Korean Experience of Public Private Partnerships Jungwook KIM Public and Private Infrastructure Investment Management Center PIMAC October 2012

KDI – PIMAC Part-01

History of KDI and PIMAC Dec. 1970 Promulgation of law establishing KDI (Law No. 2247) Promulgation of Presidential Act establishing KDI (Presidential Act No. 5527) Feb. 1971 Establishment of KDI Mar. 1971 Establishment of the Economic Information and Education Center within KDI by merging the National Institute of Economic System and Information Dec. 1991 Establishment of KDI School of Public Policy and Management Dec. 1997 Establishment of Public Investment Management Center (PIMA) within KDI Jan. 2000 Establishment of Public and Private Infrastructure Investment Management Center (PIMAC) within KDI * PIMA of KDI + PICKO of Korea Research Institute for Human Settlements Jan. 2005

Organization of KDI Organization KDI belongs to the National Research Council for Economics, Humanities and Social Science (NRCS) under the Office of the Prime Minister

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 (Korea Research Institute for Human Settlements), founded in April 1999, centered on research and management of PPP projects.

Organization Chart of PIMAC 85 staffs in 3 divisions Policy Research Unit Public Institution Evaluation Unit Program Evaluation 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 Division (32) Public-Private Partnerships Division (30) PFS Unit 2 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 Researches on Methodology of Project Evaluation Program Evaluation and Performance Management of Public Investment Projects Appraisal for SOE Projects Conduct and manage PFS and RSF and RDF Policy research on PIM

Areas of Expertise of PIMAC Staff 2. PPPs in Korea: KDI - PIMAC Areas of Expertise of PIMAC Staff Areas of Expertise Head-Count Economics / Business 32 Finance 3 Accounting 7 Law 4 Transport 14 Engineering (civil, road, architecture, port, environment, etc) 15 Urban Planning 1 Tourism Water Resources International Cooperation Total 81

Duties of PIMAC in PPP System 2. PPPs in Korea: KDI - PIMAC Duties of PIMAC in PPP System The role of PIMAC as stipulated by the PPP Act Researcher Support for formulation of the Basic Plan for PPP Theoretical and policy studies on PPP programs Development of implementation guidelines 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 PPP Market Promoter Training programs and seminars on PPP for public officials International cooperation Database management

2. PPPs in Korea: KDI - PIMAC KDI – PIMAC efforts for International Cooperation Strengthen international cooperation KDI/ADB/ADBI/WBI Conference: "Knowledge Sharing on Infrastructure Public- Private Partnership in Asia" ('09.5) ASEM Conference on Public-Private Partnerships in Infrastructure: "The Impact of the Global Financial Crisis on PPPs" ('09.10) Providing training and educational program of PPP to several countries training of the government officials from Thailand, Indonesia, Vietnam, Sri Lanka, Myanmar, Mongolia, and Bangladesh Sharing and disseminating knowledge PIMAC-ADB research project on PPPs system development and sharing information of Korean PPP thru PIMAC website

Overview of Korea PPP System Part-02

Legal Framework for PPP Since the formal PPP program was first introduced with the enactment of the PPP Act in 1994, the act has gone through several revisions. Enactment Aug. 1994 『The Private Capital Inducement Promotion Act』 『The Act on Private Participation in Infrastructure 』 · Unsolicited proposals, Minimum Revenue Guarantee Revision Jan. 1999 『The Act on Private Participation in Infrastructure 』 · Diversified Facility Types (35 -> 44) · Introduction of BTL Scheme Amendment Jan. 2005 Unsolicited proposals and MRG in 1999 BTL in 2005 : promoted its use in educational facilities, military residences, environmental facilities, etc. Dispute Resolution committee in 2011 11

Legal Framework of the PPP System Legal Framework for PPP Legal Framework of the PPP System Hierarchy of legal and administrative framework of PPP System PPP Act PPP Act Enforcement Decrees Annual PPP Basic Plan PPP Implementation Guidelines The Legal Status of the PPP Act The PPP Act and the PPP Act Enforcement Decrees are the principal components of the legal framework of PPP Eligible Infrastructure types, Procurement Types, Procurement Process, the roles of the Public and Private parties, etc The PPP Act is a special Act that precedes other Acts Exempts PPP projects from strict regulation in national property management Allows a SPC to play a role of competent authority 12

Legal Framework of the PPP System (3) Legal Framework for PPP Legal Framework of the PPP System (3) PPP Basic Plan and Implementation Guidelines The PPP Act directs the MOSF and PIMAC to issue the PPP Basic Plan. The Basic Plan provides: PPP policy directions Details in PPP project implementation procedure Financing and re-financing directions Risk allocation mechanism Payment scheme of government subsidy Documentation direction PIMAC has developed PPP Implementation Guidelines: guidelines for value for money (VFM) test guidelines for RFP preparation guidelines for standard output specification by facility guidelines for tender evaluation guidelines for standard concession agreement guidelines for refinancing PPP Basic Plan and Implementation Guidelines are annually updated, reflecting relevant changes and market conditions. 13

47 types of facilities in 15 categories are eligible for PPP Eligible Infrastructure Types 47 types of facilities in 15 categories are eligible for PPP Road (3) Port Railway Welfare (4) Forestry (2) Energy Water Resources Communication (5) Environment Logistics 15 categories (facility types) Education (1) Military Housing Culture & Tourism (10) Airport Public Housing Requirements : 1. The project is in accord with mid- to long-term Infrastructure plans and national investment priorities 2. The project has such profitability to attract private sector participation Revision of the Act in 2009 : Eligible infrastructure facility types, which have been stipulated by the Act, can also be stipulated by the Enforcement Decree. 14

* Newly included in the 2009 revised PPP Act Enforcement Decree Eligible Infrastructure Types PPP Facility Types Sector Facility Types Road (3) Railway, Railway Facilities, Urban Railway Rail(3) Port(3) Port, Fishing Port Facilities, New Port Construction Facilities Communications(5) Telecommunication Facilities, Information Communication System, Information Super-highway, Map Information System, Ubiquitous City Infrastructure Water Resources(3) Multi-purpose Dam, River-affiliated Ancillary Structures, Waterworks Energy(3) Electric Source Facilities, Gas Supply Facilities, Collective Energy Facilities Environmental(5) Waste Treatment Facilities and Public Livestock Wastewater Treatment Facilities, Waste Disposal Facilities, Wastewater Treatment Facilities, Recycling Facilities, Public Waste-water Treatment Facilities Logistics(2) Distribution Complex, Cargo and Passenger Terminals Airport(1) Airport Culture and Tourism(10) Tourist Site or Complex, Youth Training Facilities, Public Sports Facilities, Libraries, Museums and Art Galleries, International Conference Facilities, Culture Centers, Science Centers, Urban Parks, Professional Training Facilities* Military Housing (1) Military Housing Education(1) Schools Forestry(2) Natural Recreational Resorts, Arboretums Public Housing(1) Public Rental Housing Welfare(4) Child-care Facilities, Senior Homes, Medical Facilities, Facilities for the Disabled* * Newly included in the 2009 revised PPP Act Enforcement Decree

Government Support (1) Acquisition of land by the concessionaire Granting of land expropriation rights to the concessionaire National or public property in designated areas may be sold to the concessionaire Concessionaires are allowed to use national or public property without charge or at lower price Financial support Construction subsidy: The government may grant construction subsidy to the concessionaire, if it is inevitable to maintain the user fee at a reasonable level Tax incentive Exemption from acquisition and registration taxes on real estate for BOT projects 0% VAT on construction services Tax reduction for infrastructure bond 16

Government Support (2) Government Support (2): Risk-Sharing Scheme by MRG Minimum Revenue Guarantee (MRG): A certain fraction of projected annual revenues may be guaranteed when the actual operating revenue falls considerably short of the projected revenue prescribed in the contract. Applicable only to solicited projects Not applicable to projects that earn less than 50% of projected revenue Profile of Minimum Revenue Guarantee Jan 1999 May 2003 January 2006 Solicited* Unsolicited Solicited Period Whole operating period 15 Years 10 Years Abolished Guarantee Level (Max) 90% 80% First 5 Years 90% Next 5 Years 80% Last 5 Years 70% First 5 Years 75% Next 5 Years 65% Condition None No MRG applied if Actual Revenue < 50% of Forecasted Revenue Same as Left * Abolished in October 2009. 36 out of 145 signed contracts include minimum revenue guarantee clauses at the end of 2008. Criticisms about MRG Government took most of the risks, but provided unreasonable high returns to private participants. Project company may show moral hazard behavior by not trying its best to increase the revenue.

Government Support (3) SOC credit guarantee fund provides credit guarantee for PPP project finance to enhance the timely payment of debt service. Its guarantee products include: Guarantee for facility loans (during construction) Guarantee for working capital loans (during operation) Guarantee for bridge loans Guarantee for refinancing Guarantee for infrastructure bond Buyout options Force majeure (natural disaster or political turmoil) Other specific events prescribed in the concession agreements 18

Compensation for Proposal Cost Government Support (4) Incentive for Early Completion In the event of early completion, the SPC is granted the right to operate the facility to the extent of ½ the reduced completion period. Compensation for Proposal Cost Compensation for Proposal Cost Purpose Compensate the unsuccessful bidder for a portion its project proposal cost for the purpose of promoting the competition in projects. Calculation The maximum amount of compensation as follows. Only 1 unsuccessful bidder: 25% of basic design cost 2 or more unsuccessful bidder: 30% of basic design cost for 2nd contender and 20% of 3rd contender (*Basic design cost: applying the basic design rate for the government project as set forth in the budget compilation guideline) Exclusion Unsuccessful bidders who earned the engineering score under certain level (eg. average “C” level from A~E 5 level evaluation), Unsuccessful bidders who submitted the project proposal containing service quality significantly below the required level. Notice The competent authority is to provide the details in the RFP. such as whether the compensation is available, the size of compensation, criteria and procedures of compensation, and due period of compensation. 19

Process of Solicited PPP Projects Competent Authority Review by PIMAC Selection of PPP Project Designation as the PPP Project Announcement of RFPs Submission of Project Proposals Evaluation and Selection of Preferred Bidder VFM Test Negotiation and Contract Award (Designation of Concessionaire) Application for Approval of Detailed Implementation Plan Construction and Operation Private Sector → Competent Authority → Concessionaire → Concessionaire 20

Process of Unsolicited PPP Projects Submission of Project Proposal VFM Test Notification of Project Implementation PIMAC Private Sector → Competent Authority Competent Authority → Proponent Announcement of RFPs Submission of Project Proposals Evaluation and Selection of Preferred Bidder Negotiation and Contract Award (Designation of Concessionaire) Application for Approval of Detailed Implementation Plan Construction and Operation Concessionaire → Concessionaire 21

Investment Trends of PPP Public & Private Infrastructure Investment Trends Unit: Trill. KRW, % ’98 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 Private Investment (A) 0.5 1.0 0.6 1.2 1.7 2.9 3.1 3.8 3.9 2.7 2.2 Gov’t Investment (B) 12.7 15.2 16.0 18.4 17.4 18.3 20.5 25.4 24.5 24.4 A / B (%) 6.6 3.4 7.5 5.6 9.8 16.1 15.9 17.0 15.4 11.0 9.0 A : Public works completed B : Annual budget in transportation and regional development sector, The Five-year National Fiscal Management Plan In 2011, PPP investment in the SOC sector amounted to W2.2 trillion, about 9% of the total public and private investment in SOC; In 1995, it was merely W0.4 trillion when the PPP program was first introduced. 22

PPP Market in Korea PPP Projects by Procurement Scheme (As of Dec. 2011) Total Completed Under Construction Under Preparation Number 595 393 157 45 Amount 85.0 tril. Won 47.7 tril. Won 23.9 tril. Won 14.5 tril. Won BTO 199 (33.4%) 145 32 22 61.4 tril. Won (72.2%) 37.3 tril. Won 13.0 tril. Won 11.1 tril. Won BTL 396 (66.6%) 248 125 23 23.6 tril. Won (27.8%) 10.4 tril. Won 11.5 tril. Won 1.6 tril. Won *** Large-scale projects whose total costs are 200bill. or more are monitored by the PPP Review Committee organized by the MOSF 23

Key Success Factors in PPP Solid legal framework corresponding to int’l standards Clear & consistent implementation procedure regulated by PPP Act & implementation guidelines Fair & equal treatment of domestic & foreign investors Strong government commitment & support Construction subsidy, MRG, compensation on termination, etc. Technical assistance provided by PIMAC VFM test, Review of RFPs & concession agreements, assistance in project evaluation & negotiation, research for PPP policies & guidelines... Central role of MOSF as budget authority Develop national PPP policies, guidelines, & fiscal rules Coordinates sectoral PPP plans & establish comprehensive investment plans Review & approve national management projects MOSF hosts PPP Review Committee when necessary 24

Thank you 25