Sungmin Han

Associate Fellow

Public and Private Infrastructure Investment Management Center(PIMAC)

KDI

Nov 2015

Towards More Efficient Public Investment

Management

1

Most infrastructure

investment projects had

been evaluated by

foreign organizations or

experts.

Implementation of new

infrastructure investment

as suggested by the

Five-year Economic

Development Plans

History of Project Appraisal in South Korea

1960s

Investment Project

Deliberative Committee

(IPDC)

(Economic Planning

Board (EPB))

Review of the feasibility

of investment projects

costing over 10 billion

Korean Won (KRW)

1970s

As the nation began to

expand steadily at an

unprecedented rate

financially and

economically,

the number of projects

and their value

increased, rendering

effective analysis

increasingly difficult.

1991

The “Regulations on

the Major Investment

Project Review”

amended (EPB dir.)

Review of projects

with total investment

of KRW 50 billion or

more;

Internal review of

projects with KRW 10

billion to just under

KRW 50 billion by an

“operating division”

1994

The Budget Office in

MFE

Difficult to review the

results of feasibility

assessments of major

projects submitted by

each operating

division

Total Projects Cost

Management (TPCM)

『The Private Capital

Inducement

Promotion Act』

1999

Introduction of

preliminary

feasibility study

The Public Investment

Management Center

(PIMA) at the Korea

Development Institute

(KDI) to undertake pre-

feasibility studies was

established (2000)

『The Act on Private

Participation in

Infrastructure 』

(MPB); the

amendment of PPP

Act

0

2

4

6

8

10

12

14

16

18

0

20

40

60

80

100

120

140

Considerable increase in government expenditure for social

welfare and physical Infrastructure

Welfare

Physical Infrastructure

(unit: trillion won, % of expenditure)

Source: Ministry of Strategy and Finance, Korea. Consolidated Fiscal Balance, Respective Year.

Consolidated Fiscal Expenditures and Net lending by Central Government

A Need for Effective PIM System ( I )

2

A Need for Effective PIM System ( II )

Criticism against Feasibility Studies by Line Ministries

: Lack of Objectivity and Reliability in FS

The baseline cost of the Seoul-Busan High Speed Rail (KTX) project has

more than tripled from 5.5 trillion KRW ($5.5 billion USD) to 18.5 trillion

KRW ($18.5 billion USD).

A feasibility review committee investigated the FS.

Thirty-two out of thirty-three projects (1994-98) were evaluated as

feasible in FS.

Serious flaws in terms of transparency, credibility and objectivity

3

4

What went wrong and why?

Polluted by interested groups

No independent review process

Economic value isolated from social value

Lack of standardized guidelines and databases

Capital project budgeting inconsistent with the Medium Term Expenditure

Framework (MTEF) budget

Ex ante appraisal, and nobody cares thereafter

A Need for Effective PIM System ( III )

Evolution of PIM System

5

TPCM (Total Project Cost Management)

PFS (Pre-Feasibility Study)

RSF (Re-assessment Study of Feasibility)

IEBP (In-Depth Evaluation of Budgetary program)

RDF (Re-assessment of Demand Forecast)

PE (Performance Evaluation)

VE introduced in 2000 and reinforced in 2005

2006

RDF introduced

RSF strengthened

National Finance Act

legislated

2003

RSF guidelines

developed

1999

PFS introduced

RSF introduced

PE introduced

2005

IEBP introduced

1994

TPCM introduced

Introduction of PFS

New paradigm of PIM

As a government reform initiatives in response to the financial crisis of

1997-98, a new PIM started in 1999.

Introduction of Preliminary Feasibility Study (PFS)

Short and brief evaluation of a project to produce information for

budgetary decision

Owned by the Ministry of Strategy and Finance (MOSF) and evaluated

by independent evaluation unit, PIMAC

Clear and explicated binary judgment (feasible/non-feasible) on the

overall feasibility

6

Line Ministry KDI (PIMAC)

Select PFS Projectsin consultation with

PFS committee

Request PFS

Make InvestmentDecision

Submit PFS Report

Organize Teams/Conduct PFS

Consultation based on :• Eligibility for central

government grants•Urgency of the Projects•Concreteness of the project plan

Determination of the Priorities by considering • The long-term

National Compre-hensive Plan,

• National Policy Direction

Select and Submit PFS candidate

projects

(pre –PFS Committee)

Implementation Procedure of PFS

Ministry of

Strategy & Finance

Conduct Feasibility Study or Stop the Project

1st

Stage

2st

Stage

3st

Stage

Open to the PublicAnnouncement & Report to the National Assembly

7

1st Stage: Selection of Target Projects Subject to PFS

Line Ministry: Selection of PFS Candidate Projects and Submission of

Project Proposals to MOSF

All new large-scale projects with total costs amounting to 50 billion KRW (about

50 Million USD) or more are subject to PFS.

In principle, line ministries submit a project proposal to MOSF two years before

the project.

PIMAC: Setting Forth its Views based on Project Proposals

Consultation based on eligibility for central government grants, urgency of the

projects and concreteness of the project plan

MOSF: Selection of target projects subject to PFS in consultation with

PFS committee

Eligible projects are selected from the PFS request submissions through a PFS

committee.

8

1st Stage: Coverage of PFS

Initially focused on economic infrastructure, PFS has expanded

to social infrastructure, non-infrastructure (e.g. R&D, welfare)

programs, SOE projects and tax expenditure program.

PFS on Transport

Social

Infrastructure

Non-infrastructure

(R&D, Welfare program)

PFS on

SOE Projects

Tax Expenditure

Program

9

2nd Stage: Setting Out PFS

Receiving project proposals of line ministries from MOSF,

PIMAC sets out PFS and objectively evaluates project feasibility

for 6 months.

In the early stages: organizing PFS team(External + Internal Experts),

inquiring related data, addressing issues, studying PFS guidelines, etc

Well developed evaluation guidelines

Detailed description of methodology and procedures of PFS

implementation to avoid ambiguity

PFS guidelines by sector :

Roads, rail, seaports, airports, dams, and cultural facilities

Using the same dataset for different projects in the same sector

Continuous revision of guidelines through academic research

10

2nd Stage: Evaluation

Various values are incorporated and evaluated.

Various values (economic efficiency, policy consistency, relevant plans

and policy directions, environmental impact, regional equity, project-

specific factors) are incorporated in the frame of PFS.

Multi-criteria decision making technique(AHP) is finally adopted to

combine quantitative and qualitative elements of evaluation.

Giving a weight on each element through pair-wise comparison

A project is evaluated as feasible if AHP score is 0.5 point or more out of 1.0

point.

PFS results are rarely overruled by budget ministry and the National

Assembly.

Range of weight: Economic analysis–40~50%, Policy analysis–

25~35%, Balanced regional development analysis -20~30%

11

Project proposal

• Review of statement of purpose

• Collect socio-economic, geographic, and technical data

• Brainstorming (Other Alternatives)

• PFS issues raised

Background study

• Consistency with higher-level plan and policy directions

• Project risk (financing and environmental impacts)

• Project-specific evaluation item

Policy analysis

• Demand analysis

• Cost estimation

• Benefit estimation

• Cost-benefit analysis

• Sensitivity analysis

• Financial analysis

Economic analysis

• Overall feasibility

• Prioritization

• Financing and policy suggestion

Analytic Hierarchy Process

• Regional backwardness index analysis

• Regional economic impacts

Balanced regional development analysis

2nd Stage: Flowchart of PFS Analysis

12

Receiving the PFS result from PIMAC, MOSF makes an

investment decision based on it.

Submission of the PIMAC’s PFS full report to MOSF when PIMAC

completes PFS

MOSF announces the result to the National Assembly.

Go or Stop decision

In case of a project found feasible(go decision), line ministries conduct

feasibility study in more detail.

PIMAC announces the report to the public through the web.

The public can be readily accessible to the web and download PFS

reports from it.

3rd Stage: Investment Decision

13

3rd Stage: PIMAC, KDI Website

14

Number of PFS Executed and Total Project Cost (1999~2014)

Note: 1) PFS completed as of 31 Dec 2014.

2) About 60 PFS conducted by other organizations are not included.

20

30

41

3032

55

30

52

46

38

63

48

43

35

13

36

0

5

10

15

20

25

30

35

40

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(Number) (Trillion)

# of PFS executed total project cost

15

Proportion of Feasible Projects and Total Project Cost Saving

(1999~2014)

Note: 1) PFS completed as of 31 Dec 2014.

2) About 60 PFS conducted by other organizations are not included.

65.0%

53.3%

34.1%

43.3%

59.4%

74.5%

63.3%

53.8%56.5%

68.4% 68.3%

75.0% 74.4%

69.4%

76.9%75.0%

63.2%

0

5

10

15

20

25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

(Percent) (Trillion)

Proportion of feasible projects Saving Project Cost Total Saving Project Cost

16

Challenges and the Way forward

International comparison of general gov’t debt levels shows

Korea has a sound fiscal condition compared to other countries.

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17

Challenges and the Way forward

Public sector debt is a sustainable level, but the size and portion

of the debt held by public corporations are relatively greater than

other countries.

235

124 11091

5637 31

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928

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0

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Japan Portugal Canada United Kingdom Australia Korea Mexico

General Government Public Nonfinancial Corporations

18

Challenges and the Way forward

The new paradigm of public investment management system in

early 2000 was a successful device to shift the trend of

infrastructure development, strengthening fiscal efficiency.

The PIM process in Korea need to be developed following good

tradition of infrastructure development.

Strong linkage of infrastructure development to national policy direction

such as economic growth

Guide of infrastructure development by a strategic vision of national

development

Capability to adjust investment priority by national economic

development stage

19

THANK

YOU!