Management of Public Investment Projects in Korea

2005. 5. 24.

Korea Development InstitutePublic and Private Infrastructure Investment Management Center

Hyeon Park (hpark@kdi.re.kr]

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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

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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 1998.

• 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 1994.

• 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.

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1. Introduction (2)

Planning

PFS(Pre-Feasibility

Study)

Draft DesignOperation/

Maintenance

Blueprint Design

Feasibility StudyLand Acquisition/

Construction

Ex Ante Intermediate Ex Post

Total Project Cost Management

Re-inspection of Project Feasibility

Performance Evaluation

Public Investment Management Process

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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

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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 InvestmentDecision

Feasibility Study or Stop

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2. PFS Overview(3)

PFS Feasibility Study

Definition An 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 Analysis

Examination 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.

EvaluationOwnership

Ministry of Planning and Budget Spending Agency (Line Ministries)

Research fund/duration

80 – 100 million wonApproximately 6 months

300 million - 2 billion won Depending on the project

Comparison of PFS and Feasibility Study

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2. PFS Overview(4)

<Table 1> Number of PFS Conducted

Evaluation Results

₵ About half of the projects were evaluated as being ‘Not-Feasible.’.

Roads Rail Seaports Airports Dams Other Sum1999 11 2 1 0 1 4 192000 11 7 5 1 1 5 302001 20 14 1 1 0 5 412002 9 9 0 0 5 7 302003 19 11 4 0 5 12 512004 14 6 0 0 3 10 33Sum 84 49 11 2 15 43 204

Proportion (%) 41.2 24.0 5.4 1.0 7.4 21.1 100.0

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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

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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

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4. PFS Methodology

[Figure 1] PFS Flowchart

Policy AnalysisBalanced Regional Development

Regional Economic ImpactConsistency with Higher-level PlanEnvironmental Impact Assessment

Regional PreferenceFinancial Feasibility

Project Proposal

Background StudyReview of statement of purpose

Collect Socio-economic, geographic, and technical dataBrainstorming

Raising issues concerning PFS

Economic AnalysisDemand AnalysisCost Estimation

Benefit EstimationCost-Benefit Analysis

Financial Analysis

Multi-Criteria Decision Analysis (AHP)Overall Feasibility

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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)

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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

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4. PFS Methodology (4)

[Figure 2] AHP Structure of PFS (Prototype)

Pre-Feasibility

Economic Analysis

Policy Analysis

Project-specific CriteriaCommon 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

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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: 2008~2013

5. Case Study 1

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Site Map

5. Case Study 1 (2)

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Route Map

5. Case Study 1 (3)

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Demand Forecast

10,000~40,000 vehicles/day (2014)

5. Case Study 1 (4)

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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/CNPV

(Billion won)

IRR(%)

Route 1 37,233 11,791 1.36 213.1 10.9

Route 2 32,966 11,271 1.26 152.9 10.2

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Policy Analysis

AHP Weights on economic analysis & policy analysis results

Final results

5. Case Study 1 (6)

 Economic Analysis Policy Analysis

Average 0.614 0.386Person 1 0.600 0.400Person 2 0.700 0.300Person 3 0.550 0.450Person 4 0.600 0.400

 Feasible Non-Feasible

Average 0.779 0.221

Person 1 0.771 0.229

Person 2 0.804 0.196

Person 3 0.799 0.201

Person 4 0.757 0.243

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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-cent

er 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

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6. Case Study 2 (2)

Route Map of LRT

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6. Case Study 2 (3)

Seated-Type Monorail

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6. Case Study 2 (4)

AGT (Automated Guideway Transit)

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6. Case Study 2 (5)

Travel Demand

₵ 80-90 thousand daily passengers

Summary of Economic Analysis

(Billion Won)

System Benefits Costs B/C NPV

Monorail 180.4 256.9 0.70 -76.4

AGT 180.4 192.6 0.94 -12.2

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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.

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Expansion of PFS Coverage

Continuous Standard Guidelines Revision

Database Building

7. Further Issues in PFS