Kangsoo KIM (kskim@kdi.re.kr)

Executive Director

Public and Private Infrastructure Investment Management Center(PIMAC)

KDI

October 2014

Strong Project Appraisal Schemes ; Preliminary Feasibility Study (PFS) ?

1. PIMAC

2. Evolution of Feasibility Study in Korea

3. How to manage the Pre-Feasibility Study(PFS)

4. Features of Pre-Feasibility Study(PFS)

5. Performance of Pre-Feasibility Study(PFS)

PIMAC Part-01

Foundation of PIMAC

PIMA (Public Investment Management Center) was

established in Jan 2000 as an affiliated body of KDI.

The MOSF, then Ministry of Planning and Budget, decided to establish it to

conduct PFS.

PIMAC (Public and Private Infrastructure Management

Center) was established as a merger of PIMA and PICKO by

the second amendment of ‘The PPP Act’ in January 2005.

The PICKO (Private Infrastructure Investment Center of Korea) of KRIHS

(Korea Research Institute for Human Settlements) was founded in April

1999, to manage PPP projects as stipulated by the amendment of PPP Act.

PIMAC is a statutory organization based on the PPP Act,

while the KDI was established in1971 by the ‘Government

Funded Research Institute Act.’

3

Organization of PIMAC of KDI

4

RSF PPP

Policy

Policy and Research Division Public Investment Evaluation

Division Public-Private Partnerships

Division

- Conduct and manage PFS

- Policy research on PIM

- Program Evaluation and in-depth

evaluation of Public Investment

Projects

- Conduct and manage RSF

- Research on methodology of project

evaluation

- Appraisal for SOE Projects

- Int’l Cooperation

- Tax Expenditure Appraisal and

Evaluation

- Formulate PPP Annual Plan and develop

PPP guidelines

- Conduct evaluation of PPP Projects

- Research on PPP

- Financing and refinancing of PPP

- Capacity building and training

- Infrastructure DB management

PFS 2

Executive Director

PPP

Finance Policy

Research

SOE Project

Evaluation

Tax Expenditure Evaluation

PPP Project

PFS 1

96 staff members in 3 divisions Legal Affairs Team

The role of PIMAC stipulated by the National Finance Act

1) Evaluator and/or Government Agency in Public Investment Management (PIM) :

Carry out preliminary feasibility study (PFS)

Carry out re-assessment study of feasibility (RSF)

Carry out re-assessment of demand forecast (RDF)

2) Researcher

Support for new initiatives of better PIM

Policy studies on PIM

Missions of PIMAC (1)

5

The role of PIMAC stipulated by the Special Tax Treatment Control Act

1) Evaluator and/or Government Agency in Tax Expenditures (TE) :

Carry out TE preliminary feasibility study (PFS)

Carry out in-depth evaluation of Tax Expenditures and Reduction

2) Researcher

Studies on the Tax Expenditures Impact and evaluation methods

The role of PIMAC stipulated by the Act on the Management of Public Institutions

1) Evaluator in SOE’s new investment

Carry out preliminary feasibility study (PFS)

Carry out re-assessment study of feasibility (RSF)

2) Researcher

Studies on the evaluation methods

Missions of PIMAC (2)

6

The role of PIMAC stipulated by the PPP Act 1) Researcher

Support for formulation of the Basic Plan for PPP

Theoretical and policy studies on PPP programs

Development of implementation guidelines

2) Advisor and/or Government Agency in Project Management

Development of PPP projects

Execution and Review of VFM test

Support for formulation of RFPs

Review of RFP and concession agreement

Assistance in tendering and negotiation

3) PPP Market Promoter

Training programs and seminars on PPP for public officials

International cooperation

Database management

Missions of PIMAC (3)

7

As of May 2013

Areas of Expertise of PIMAC Staff

Areas of Expertise Head Count

Economics 26

Finance/Business/Accounting 16

Law 6

Transport 13

Engineering

(civil, architecture, environment, etc.) 8

International cooperation 4

Others

(urban planning, real estate, tourism, etc.) 23

Total 96

8

Evolution of Feasibility Study in Korea Part-02

1977 1970

Most infrastructure investment projects had been evaluated by foreign organizations or experts

Investment Project Deliberative Committee(IPDC) (Economic Planning Board (EPB))

IPDC was established to review the feasibility of a variety of investment projects.

The Regulations on Major Investment Project Review (EPB directive)

New treasury investment and loan projects, costing over 10 billion Korean Won (KRW) in total

Investment Appraisal Bureau (IAB) was established in EPB

As the nation began to expand steadily at an unprecedented rate financially and economically, the number of projects and their value increased in tandem, rendering effective analysis increasingly difficult.

Criteria for review and analysis: long-term plans and alignment with economic policies; cost, facility size, and international competitiveness; financing capability; debt service capacity; profitability;

The government identified and implemented new infrastructure investment projects, as suggested by the Five-year Economic Development Plans.

1979~1991

History of Project Appraisal in Korea

10

1991 1994

The “Regulations on the Major Investment Project Review” amended (EPB directive)

limiting new fiscal projects subject to review to those with total investment of KRW 50 billion or more

Calling for an internal review for projects with total investment of KRW 10 billion to just under KRW 50 billion by an “operating division “

Allowing a ministry concerned to carry out project reviews prior to the establishment of mid- and long-term plans

The Budget Office in MFE

Due to a lack of expertise and time, the Budget Office was not able to sufficiently review the results of feasibility assessments of major projects submitted by each operating division.

Feasibility assessments : merely a means to secure project budget funds.

1997

Currency and Financial Crisis

『The Private Capital Inducement Promotion Act』

1998

The Planning and Budget Committee (PBC)

Budget for 1998 was based on an estimated economic growth rate of 10.8 percent requiring substantial budget restructuring to overcome economic turmoil.

The PBC: feasibility studies performed under the supervision of each ministry lacked objectivity and reliability, and that there were no uniform and standard guidelines in place for feasibility studies.

In formulating the 1999 budget, the PBC’s assertion that feasibility studies for new large projects could not be left up to each ministry .

1999

The Planning and Budget Committee (1998) + The Budget Office Ministry of Planning and Budget (MPB)

『The Enforcement Decree of the Budget and Accounts Act』 was amended (MPB)

Any new large project be carried out with a pre-feasibility study, feasibility study, basic design, implementation design, compensation, and construction.

The Public Investment Management Center (PIMA) at the Korea Development Institute (KDI) to undertake pre-feasibility studies was established (2000)

『The Act on Private Participation in Infrastructure 』(MPB)

The Private Infrastructure Investment Center of Korea (PICKO) at the Korea Research Institute for Human (KRIHS) the influence of the Ministry of Construction and Transportation to manage PPP projects as stipulated by the amendment of PPP Act.

History of Project Appraisal in Korea

Total Projects Cost Management (TPCM)

11

0

2

4

6

8

10

12

14

16

18

0

20

40

60

80

100

120

140

Considerable increase in government expenditure for

social welfare and physical Infrastructure

Welfare

SOC

(unit: trillion won, % of expenditure)

Source: Ministry of Strategy and Finance, Korea. Consolidated Fiscal Balance, Respective Year.

Background of PFS : Needs for the control of

Increased Investment Expenditure

12

Consolidated Fiscal Expenditures and Net lending by Central Government

Background of PFS : Signs of Overinvestment

Distribution of Traffic Forecasting Errors and Marginal

Productivity of Economic Infrastructures

13

Background of PFS : Symbolic Failure in Public

Investment

Criticism against Feasibility Studies : Lack of Objectivity

and Reliability in FS

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

has more than tripled from 5.5 Trillion KRW ($5.5 Billion USD) to 18.5

Trillion KRW ($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

14

Background of PFS : Financial Crisis 1997-98

Financial crisis in 1997-98 and PFS

In the wake of financial crisis, the issue of fiscal soundness became an

important policy agenda.

Budget for 1998 was based on an estimated economic growth rate of 10.8

percent requiring substantial budget restructuring to overcome economic

turmoil.

As a government reform initiative, the MPB (Ministry of Planning and

Budget) separated from the MOFE (Ministry of Finance and Economy),

whose core task is to enhance 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.

15

Introduction of New PIM system : PFS

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. claiming that feasibility studies require each of their unique

expertise, and that no single country allows a budget authority to carry out

feasibility studies by itself.

The Enforcement Decree of the Budget and Accounts Act was amended in

April 1999 to require that any new large project be carried out with a pre-

feasibility study, feasibility study, basic design, implementation design,

compensation, and construction.

16

How to manage the Pre-Feasibility Study(PFS)

Part-03

What is PFS?

Short and brief evaluation of a project to produce

information for budgetary decision

Owned by the Ministry of Strategy and Finance (MOSF) 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

18

Coverage of PFS

All new large-scale projects with total costs amounting to

50 Billion KRW (about 50 Million USD) 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 Billion KRW.

Initially focused on economic infrastructure, PFS has

expanded to social infrastructure and non-infrastructure

(e.g. R&D, welfare) programs.

Projects without effectiveness of PFS are exempted

Typical building projects: government offices and correctional institutions

Legally required facilities(specified in the law) : sewage and waste

treatment facility

Rehabilitating projects and restoration from natural disaster

Military facilities and projects related with national security 19

Flowchart of PFS Analyses

Project proposal

• Review of statement of purpose

• Collect socio-economic, geographic, and technical data

• Brainstorming (Other Alternatives)

• PFS issues raised

Background study

• Consistency with higher-level plan and policy directions

• Project risk (financing and environmental impacts)

• Project-specific evaluation item

Policy analysis

• Demand analysis

• Cost estimation

• Benefit estimation

• Cost-benefit analysis

• Sensitivity analysis

• Financial analysis

Economic analysis

• Overall feasibility

• Prioritization

• Financing and policy suggestion

Analytic Hierarchy Process

• Regional backwardness index analysis

• Regional economic impacts

Balanced regional development analysis

20

Analysis Structure in PFS

Economic Analysis Policy Analysis

Consistency with higher level plan

Project risks Project-specific

factors

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Project Implementation Status Quo Alternatives

Level 1

Level 2

Level 3

21

Overall Feasibility

Balanced Regional Development Analysis

PFS Implementation Procedure

Line Ministry Ministry of

Strategy & Finance KDI (PIMAC)

Conduct Feasibility Study or Stop the Project

Select PFS Projects In consultation with

PFS committee

Request PFS

Make Investment Decision

Announcement & Report to the National Assembly

Submit PFS Report

Organize Teams/ Conduct PFS

Open to the Public

Consultation based on : • Eligibility for central

government grants • Urgency of the Projects • Concreteness of the

project plan

22

Determination the Priorities by considering • The long-term

National • Comprehensive Plan, • National Policy

Direction

Select and Submit PFS candidate

projects

(pre –PFS Committee)

Management ; Selection of External PFS Research Team

Multi-disciplinary PFS team

Three or more organizations are involved

e.g. KDI (Project manager), University professors (Transportation demand

analysis), and private Engineering firms (Cost estimation

Open Recruitment for external experts or outsourcing PFS

research team throughout the homepage announcement of

KDI, Public Procurement Service Agency, related

associations and daily newspaper advertisement.

Consider the main research and project experiences and comprehensive

reviews on the PFS external research team(expertise, impartiality,

accountability)

Exclusion of stakeholder through the checking school ties, regionalism, pre-

feasibility participation etc.

School ties and regionalism with KDI internal research team for Internal

PFS conducted are also excluded. 23

Management ; Selection of External PFS Research Team

Selection of outsourcing PFS research team through a

public tender evaluation by the evaluator consisting of KDI

PIMAC, Ministry of Strategy and Finance and the competent

authorities officials, external experts.

Evaluation criteria: Understanding of Project, Approach method,

Institutional assessment, Outcomes, Input personnel evaluation

24

Management ; PFS progressives

① Kick-off Meeting

Attendance: MOSF, KDI PIMAC, PFS

Research Team

Meeting Issue: PFS overview, guidelines

and schedule

② Progress Check Meeting

Attendance: PIMAC, Internal reviewer,

External research team, external experts

Meeting Issue: Background, survey

result, issues and schedule

③ KDI 1st Check Meeting

Attendance: PIMAC, Internal reviewers,

External research team, external experts

Meeting Issue: Cost, Demand, Benefit

Estimation result and tentative result of

B/C

25

Management ; PFS progressives

④ MOSF 1st-Check Meeting

Attendance: KDI PIMAC, PFS research team, MOSF and Line ministry

Meeting Issue: Cost, Demand, Benefit Estimation result and Tentative

result of B/C

⑤ KDI 2nd Check Meeting

Attendance: KDI PIMAC, Internal reviewer, External research team,

external experts

Meeting Issue: Major changes after 1st Meeting, Result of Policy and

Balanced Regional Development Analysis

⑥ KDI 2nd Check Meeting

Attendance: KDI PIMAC, PFS research team, MOSF and Line ministry

Meeting Issue: Major changes after 1st Meeting, Result of Policy and

Balanced Regional Development Analysis

26

Management ; (implicit) Code of Conduct

① Reference the regionalism for the duty avoidance of stake

when KDI internal PFS team selected.

② Prohibit sensitive information leakage obtained in

connection with conducting PFS.

KDI internal team (KDI Code of Conduct), external researchers (service

declaration)

③ Not accepting any kind of bribes from relevant competent

authorities.

(example) Expenditure from PFS service charge for expenses when having

meetings with competent authorities and relevant local government.

27

Features of Pre-Feasibility Study(PFS)

Part-05

Owned by the Ministry of Strategy and Finance (MOSF),

evaluated by Independent Evaluation unit, PIMAC

PFS is a evaluation of a project to produce information for budgetary

decision

PFS evaluated by KDI PIAMC, an independent research institute,

provided some buffer from political and bureaucratic pressure.

PFS team evaluates feasibility of the comprehensive judgment

expenditures.

Features of PFS

29

Features of PFS

The Expanded Role of Policy Analysts (PFS team) in PFS,

beyond only Technical Information Providers:

PFS team members (e.g. Team leader (KDI), Demand (Professor), Cost

(Engineer)) ) and Advisory committee members (Staff of PIMAC and peer

reviewers) make their explicitly quantified judgments on project

desirability, and their judgments are respected in the government

decision-making.

PFS results are rarely overruled by budget ministry and the National Assembly

Clear and Explicated Binary judgment (feasible/non

feasible) on the overall feasibility

Minimizing uncertainty and arbitrary Interpretation of acquired information

from analysis

Gained increasing acceptance as a highly information means of budget

allocation

30

Features of PFS

Well developed evaluation guidelines

Detailed description of methodology and

procedures of PFS implementation to avoid

ambiguity

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

31

Features of PFS

Multi-disciplinary PFS team

► Three or more organizations are involved

► e.g. KDI (Project manager), University professors (Transportation demand analysis), and private Engineering firms (Cost estimation)

Open review process

► Independent reviewer is designated

► Open discussion on a mid-term and final PFS reports

► Reviewed by the MOSF and line ministries, PIMAC, and field specialists from private and public sectors

32

External experts to join PFS

Open review process

Neutrality and Objectivity

Phase 1: Feasibility study (Decision to Invest)

► The cost- benefit analysis and AHP is conducted to determine

feasibility of the project from a national economy perspective.

Phase 2: Value for Money Assessment (Decision on PFI)

► The government payment of PSC (Public Sector Comparator) is

compared against that of PFI (Private Finance Initiative) to assess

whether the PFI achieves VfM.

33

Features of PFS

Unified tool to consider the possibility of PPP (Public Private

Partnerships)

Various values are incorporated and evaluated

Various values (job creation, environmental impact, regional equity,

project-specific factors) are incorporated in the frame of PFS

Multi-criteria decision making technique(AHP) is adopted to combine

quantitative and qualitative elements of evaluation

PFS results are rarely overruled by budget ministry and the National Assembly

Gives weight on each element through pair-wise comparison

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

point

Systematic Management

Procedures of PFS ; Selection of PFS projects, manage and external

experts, five report review meetings, code of conducts

Select ion of PFS Projects Organize Teams Conduct PFS

34

Features of PFS

Performances of Pre-Feasibility Study(PFS)

Part-04

Number and Total Project Cost (1999~2012)

36

Note: 1) PFS completed as of 31 Dec 2012.

2) About 60 PFS conducted by other organizations are not included.

20

30

41

30 32

55

30

52

46

38

63

48

43

35

0

5

10

15

20

25

30

35

40

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Trillion) (Number)

Number Total Project Cost

Proportion of Feasible Projects and Total Project Cost Saving (1999~2012)

37

Note: 1) PFS completed as of 31 Dec 2012.

2) About 60 PFS conducted by other organizations are not included.

65.0

53.3

34.1

43.3

59.4

74.5

63.3

53.8

56.5

68.4 68.3

75.0 74.4

71.4

62.5

117.7

0

5

10

15

20

25

30

40

50

60

70

80

90

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average

(Trillion) Proportion(%)

Proportion Saving Project Cost Total Saving Project Cost

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