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PPP Process and Government Support

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PPP Process and Government Support06



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Title PPP Process and Government Support
Similar Titles
Material Type Reports
Date 2015
Language Korean
File Type Theme
Subject Industry and Technology < General

Abstract

Eligible Facilities and Contract Types

The Act lists 48 facilities in 15 sectors as eligible facilities for PPP-driven procurement, which are high in demand and more likely to save government’s budgets.##3D_LAYER##[1]##3D_TEXT:Eligible Infrastructure Facility Types.##3D_LINK:https://www.kdevelopedia.org/Resources/economy/eligible-infrastructure-facility-types--05201512030142478.do?fldIds=TP_ECO|TP_ECO_GE#.VndW1LaLTcs###3D_LAYER_END## It also defines a few alternative ways in which the private sector can engage in PPP projects. Four major contractual types are in practice: Build–Transfer–Operate (BTO), Build-Transfer-Lease (BTL), Build-Operate-Transfer (BOT), and Build-Operate-Own (BOO). Other types can be also arranged if necessary, including Rehabilitate-Operate-Transfer (ROT).##3D_LAYER##[2]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). p. 30-31.##3D_LINK:https://www.kdevelopedia.org/Resources/all/public–private-partnerships--04201306130126672.do##3D_LAYER_END## The law also allows profit-yielding supplementary projects, encouraging concessionaires to maintain a desirable level of ROI so that the competent authorities may reduce user fee, or government subsidies, and eventually, fiscal burden. 



PPP Procurement: Feasibility study VfM Test

Solicited or unsolicited, the PPP procurement process requires two sets of the test; the Preliminary Feasibility Study (PFS)##3D_LAYER##[3]##3D_TEXT:The PFS mainly depends on B/C (Benefit-cost) ratio, verifying the project’s economic worthiness. The VfM test is basically a comparative process between PSC (Public Sector Comparator) and PFI (Private Finance Initiative) in terms of life-cycle cost efficiency.##3D_LAYER_END## and the Value-for-Money (VfM)##3D_LAYER##[4]##3D_TEXT:See below for detail description of solicited vs. unsolicited project processing steps.##3D_LAYER_END##. The former simply ascertains that the project in question is feasible economically, financially, and fiscally. It also checks if the project is on the high priority list. The VfM test is mandatory if a project wants budgetary support from the competent authority. 



PPP Procurement Process

In case of solicited projects the competent authority develops projects and solicits proposals from the private sector. For unsolicited projects the private sector works out "socially desirable" projects and asks the relevant authority to designate it as officially recognized PPP procurement project. Solicited or unsolicited, the project selection process requires a competitive bidding, but in case of an unsolicited project, the original proponent is more likely selected because it earns extra points. 







      



Direct Government Subsidies 

Direct subsidy involves both the construction subsidy at the construction phase and compensation of the base costs when the facility operates. The government establishes subsidy guidelines for different projects in the range of 20 to 30% of the total project costs. ##3D_LAYER##[5]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). pp. 38-39. ##3D_LINK:https://www.kdevelopedia.org/Resources/territorial-development/public%E2%80%93private-partnerships--04201306130126672.do?fldIds=TP_TER|TP_TER_GE#.VndXKraLTcs##3D_LAYER_END## National BTO projects more likely to receive a 5 to 15% larger share of a construction subsidy than the local projects. Another type is the compensation for bid preparation costs, designed to increase competition by encouraging qualifying bidders to actively participate in the bidding process. Unsuccessful bidders are compensated up to 35% of the design preparation costs.  



Assisting Land Acquisition##3D_LAYER##[6]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). p. 35. ##3D_LINK:https://www.kdevelopedia.org/Resources/territorial-development/public%E2%80%93private-partnerships--04201306130126672.do?fldIds=TP_TER|TP_TER_GE#.VndXKraLTcs##3D_LAYER_END##

Projects like expressway and industrial estate development require a huge amount of land. A concessionaire is granted the right to expropriate land under the PPP Act, but if it fails to reach a purchase agreement, it may entrust the government with the execution of land purchase in accordance with the Compulsory Purchase of Land Act.##3D_LAYER##[7]##3D_TEXT:Under the Land Acquisition Act, either the concessionaire or the project company can carry out land acquisition as prescribed by the Act. When a public facility plan is approved, the concessionaire prepares a list of land to be expropriated for PPP project execution. For a more detailed description about land expropriation procedures, refer to the Public Private Partnership: Lessons from Korea on Institutional Arrangements and Performance, 2013, KDI (pp. 35-37) ##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_LAYER_END##.  In some cases the competent authority makes an outright purchase of the land on behalf of the concessionaire because the land appropriation process is time-consuming##3D_LAYER##[8]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). pp. 36. ##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_LAYER_END## and mind boggling##3D_LAYER##[9]##3D_TEXT:In cases where the government agreed to provide a subsidy for land acquisition, but it does not have enough funds, private investors are allowed to borrow the necessary funds from commercial banks to pay the land price. The government should repay the pre-determined principal and interest later on. This support contributes to accelerated land acquisition even when the government does not have enough funds in its budget for land acquisition, allowing timely completion of PPP facilities.##3D_LAYER_END##.



The Credit Guarantee System##3D_LAYER##[10]##3D_TEXT:Comprehensive evaluation of Korean PPP (2012, PIMAC of KDI)##3D_LAYER_END##

The Credit Guarantee System is probably the most important government support in activating the PPP projects when it comes to dealing with financing, because under the system the government shares financial risks with concessionaires. The CGS works in conjunction with the Infrastructure Credit Guarantee Fund (ICGF)##3D_LAYER##[11]##3D_TEXT:(1) Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). pp. 43-45.##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_TEXT:(2) Enforcement decree of the act on publuc-private partnerships in infrastructure. pp. 81-83.##3D_LINK:https://www.kdevelopedia.org/Resources/territorial-development/enforcement-decree-act-publuc-private-partnerships-infrastructure--04201506020138368.do##3D_LAYER_END##. It helps provide credits for the PPP concessionaires when they apply for construction loans from the commercial banks. The Korea Credit Guarantee Fund Inc. manages the fund, with a credit guarantee of up to 300 billion won by charging a fee of 1.5% of the total amount of the guaranteed credit.##3D_LAYER##[12]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). p. 44. Table 1-6.##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_LAYER_END##  The average guarantee fee has been priced around 0.5% to 0.4% of the guaranteed balance. 



The Infrastructure Bond and Infrastructure Fund

Infrastructure bonds are issued by commercial banks and other financial institutions to support PPP projects. The bonds have a 15 year maturity period, with an interest rate of 14% when it was first issued in 1997.##3D_LAYER##[13]##3D_TEXT:Refer to Article 29 of the Restriction of Special Taxation Act##3D_LINK:https://www.kdevelopedia.org/Resources/economy/restriction-special-taxation-act--05201512030142479.do?fldIds=TP_ECO|TP_ECO_GE#.VndXeraLTcs##3D_LAYER_END## The Infrastructure Fund is a special purpose mutual fund, subject to the Act on Business of Operating Indirect Investment Assets##3D_LAYER##[14]##3D_TEXT:Act on public-private partnerships in infrastructure. pp. 30-34.##3D_LINK:https://www.kdevelopedia.org/Resources/territorial-development/act-public-private-partnerships-infrastructure--04201506020138367.do##3D_LAYER_END##. The PPP Act supports the Fund by exempting it from compliance with the Free Trade Act.##3D_LAYER##[15]##3D_TEXT:Draft Standard Concession Agreement for Build-Transfer-Operate Projects : Road Projects (2010). p. 4.##3D_LINK:https://www.kdevelopedia.org/Resources/territorial-development/draft-standard-concession-agreement-build-transfer-operate-projects-road-projects--04201210020121927.do##3D_LAYER_END## Unlike Infrastructure Bonds, the Infrastructure Fund has substantially contributed to infrastructure investments, as much as 12.2% a year on average.##3D_LAYER##[16]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). p. 70. Table 2-8.##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_LAYER_END##



The MRG (Minimum Revenue Guarantee)##3D_LAYER##[17]##3D_TEXT:Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). p. 42. Table 1-5.##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_LAYER_END## and Tax Subsidies  

Concessionaires are freed from many taxes – corporate income tax, property tax, sales and excise tax, value-added tax, etc. Also many business related regulations are either relaxed or even exempted, when applied to PPP projects, e.g. the Monopoly Regulation and Fair Trade Act. The MRG system works well when it operated in conjunction with the Redemption Clause of the Act. ##MORE_LAYER##

The government agreed with the concessionaire on both the upper and lower limit of operational revenue. If the revenue fell short of the lower limit, the government made up the difference between the guaranteed and the actual revenues. If actual revenue exceeded the upper limit of operational revenue, the government redeemed the difference by contracts.##3D_LAYER##[18]##3D_TEXT:However, South Korea recognized various criticisms against MRG and it was abolished in 2009. One of the main issues was "optimistic bias" in demand forecast, which was caused by moral hazard and resulted in too much government burden.##3D_LAYER_END## Other related supports worthy of mentioning include the Buyout Right##3D_LAYER##[19]##3D_TEXT:The buyout right is allowed only if concessionaire can neither build, nor manage, the  facility under the extenuating circumstances, as defined by the Article 39 of the PPP Enforcement Decree, such as "natural disaster, war and force majeurs – both political and nonpolitical." Refer to Tables 1-8 through 1-10 for detailed description of concession termination. pp. 47-49.##3D_LINK:https://www.kdevelopedia.org/Resources/territorial-development/enforcement-decree-act-publuc-private-partnerships-infrastructure--04201506020138368.do##3D_LAYER_END## and Dispute Mediation Committee##3D_LAYER##[20]##3D_TEXT:The Committee was created by MOSF in 2011 to examine disputes among the contracting parties. It prepares mediation opinion in writing and each party should notify its decision of either accepting or rejecting it within 15 days upon the receipt of the notification.Public-Private Partnerships: Lessons from Korea on Institutional Arrangements and Performance (2013). pp. 51-52.##3D_LINK:https://www.kdevelopedia.org/resource/view/04201306130126672.do##3D_LAYER_END##.##MORE_LAYER_END##