presented to acet seminar accra, ghana january 25, 2012 okyu kwon kaist graduate school of finance...
TRANSCRIPT
Presented to ACET SeminarAccra, Ghana
January 25, 2012
Okyu KwonKAIST Graduate School of Finance
Public-Private Partner-ships
in Infrastructure of Ko-rea
I Overview on PPPsOverview on PPPs
II Government SupportGovernment Support
Table of Contents
III Success Factors of Korea’s PPPSuccess Factors of Korea’s PPP
1
IV Concluding RemarksConcluding Remarks
I. Overview on PPPs
2
3
1. Major Functions of PPP
In 1994, the Act on Promotion of Private Capital into Infra-structure Investment enacted.
Expected Functions of Public-Private Partnership (PPP)• Effective alternative to financially constrained government• To utilize private sector’s know-how and creativity • Long-term investment opportunity for private investors Partnership between government and private sector Government role was to plan, evaluate, approve execution,
and support implementation. Private partner’s role was to design, finance, build, and oper-
ate facilities.
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2. Evolvement of PPP Act
- PPP Act introduced with components of market contract.- Started from Total Project Cost Management System.- Basic Plan for PPP drawn.
Revision of PPP Act in 1998
• Execution agreement between Ministries and concessionaires• Supporting measures: minimum revenue guarantee, request for
government buyout, credit guarantee, supporting agency• Further reforms undertaken since 2003: Introduced infrastructure fund and compensation scheme for
dropouts. For effective competition, price factor taking more than 50%
weight
- BTOBTO
Build - Transfer - Operate
① Construction by the private sector ② Ownership transferred to government ③ Operation by the private sector IRR is determined through negotiation(9~15%)
-
Build - Transfer - Lease
① Construction by the private sector ② Ownership transferred to government ③ Lease and payment by the government
IRR = Reference rate (government bond) + α(80~100bp)
BTLBTL
3. Implementation Method
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Others : BOT, BOO, etc.
delivers Service
Pays usage fee
Transfers Ownership
Grantsoperating rights Transfers
Owner-ship
Lease pay-ments
delivers Ser-vice
Tax or FeesGovernment
Private Participant(SPC)
User User Government
Private Participant(SPC)
BTOBTO BTLBTL
There are 46 types of infrastructure facilities in 15 sectors
specified by the PPP Act
Road(3)
Port(3)
Rail(3)
Welfare(4)
Forestry(2)
Energy(3)
WaterResources
(3)
Communication(5)
Environment(5) Logistics
(2)
15 Categories Education(1)
Military Housing(1)
Culture & Tourism(9)
PublicHousing
(1)
* Positive listing
Airport(1)
Available Facility Types
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BTOBTO BTLBTL
< Average Operation Period > Road : 30 years (20~40 years) Railway : 30 years Seaport : 50 years (30~50 years) BTL : 20 years
Decided at concession agreement between the authorities in charge (gov’t) and the concessionaire (private participant)
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Operation Period Operation Period
Within 50 years under the PPP guideline
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4. Achievements of PPP in Korea
Private Investment Fast Growing
• Private played a key role, complementing public investment. • The proportion of private investment over public investment From 3.9% in 1998 to 15.4% in 2009 At the end of 2009, 461 projects PPP contracts approved. 106 BTO and 145 BTL projects were completed to provide services
to the public.
<Table 1> Share of PPP in Government Infrastructure Investment
(KRW trillion, %)
1998 2003 2005 2007 2009 Sum
Private investment by PPP 0.5 1.0 3.0 6.0 9.6 70.9
BTO 0.5 1.0 2.9 3.0 3.1 51.1
BTL - - 0.1 3.0 6.5 19.8
Share in government
investment
3.9 5.6 16.1 17.0 19.7 -
II. Government Support
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Government Support
TaxBenefits
ConstructionSubsidy
Land Acquisition Support
Risk-Sharing Structure
TerminationPayment
InfrastructureCredit
GuaranteeFundFinancial
Support
Risk SharingMeasures,etc.
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1.Costruction Subsidy
Construction Subsidy
Land Compensation : 100% Government Subsides
Roads : Up to 30% of Total Investment Railways : Up to 50% of Total Investment Ports : Up to 30% of Total Investment * Foreign exchange loss compensation scheme was abol-ished.
Land Compensation : 100% Government Subsides
Roads : Up to 30% of Total Investment Railways : Up to 50% of Total Investment Ports : Up to 30% of Total Investment * Foreign exchange loss compensation scheme was abol-ished.
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2. Risk-Sharing Structure
Construction Subsidy
Risk-Sharing Structure
*Available for solicited projects only* - Under the new risk-sharing structure, government guarantees redemption of the minimum costs* of the project (costs for PSC at maximum)
* Minimum Costs= (Private investment cost + interest on government bonds)
*Available for solicited projects only* - Under the new risk-sharing structure, government guarantees redemption of the minimum costs* of the project (costs for PSC at maximum)
* Minimum Costs= (Private investment cost + interest on government bonds)
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Risk-Sharing Structure (Introduced in PPP Revitalization Plan to ease credit crunch - Aug. 2009)
Risk-sharingBy the
Government
- Government pays the amount of shortfall when the actual operation revenue is less than the level of risk-sharing revenue* * Risk sharing revenue: The amount of operation revenue that guarantees the IRR comparable to the government bond’s rate of return.
- When the actual operation revenue exceeds the risk-sharing revenue, Government subsidies are redeemed on the basis of realized payments.
Revenue Revenue
Redemption
n
Revenue
Rev-enue
n+1 n+2 n+3
SubsidiesNo Subsi-dies
Risk-Sharing revenue
Prospective revenue
50% of Risk-Sharing revenue
- Subsidy is only provided when the actual operation revenue is greater than 50% of the risk-sharing revenue.
- Uncertain guarantee of IRR (Internal Rate of Return)
Risk sharingof Private
Participants
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3. Tax Benefits
Construction Subsidy
Various Tax Benefits
• Exempt from Acquisition and Registration Tax• Application of 0% VAT • Separate Tax on Interest Income from Infra Bond (14%)• Separate Tax on Dividend Income from Infra-Fund (14%)• Dividends from SPC are tax-exempt (if more than 90% of the
profit was distributed)
• Exempt from Acquisition and Registration Tax• Application of 0% VAT • Separate Tax on Interest Income from Infra Bond (14%)• Separate Tax on Dividend Income from Infra-Fund (14%)• Dividends from SPC are tax-exempt (if more than 90% of the
profit was distributed)
Risk-Sharing Structure
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4. Termination Payment
Termination Payment
Construction Subsidy
Various Tax Benefits
Increased Coverage for Payment Upon Termination i.e. If the project has to terminate for unavoidable reasons, the amount of compensation is increased (50~55% of investment cost → 80~85%) (PPP Revitalization Plan to ease credit crunch )
Risk-Sharing Structure
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5. Credit Guarantee Scheme
Termination Payment
Construction Subsidy
Various Tax Benefits
Infrastructure CreditGuarantee Fund
`
Credit guarantee for concessionaires to obtain bank loan - Guarantee limit per project is increased from KRW 200 billion to KRW 300 billion - Guarantee for subordinate debts is increased from 4.5 to 20% of the to-tal guaranteed amount (PPP Revitalization Plan to ease credit crunch )
Credit guarantee for concessionaires to obtain bank loan - Guarantee limit per project is increased from KRW 200 billion to KRW 300 billion - Guarantee for subordinate debts is increased from 4.5 to 20% of the to-tal guaranteed amount (PPP Revitalization Plan to ease credit crunch )
Risk-Sharing Structure
• Acquisition of Equity* minimum equity ratio of project company has decreased: - BTO : 25% → 20% (20% → 15% if financial investor’s participation exceeds 50%) - BTL : 5~15% → 5%
• Granting loans • Underwriting infrastructure bond
A. Direct investment
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6. Two Ways to Invest
By establishing or participating in infra-fund
* Macquarie Korea Infrastructure fund invested in 15
Projects worth 1.8 billion USD (30%FDI), which ismanaged by Mac-quarie Capital Fund Limited (Europe)
B. Indirect investment
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Equity acquisition of loan for PPP projects
Minimum required capital : 10 billion KRW (8.5
million USD)
* To decrease from 10 billion → 1 billion KRW (850,000 USD)
by the end of this year (PPP Revitalization Plan to ease credit crunch )
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Infrastructure FundsInfrastructure Funds
Advantages : No limit in investment portfolio Debt allowed up to 30% of eq-uity Current status : 10 funds, as of 2010, (1 public equity fund, 9 private)
Advantages : No limit in investment portfolio Debt allowed up to 30% of eq-uity Current status : 10 funds, as of 2010, (1 public equity fund, 9 private)
III. Success Factors of Korea’s PPP
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1. Sound Legal Framework: PPP Act
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• Prime regulator: Ministry of Strategy and Finance (MOSF) Draw the Basic Plan for PPP Prepare directions of government policy• Workable, clear and detailed legal framework Procedures, rights, obligations, risk sharing mechanism Reduce potential business risks for private sector
The PPP Act[MOSF]
Enforcement Decree onPPP Act [MOSF]
Basic Plans for PPP [MOSF]
Request for Proposals
[Competent Authority]
Act Enforcement Decree
General GuidelinesBasic plans of
Individual Project
2. Creation of Supporting Agency: PIMAC
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• Established PICKO to provide professional supports for PPP projects.
• Expanded to PIMAC, which
- consists of experts from economics, finance, accounting, law, engineering, urban planning, etc.,
- performs feasibility studies, VFM tests, request for pro-posal (RFP), evaluation, etc., and
- provides education programs for government officials, and cooperation with international organizations and foreign countries.
PIMAC contributed to designing efficient PPP implementation conditions and enhancing transparency on bidding process.
3. Reasonable Level of Incen-tives
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• A reasonable level of incentives to attract investors is necessary. Private sector risk: high up-front cost, delayed ROI, economic un-
certainties, limited financial resources Over-incentives hazardous and undesirable will cause fiscal bur-
den.
* Korea’s the six government support schemes seem to be well designed. - support for land acquisition, credit guarantee, termination
payment, risk-sharing structure, tax benefit, and construction subsidy
* However, overly protective incentives are not desirable due to potential moral hazard and future fiscal burden. - minimum revenue guarantee, a general government's buyout
scheme, foreign exchange rate risk sharing
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4. Foreign Investors’ Participation
• Equally treated with domestic investors• Entitled to additional benefits For more than US$10 million to build PPP facilities in a Foreign In-
vestment Area, tax breaks were granted For foreign exchange losses, government could offer subsidies or
long-term loans Positions of foreign investors, holding significant portion of a
project, are better respected: language and provisions in conflicts resolution in the agreement
Instrument Projects
Equity Busan New Pore Phase 1(25%), Incheon Bridge(23%), Yongin LRT(26%), Busan New Port Phase 2,3(18.5), Daejeon Riverside Expressway(67%), Songdo-Mansu Sewage Treatment Facility(80%), Busan Aquarium(100%)
Debt Busan New Port Phase 1(43%), Daejeon Riverside Expressway(83%), Daegu-Busan Expressway(10%), Seoul Beltway(11%), Busan Aquarium(100%)
5. Existence of Developed Construction In-dustry
And Soft Infrastructure
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• Construction companies have participated in overseas construction works vigorously
- with skilled workers, work discipline, and low wages.
- In 1982, construction orders received exceeded US$13 billion.
• Learned advanced technologies, construction manage-ment skills, and financial know-how’s.
• Contributed to successful adoption of PPP in 1990s as well as efficient domestic infrastructure development.
• Soft infrastructure, such as legal, accounting, taxation, fi-nance, etc., also helped fair contract and negotiation.
IV. Concluding Remarks
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• Preemptive, sufficient and steady investment necessary
• A top-down approach is essential considering weak capacity of private sector.
• Foreign capital with local partnership should be encouraged.
• A transparency in bidding procedure as well as strict construction supervision is essential.
1. Infrastructure development plays a leading role.
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• PPP provides solutions to inefficiency of gov-ernment monopoly supplier and capital short-ages.
• Outright privatization may not be a good option.• Need not to wait until the country reaches mid-
dle income level.• Foreign suppliers with domestic partners will
provide opportunities to learn.
2. PPP needs to be widely adopted.
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3. A strong coordination function is nec-essary.
• Government: interested in infrastructure growth and effective public policy
• Private sector: interested in maximizing the ROI.• Regulators: interested in ensuring transparency
and interests balancing.• Consumers: seek to realize their value for
money.
Need to establish a good framework to coordi-nate stakeholders’ interests.
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4. A good framework for coordination in-cludes;
• Policy making role given to the most competent Government Ministry.
• Regulatory framework should be clearly stipu-lated by laws.
• A transparent and efficient process of PPP should be put in place.
• A reasonable level of incentives to attract in-vestors is necessary.
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5. Foreign capital inducement should be encouraged.
• Including loans from international financial or-ganizations
• Complements domestic capital shortages.• Provides momentum to adopt international stan-
dard in infrastructure development. Essential for domestic companies to have op-
portunities to learn.
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6. To avoid political pressure, a transpar-ent and professional decision-making process is necessary.
• PPP Act clearly stipulates a strict compliance to the law.
• Use professional organizations like PIMAC.• Civic group’s surveillance activities could be a
great help.
T h a n k Y o u !T h a n k Y o u !