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Issues and Suggestions

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Issues and Suggestions06



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Title Issues and Suggestions
Similar Titles
Material Type Reports
Date 2015
Language Korean
File Type Theme
Subject Official Aid < Economic Infrastructure

Abstract

Current Issues

Discrepancy Between Forecasted and Actual Demand##3D_LAYER##[1]##3D_TEXT:There are many cases in which real demand was substantially lower than the forecasted demand, including the Incheon Airport Railroad, the Incheon Airport Expressway, and the Great Gyega Bridge projects.##3D_LAYER_END##

The large amount of government subsidies, mostly in the form of MRGs, brought social criticism and resulted in the abolishment of MRG in 2009. However, some of the early stage contracts that had MRG clause, have still caused the government’s fiscal burden due to the lower level of revenue than was guaranteed. The discrepancy occurs as a result of the gap between projected and actual demand. Even without MRG, the accuracy in demand forecasting is still a critical issue in planning phase of infrastructure development because the forecasted demand has a big impact on judging project eligibility: i.e., how much social value exists compared with construction and operation costs. PIMAC of KDI has recently introduced the Demand Forecast Review Committee which reviews forecasted demand during the pre-assessment process to enhance the accuracy of demand forecast in transportation projects. Corollary to this issue is the debate on user charges. Some consumers feel user charges are unreasonably high.  




Skewed Distribution of Project Risk 

Another issue is how to share the risks associated with future demand among the stake-holders. The risks can sometimes be huge and practically impossible to diversify. Such a difficulty resulted in skewed distribution of the project risks and resulted in a large amount of MRG subsidy.##3D_LAYER##[2]##3D_TEXT:Evidently the government bore more risks than the concessionaire, given the fact that the actual MRG payments significantly increased in recent years. That is why there was criticism against PPP.##3D_LAYER_END##  A related issue is that MRG support may cause a moral hazard. With MRG intact, project companies do not have an incentive to do its best to increase its revenues.##3D_LAYER##[3]##3D_TEXT:Accordingly, the MRG support was abolished in 2009. Thus, BTO projects, with no MRG clauses, may impose most of the demand risks on private investors. The problem now is that the increased demand risks of private investors may harm their ‘bankability’ and thus, discourage private investors from undertaking PPP projects. It may explain the decreasing trend of BTO projects since 2010.##3D_LAYER_END##



Lack of Competition 

Competition appears to be increasing for these types of projects, but competition is far from being at a desirable level. In the old days, almost 70% of the projects were proposed by a consortium type of single bidder, probably because of the high costs of preparing and submitting proposals. But now the number of bidders has increased over time. The reasons may have to do with sharing risks and the difficulty of finding stable investment opportunities elsewhere, which generate rate of returns comparable with the yield from PPP project operation.



Too Much Time Required for Project Preparation  

A PPP project proposal demands the work of many experts in its preparation. The whole process may take almost three full years, starting from project assessment and RFP to bidder selection and contract negotiation. The long process causes uncertainty, making the private investors hesitant in making an investment decision. Sometimes conditions initially agreed upon may have to be substantially modified to attract private funding because the market situations, both financial and service, may change so much by the time when the proposal becomes finalized. 



Suggestions for the Improvement of PPP System  

Increase Competition

A high degree of competition would help resolve many of above-mentioned problems. Such competition will make user charges more competitive, implying that the demand for PPP-oriented services will increase and thus, the market will expand. Improvement of infrastructure financing can reinforce competition because if financial resources are readily available, the PPP market will quickly expand and a large number of investors will compete. This increased level of competition may also help balance the project risk burdens between the government and private investors. The trick is to make PPP projects draw upon more users, thus generating more revenues. 



Improve Demand Forecasting Methods##3D_LAYER##[4]##3D_TEXT:A study on the guideline to forecast travel demand (2004)##3D_LINK:https://www.kdevelopedia.org/resource/view/05201211160123402.do##3D_LAYER_END##

More reliable demand forecasting is the key to reducing the gap between actual and projected revenues, and thus, to minimizing project risks and increasing the probability of success. Essentially better forecasting will help all the participants make more rational decisions; the government, financiers, investors and concessionaires alike. Perfect forecasting methodologies may not exist, but repeated experimentation of a few statistically proven methods may increase the power of predictability. The point is that no matter how sophisticated forecasts may be, their predictive power must be reasonably high so that the participants can rely upon these forecasts when making investment decisions.



Moderate User Charges##3D_LAYER##[5]##3D_TEXT:Issues on fare of PPP projects (KDI PIMAC)##3D_LAYER_END##

The difference in user fees between government financed road facilities and PPP-driven projects has been significantly reduced recently primarily because the government raised the user fees to cover the increasing costs of repair and maintenance. The user fee of PPP-driven facilities is fixed until the PPP contract is modified to allow for the fee to rise. Thus, the difference in user charges between the two different types of projects is likely to disappear in the years to come. Meanwhile efforts should be made to lower the user fee sooner, so that PPP-initiated facilities attract more users while maintaining high quality of services.