (Professor), Cost (Engineer))

Advisory committee members (Staffs of PIMAC, and peer reviewers)

The ranges of AHP weight were set to reflect priority of government-wide policy direction

Economic Analysis Policy Analysis Balanced regional development analysis

40 ~ 50 % 25 ~ 35% 15 ~ 35%

A project is evaluated as feasible if AHP score is 0.5 points or more out of 1.0 point.

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• Unit: number

Number of PFS by Sector (1999~2009)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sum

Road 11 11 20 9 11 24 11 27 30 12 22 188

Railway 2 7 14 8 7 13 6 12 5 2 5 79

Seaport 1 5 1 2 3 1 2 5 1 4 2 27

Culture and tourism 3 2 5 2 5 2 1 5 2 3 2 31

Water re-sources 1 1 0 5 5 3 3 1 1 2 12 34

Others 1 4 1 4 2 12 7 4 7 15 20 78

Sum 19 30 41 30 33 55 30 52 46 38 63 437

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• Unit: %, number

Proportion of Feasible Projects by Sector (1999~2009)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Total

Projects(A)

Total Feasible Projects

(B)

(B)/(A)

Road 45.5 27.3 30.0 33.3 72.7 87.5 36.4 63.0 63.3 75.0 50.0 188 106 56.4

Railway 50.0 57.1 35.7 75.0 71.4 53.8 83.3 40.0 20.0 100.0 80.0 79 44 55.7

Seaport 100.0 80.0 100.0 50.0 100.0 100.0 100.0 40.0 100.0 100.0 50.0 27 21 77.8

Culture and

tourism100.0 0.0 40.0 0.0 0.0 100.0 100.0 40.0 50.0 100.0 0.0 32 14 43.8

Water re-sources 100.0 100.0 0.0 0.0 60.0 66.7 66.7 100.0 100.0 50.0 91.7 34 23 67.6

Others 100.0 75.0 0.0 75.0 50.0 66.7 71.4 50.0 42.9 46.7 78.9 77 48 62.3

Average 63.2 50.0 34.1 43.3 60.6 74.5 63.3 53.8 56.5 68.4 67.7 437 256 58.6

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PIM at Intermediate PhaseTPCM (Total Project Cost Management)RSF (Re-assessment Study of Feasibility)RDF (Re-assessment of Demand Forecast)

Part-03

32

Overview TPCM is a device that budget ministry monitors expenditure on public investment

to contain cost overrun throughout the project cycle from planning to construction completion.

Principles Increase in construction size through design modification is not allowed except for

inevitable events The line ministry should consult with MOSF about adjusting TPC.

Coverage Projects implemented by central government or its agents, or by local governments

or private institutions that have central government funding Projects whose construction period ≥ 2 years Civil engineering projects whose TPC ≥ 50 bill KRW Building construction projects whose TPC ≥ 20 bill KRW

Total Project Cost Management System (TPCM)

33

RSF (Re-assessment Study of Feasibility)

Under TPCM, RSF is conducted if:

TPC has increased by more than 20 percent (excluding price escalation and in-

crease in land acquisition cost) of the cost; or

PFS has not been conducted although it falls under the PFS coverage.

The same methodology and implementation procedure as PFS are applied

Decision making

RSF team makes judgment whether to continue or to stop the project.

Compared with PFS, it is emphasized to find alternatives to cut down project

costs.

34

RDF (Re-assessment of Demand Forecast)

Under TPCM, RDF is to verify the adequacy of demand forecast with latest informa-

tion available, reflecting changes in project environment.

RDF is can be conducted at any phase throughout the project cycle from planning

to construction completed when:

a substantial decrease of demand is anticipated due to material changes in the

premises on which demand forecast has been made or errors have been found in de-

mand forecast; or

more than five years have passed since the latest demand forecast had been con-

ducted.

When the demand forecast for a project has decreased by 30% or more, the MOSF

conduct RSF and decide whether to continue or to stop the project.

Performance of TPCM

• (unit: %)1996~1999 2000~2003

Request for TPC in-crease in % (A) 26.4 4.4

TPC adjusted in % (B) 11.1 1.0(B)/(A) (%) 42.1 22.7

35

• The amount of requested TPC has dropped significantly after 1999 The request for TPC increase in % of TPC has dropped from 26.4%

(1996~1999) to 4.4% (2000~2003) The amount of TPC adjusted in % of TPC has also dropped from 11.1% to 1.0

• Amount of TPC change before and after 1999

Performance of RSF (2006-2009)

Unit: Trill KRW

36

　 　 No of Projects Total Project Costs

　 RSF STOP Requested Recommended Savings

2006 24 1 4.1 3.7 0.4

2007 18 3 8.9 8.8 1.5

2008 18 4 13.5 12.0 2.5

2009 47 10 17.1 16.1 2.3

2010 33 6 18.6 16.1 4.7

Sum 140 24 62.2 56.7 11.4

37

PIM at ex post PhasePart-04

38

Coverage of ex post Evaluation Study Infrastructure projects with total cost ≥ 500 billion won

When is it carried out? Conducted within three ~ five years of construction completion

Conducting ex post Evaluation Study Evaluation ownership : MLTM No designated evaluation agency : Government funded institute or qualified

engineering companies

Performance Evaluation

39

Cost and time overrun

Comparison of forecast and actual demand

Ex post economic feasibility

Problems during the implementation process

Project impacts

Review of evaluation during the period of construction

Degree of acceptance of the project by local residents

Recommendations

Contents of Performance Evaluation

40

• Performance Monitoring- An annual review of program’s goal and performance indicators- Annual performance plan and indicators are reported to MOSF and examined- Simple check of indicators, but the causal relationship between input and output is

not considered• Self-Assessment of Budgetary Programs (SABP)

- A self-assessment of program by line ministries on the basis of guideline- A kind of program review similar to the PART in USA- Provide information for the central budget office

• In-depth Evaluation of Budgetary Programs (IEBP)- Systemic and analytical evaluation of all the aspects of programs- The number of programs being evaluated is limited due to time and cost

constraints

Government-wide Performance Monitoring

A Unified Framework for PPP Project Appraisal

41

Project Initiation(Solicited / Non-Solicited)

Feasible Project?(PFS)

VFM Test

Formulation of PPP Alternative

STOPGO thru PPP

N

Y

NY

Phase 1

Phase 2

Phases 3

GO thru Government Project

42

PIM at a Strategic LevelPart-05

43

Comprehensive Public Investment Planning Approach

43 Five-Year transport Infrastructure Investment Plan

• Investment priorities, investment resource funding plan, etc.• Facilities: National and local transport facilities

Twenty-Year National Intermodal Transport Plan (NITP)

• Draft plan prepared by Minister of Land, transport and Maritime Affairs (MLTM)• Reviewed by the transport Policy Committee (chaired by the Prime Minister)

Implementation of Mid-term transport Infrastructure Investment Plan

• Various implementation plans are established and projects are implemented according to plans.• Investment requirements are reflected in the allocation of the special account for transport facilities.

Performance Evaluation of Mid-term transport Infrastructure Investment Plan

• The transport Policy Committee evaluates the implementation performance of the plan every year and provides feed-back.

44

MTEF (Mid-Term Expenditure Framework)

• Before MTEF (bottom-up budgeting)

• Budgeting on next single budget year

• Limited medium- to long-term planning function

• MOSF focused on the microscopic spending control

• After MTEF (top-down budgeting)

• Budgeting over next 5 year including the current year

• Spending ceilings for sectors and programs

• MOSF focused on the strategic alignment of budget• requests with overall policy directions

• Introduction of MTEF in 2004 for Budgeting

45

LessonsPart-06

46

Establish Evaluation Ownership

PFS, RSF, and RDF are supported by budget ministry that usually needs reli-

able information to CUT budget.

New management system mitigated information asymmetry between bud-

get ministry and line ministry that has incentives to MAXMIZE budget-

(Check and Balance)

Budget ministry can produce its own information in objective, consistent,

and transparent way.

The budget ministry used to rely on selective information provided by line

ministry.

47

Multi-disciplinary Evaluation Team To draw balanced decision-making, incorporate opinions of experts from different fields.

The engineers, or field specialists tend to be more supportive of Projects

The importance of evaluation ownership reinforced.

Analysis of decision making behavior reflected on AHP by H. Park & Ko (2001)

Team Leader group Team Member group

Background Economists Engineers

AHP Score 0.48 0.59

Weight on economic analysis 0.55 0.51

(B/C > 1) 0.55 0.54

(B/C < 1) 0.54 0.49

Consistency in responses High Low

• 48

Independent Evaluation Unit May Help

Objectivity, Consistency and Transparency is required to convince

critical stakeholders that PFS is doing a right job.

Well developed evaluation guidelines and continuous revision re-

quired

Detailed description of methodology and procedures of PFS implementation

Sector guidelines (road, rail, seaport, airport, water resources, cultural facilities,

R&D Program)

Management of DB and consistent approach to similar projects

• 49

Develop Best Practices

PFS was a stepping stone of the Integrated Public Investment Management (I-PIM)

System.

Same/similar methodologies and inquiry process were applied

Other evaluations are spin-off products of PFS

The expansion of PFS

Economic Infra Social Infra R&D and Social Program - SOE Projects

Ex ante evaluation intermediate (RSF and RDF) ex post evaluation

Budget Ministry Line Ministries Local Governments

Government Project Evaluation PPP Evaluation (VfM test)