When the economic growth rates have been high, the demand on most roads, particularly expressways, has increased so rapidly. Whenever expressways had been newly built, they have been filled up in a few years with a lot of vehicles. Therefore, the economic feasibility study (FS) on transport infrastructure had not been carefully conducted at theses times. Since the Ministry of Transport (MOT) had taken the responsibility of the FS, almost all FS results had been turned out economically feasible. It had been common to over-estimate the demand and under-estimate the cost in most FSs. Then, the major issue had been how to finance them, while the Ministry of Strategy and Finance (MOSF) had taken the fiscal burden. The Asian financial crisis in 1997 had further hit the lack of government budget. Moreover, it had been argued in the mid-1990s that the national expressway network would be completed within a decade or so. So there had been a criticism that transport infrastructure projects might be too much constructed in the near future, if the current FS system is continued.
As a result, the preliminary feasibility study (PFS) system was introduced in 1999 under the supervision of the MOSF, not the MOT. In order for the PFS to be objectively and consistently conducted, the national and regional transport databases as the basis of the demand forecast were established, the guideline on demand forecast, and benefit and cost estimation was prepared and published. All public projects over KRW 50 billion financed by the central government should conduct mandatorily the PFS using these databases and guideline. As the PFS system has been applied, about half of the projects submitted by the MOT have been rejected. Therefore, the efficiency of the central government’s budget spending must have been improved a lot. ##MORE_LAYER_BOX##
Figure 8 shows the solicited PPP project selection and development. If the project is deemed to be procured by PPPs, it is further developed by the competent authorities like the MOT. Then, a more detailed financial analysis and value for a money test, which might be called the preliminary PPP FS, are conducted by the Korea Development Institute (KDI) instead of the MOSF. The commercial viability from the perspectives of the investors and lenders as well as the fiscal affordability from the perspective of the government is examined. If the project is considered an appropriate PPP project, it is designated as a solicited project, and its Request for Proposal (RFP) is notified to the public. ##MORE_LAYER_BOX##
For unsolicited PPP projects, similar economic and financial feasibility studies could be initiated by a private sector company who is specialized in the related fields. A project proposal with those study results could be submitted to the government. There are two different ways that the government can deal with the unsolicited project proposal. One is that the government checks and evaluates the validity of the studies within a rather short time. The other is that the government conducts a separate and completely different study on its own, although it takes a rather long time and significant budget. By adopting the former way, the government could save time and budget. This is what the Korean government did between 1999 and 2005. Almost all unsolicited projects with the MRG mechanism had been procured as the project initiator had proposed.
However, this caused a serious fiscal burden on the government due to the over-estimated demand. The government could not check and evaluate the proposal by the asymmetric information since the government was largely captured by the private sector’s proposal. This was the main reason the government introduced the rigorous PPP FS for unsolicited projects in 2005. Although the economic and financial feasibility studies submitted by a private sector company were reviewed as a reference, separate and independent economic and financial studies were conducted for a proposed project by an independent institute, e.g., KDI. In most cases, the demand estimated by the KDI is smaller than the estimates by a private proposer. So, more than half of the proposed projects turned out to be economically infeasible, and they were not procured as PPP projects. Figure 9 illustrates the current unsolicited PPP project procedure in Korea. If an initial proposal prepared by the private sector is considered an appropriate PPP project, it is designated as an unsolicited project and notified to the public. ##MORE_LAYER_BOX##