Developing PPP

- Where to begin ? -

7th Annual meeting of senior PPP

officials

OECD Conference center, Paris

February 2014

Kangsoo Kim

Executive Director Public and Private Infrastructure Investment Management

Center (PIMAC)

PPP Track Record of Korea

2

bil USD Number

(*) All the figures are contract basis and thus real investment balance may be different

The infrastructure investment of Korea through PPP dramatically increased from 1999 to 2007, since then the trend has been stabilized

Social consensus on ‘user- pay principle’ and ‘PPP’

3

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)

(* ) ‘The First Han Riverside Road’ was completed in 1967 as the first toll road, and since then, other major turnpikes such as Kyung- In, Kyung- Bu, HoNam Express Ways were constructed

Km

Toll Road by Ownership

4

What happened during the late 90s in Korea?

Enactment (‘94): ‘The Act on Promotion of Private Capital into Social Overhead Capital Investment’

Revision (‘99): ‘The Act on Public-Private Partnerships in Infrastructure’

KDB’s PF commencement (‘95)

Korea Credit Guarantee Fund for PPP was established (‘94)

MRG support

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)

Ri sk Shar i ng

PPP uni t

Legal Foundat i ons

Fi nanc i al mark et

Legal Foundation (1)

5

In troduction of PPP legal fram ew ork

Enactment Aug. 1994

The Act on Promotion of Private Capital into Social

Overhead Capital Investment

Governm ent support m easures Risk sharing m echanism (Minim um Revenue Guarantee) Unsolicited proposals a llow ed

Revision Jan. 1999

The Act on Public-Private Partnerships in Infrastructure

In troduction of BTL m ethod (education facilities, m ilitary residences, environm ental facilities, e tc.) Broaden range of PPP pro ject facility types

Amendment Jan. 2005

The Act on Public-Private Partnerships in Infrastructure

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

Legal Foundation (2)

6

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

1. PPP Act

4. Implementation Guidelines

2. Enforcement Decree on PPP Act

3. Basic Plans for PPP

Hierarchy of PPP legal and administrative framework

Risk Sharing Scheme

7

“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 - New investment risk

sharing scheme (* )

Tax - Tax exemption

Termination Termination payment

Land Land acquisition work by government agent

Free use of state owned land

Funding Infrastructure credit guarantee fund

(* ) Introduced in substitution for M RG(M inimum Revenue Guarantee), and eligible for only solicited BTO project

Financial M arket(1) – Korea Development Bank

8

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’(Nov. 95) and ‘In-Cheon New 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)

Financial M arket(2) - Korea Credit Guarantee Fund

9 (Source : KODIT homepage)

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)

Professional PPP Unit - PIM AC

10

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

(87 staff members in 3 divisions)

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

Integration of PIM (Public Investment M anagement) and PPP

11

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

PICKO (PPP)

Each line ministries & Municipal governments

The Act on Promotion of Private Capital into Social

Overhead Capital Investment

PIMA (PIM)

Ministry of Finance and Strategy

The Act on Public- Private

Partnerships in Infrastructure

PIMAC (PIM & PPP)

Independent / closely cooperate

Integration of PPP into whole budget management/ planning process

Lessons Learned

12

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

13/ 12

Website: www.pimac.org Contact: pimac@kdi.re.kr