KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Reorganizing the National Grant System for Transportation Facilities: Focusing on the Local Road

National grants for local transportation facilities play a major role in building highly efficient transportation systems. The central government provides national grant to guide the construction of local transportation systems in the nationally desirable direction and promote the welfare of the whole nation.

This study presents the criteria for the differential grant for the local road facilities that meets the purpose of the national grant system. The criteria is established by utilizing as the external effect index which indicates the degree to which roads in the region are also used for traffic to other regions, and the service level of the road that means the travel time and degree of congestion. In addition, independent rate of finance of the local government was also reflected to the criteria for the differential grant.

As a result of the analysis, it was found that the roads were located in Sejong, Chungcheongbuk-do and Chungcheongnam-do regions were often used not only for intra-regional traffic but also for inter-regional traffic. Regions with relatively heavy road congestion were Seoul, Gyeonggi-do, and Daegu, and independent rate of finance indicating the financial conditions for road construction, were relatively low in Jeonlanam=do, Jeonlabuk-do and Gangwon-do. Overall, higher grant rate is required in the Chungcheongbuk-do, followed by Gyeongsangbuk-do and Seoul.

The following recommendations are suggested for the reorganization of national grant system considering the continuous progress of decentralization and the policy to strengthen the role and responsibility of local governments.

Firstly, it is recommended that the guideline as well as the legal basis for the national grant system need to be clarified and provided. A guideline needs to be provided and stipulate whether or not to grant such as land expropriation costs and whether the amount of grant is based on the total project cost or each cost item. It is also necessary to have a legal basis for the enforcement.

Secondly, it is recommended that the regional differential grant rate is applied to increase the external effects of the local transportation facilities, which is the policy goal of the national grant system, and to improve transportation services and to alleviate the imbalance of transportation investment.

Finally, it is suggested that the differential national grant rate system need to be applied according to the type of the projects. To do this, the projects need to be clarified according to the project that contributes to the construction of the national trunk transportation system, the project that can alleviate the disparity in transportation services, and the project which is environmentally friendly and contribute to the improvement of traffic safety.

This study presents the specific criteria examining the legitimacy of the national grant system for local road facilities, and contributes to the policy direction for improving the differential national grant system. It is worthy noted that the recommendations in this study are based on the analysis of real individual travelling data which has not been conducted in any other studies.

Summary

KDI Policy Forum Analysis and Implications of the Determinants of CIRR for the Seamless Execution of PPP Projects

■ The contracted internal rate of return (CIRR) of Korea's public-private-partnership (PPP) projects does not properly reflect the risks associated with the different types and characteristics of facilities and government support. Rather, the rates are set at the same level as similar preceding projects.

- The characteristics of a project, e.g. facility type, amount of private investment, and operation period, and the ensuing risks are not sufficiently reflected in the decisions over CIRR. Moreover, the construction subsidy―a government risk-sharing and support policy―inadequately contributes to lowering the rate.

- The project review period and VfM test do not have a meaningful effect on determining the CIRR, implying that project evaluations and analyses need to be improved.

■ For the seamless execution and invigoration of PPP projects and lower user fees, the CIRR must be fixed at an appropriate level through more active negotiations and efforts in addition to taking the CIRR of similar existing PPP projects into account.

- A significantly low CIRR relative to the risks could diminish the incentive to privately invest or could even lead to the bankruptcy of an ongoing project. On the other hand, an excessively high rate could raise the user fee or necessitate larger government subsidies.

- To determine the suitable CIRR, the risks and effects of government support must be analyzed. In particular, policies that encourage competition in the PPP market must be developed to lower user fees through policies, e.g. transparent disclosure of information, simplified implementation procedures, increased provision of guarantees, and the provision of compensation for the cost of failed proposals, etc.

Summary

Policy Study KOR Analysis on the Determinants of the IRR of Korean PPP Projects

The purpose of attracting private investment in the construction and operation of social overhead capital (SOC) is to maximize efficiency in the management of and investment in social overhead facilities by replenishing insufficient funds and injecting creativity and innovation from the private sector.

Korea’s Public-Private Partnership (PPP) system―implemented through the Promotion of Private Capital in Social Overhead Capital Investment Act (1994)―initiated the early expansion of social overhead facilities which contributed to economic growth and improving public benefits. Nevertheless, concerns have been raised over the validity of PPP projects due to an unexpected increase in the government’s financial burden resulting from the minimum revenue guarantee (MRG) and termination payments. In particular, the sustainability of PPP projects has been called into question and has even become a social issue because of the relatively high user fees compared to the budgetary projects, among others.

Accordingly, this study attempts to indirectly examine the accomplishments of PPP policies designed to lessen or divide the risks of PPP projects over the past two decades. It analyzed the determinants of the contracted internal rate of return (IRR) to provide implications for enhancing the effectiveness and publicness of government support so that future PPP projects are conducted in a well coordinated manner.

The analysis results revealed that the contracted IRR of build-transfer-operate (BTO) projects do not have a statistically meaningful relationship with the 5-year government bond yield―which shows the conditions in the financing market. This is because large-scale BTO projects have too many hurdles for SMEs to work through, and for that reason, all of the participants are large construction and financial firms. This means that respective participants’ ability to finance a project is more important than general financial market conditions. Moreover, in most cases, a participating financial firm serves as both shareholder and borrower, meaning that there is no incentive for the firm to make an effort to obtain loans with low rates. On the other hand, a statistically meaningful positive correlation between the financing rate and contracted IRR was found for build-transfer-lease (BTL) projects, which has SMEs as investors and separates shareholders and borrowers. In short, the overall changes in financial market conditions or the level of financing rates could greatly affect the level of the contracted IRR of a BTL project while BTO projects are affected more by individual private investors’ financing ability and the composition of investors and borrowers than by financing market conditions.

Second, the government’s risk sharing policies and specific project features such as facility type, investment amount, construction subsidy and MRG conditions were found to little affect the decisions regarding contracted IRRs.

Given that project risks can systemically vary depending on the type of facility, it was initially thought that the contracted IRR could also significantly vary, but the difference was found to be statistically insignificant. Expert opinions and surveys should be taken into account to better identify and understand the characteristics of PPP projects by type, and the government should have a fully established policy direction and support principle with regards to risk management and allocation.

It was also thought that as the size of the total project cost increases, the degree of risk aversion could rise and the ensuing increase in the required return of rate could raise the contracted IRR. However, no meaningful significance was observed. On the contrary, BTL projects―although the effect is minimal―caused a decrease in the ‘alpha (α)’ additional rate (an indicator of the contracted additional rate) as the size of the PPP project cost rises. This appears to be due to the fact that the risks of BTL projects are very small, unlike BTO projects, and thus, large-scale PPP projects are regarded as stable investments from a long-term perspective.

In addition, operational and investment risks can escalate as the period of operation lengthens and growing uncertainties over future risks could entail a high long-term investment premium which would raise the required return of rate. Nevertheless, the results revealed that the operation period did not significantly impact the decisions on the contracted IRR of BTO projects while having a slight impact on the contracted additional rate of BTL projects. Hence, overall, the characteristics of the operation period have not been properly reflected in the contracted IRR.

Meanwhile, construction subsidies, which are directly paid by the government to private concessionaires during the construction period, were found to contribute to lowering the contracted IRR of PPP projects, but the effect was found to be insignificant. The analysis found that in BTO projects, a 1% increase in construction subsidy relative to total project cost causes a reduction of 0.008% in the contractual IRR.

Above all, this study found no contribution from the MRG system to lowering the contracted IRR, and this casts doubt on the effectiveness of the government’s risk allocation policy. Despite the fact that the MRG system―which is designed to make up for the shortage if the actual yearly operating income falls short of the initially estimated income in the concession agreement―can serve as an effective risk-sharing method to sharply reduce the contracted IRR, projects with MRG conditions were found to have concluded with a 0.59% higher contracted IRR at a 99% confidence level. Furthermore, the contracted IRR of MRG-inclusive projects was found to be higher than those without such conditions in an analysis of only road projects. It is assumed that this is because the contracted IRR was set very high during the intial period of the PPP system and subsequent projects were concluded by simply referring to preceding projects without considering the inclusion of the MRG.

Thirdly, the VfM test was also found to slightly contribute to lowering the contracted IRR. The test decides on a PPP project based on a comparison of the total life cycle cost (LCC) of the public sector comparator (PSC) and private finance initiative (PFI). As such, a project will unlikely pass the test if there is an increase in the rate of return as it will weigh on the government’s financial burden. To put it another way, the contracted IRR of a project which has passed the VfM test is more likely to be lowered compared to a project which has failed the test. However, the difference in the contracted IRR between such projects was found to be statistically insignificant, implying that the contents and methods of the VfM test need to be updated. In conducting the VfM test, it is also necessary to quantify project risks and risk-sharing that derive from facility type and the government’s support policy and to reflect them properly.

What should be particularly noted in this study is the effect of the degree of market competition (competition rate) on the contracted IRR. For BTO projects, one additional competitor reduces the contracted IRR by approximately 0.25%, suggesting that the level of the contracted IRR is closely related to the number of competing participants. Considering that encouraging competition could lead to a decrease in the contracted IRR and eventually a reduction in construction subsidies and user fees, the government should aim to enhance the competition rate to strengthen the publicness of future PPP projects.

Under the current PPP system, only large firms can afford the time and expenses required for project proposal, evaluation and negotiation, which poses an obstacle to new market entrants. Simplified processes are needed to save time and money and active participation in PPP projects should be encouraged by enabling easier financing and lower rates to reduce the contracted IRR.

This study has its own limitations. Future studies need to closely examine the impact from private-sector concessionaires and project characteristics on the contracted IRR. Depending on their financing ability, credit rating, PPP experience, and knowledge and know-how about the construction and operation of specific facilities, project concessionaries may present different attitudes and decisions, which could affect the decisions over the contracted IRR.

Further analyses should include accumulating data on project funding and its equity structure; private investors’ experiences and characteristics; construction investors’ average construction margin; operation investors’ operation margin and; loan interest rates for the actual financial arrangement. Additionally, in-depth analyses of the impact of these variables should follow.

Summary

Policy Study KOR Analysis on the Land Compensation Cost of the Projects subject to PFS

The preliminary feasibility study (PFS) was adopted in 1999 to enhance the objectiveness and transparency of government-run projects under the agenda of fiscal reform. It has received recognition from the World Bank, International Monetary Bank (IMF) and other prominent global organizations for its contribution to the efficient and transparent use of budgets. However, concerns have emerged about certain PFS-related issues attributed to the synchronization of PFS and budget allocation, and due to the growing public attention over PFS results. One notable issue pertains to the adequacy of estimations for land compensation, which accounts for a large share of the cost estimations for analyses on economic value. The competent authorities argue that the costs for land compensation―estimated through PFS―are unrealistically low and thus hinder project execution. The problem may lie within the PFS analysis itself, but it may also be because the gains from development are reflected in the real compensation costs.

As such, this study focused on projects that were subject to PFS in 1999-2012 with available information on project dates and location. It analyzed the movements in land prices according to the project dates to examine whether government-run projects reflect the gains from land development in the compensation and if so, at which point they are reflected. The results were used to draw on the policy implications for land compensation estimations for future government projects. Time-series data was established on the prices of project sites or nearby land (per lot) for 14 government-funded projects from 1996 to 2014. Then, in a panel analysis using the difference-in-difference model, this study showed that the prices of both project sites and nearby land began to surge from a year prior to the initiation of PSF―during which time the competent authorities design a project and prepare for PFS―and continued throughout the PFS, basic design and implementation planning phases. Additionally, the prices of project sites exhibited a higher increase than that of nearby land until the basic design phase. The results indicate that the increase is driven by the fact that information on project design and development planning are made public and expectations are generated over the development gains as the project undergoes PFS. This, in turn, pushes up land prices and, although it can vary from project to project, the development gains during the basic design and implementation phase are reflected. The findings imply that PFS-estimated compensation costs are lower than real compensation costs not because of errors in the PFS estimations, but rather because of the time difference between cost estimation and real compensation, and reflection of the development gains during this period. Furthermore, a separate analysis of ongoing projects that passed PFS and those that did not revealed that the land prices for the project sites of the latter significantly increased far before the project was put forward but declined with the initiation of PFS, recording a lower growth than that of nearby land. However, once a project receives a budget and starts to roll, this pattern is reversed. Given that PFS and budget allocation have become increasingly synchronized, the market’s instant response to PFS results is a sign of a troubling reality.

These findings indicate that to smoothly operate government-funded projects, it is necessary to foster prompt management of the entire process, from establishing the basic plan―including the release of information on project planning, compensation negotiations and project approval―to conducting PFS and developing the basic design. Above all, PFS should ideally take no more than 4-6 months. But, due to the lack of significant proposal contents such as location and the frequent changes in project plans, it can sometimes take 1-2 years before PFS results become available. To avoid this and conduct a prompt and timely study, the system should to be managed to allow only fully completed proposals to be selected as PFS-subject projects by the PFS committee. Also, once submitted, in principle, no changes to the project plan should be allowed. Compensation-related provisions in the PFS guidelines should also be revised to better reflect the current situation. The ratio of assessed values to market values of land has been quite low in Korea, and this is the partial reason behind the rapid hike in project site prices around the time of project establishment and growing gap between compensation costs as projects become delayed. Thus, PFS provisions regarding the land compensation ratio must be updated to reflect at minimum the actual conditions.

Summary

Other Research KOR A Study on Guidelines for Travel Demand Forecast

Part 1. Basic Directions for the Guidelines

I. Overview of the Study

　 1. Background and Purpose
　 2. Scope
　 3. Methodology

II. Current Status and Problems of Existing Travel Demand Analysis for PPP Projects

　 1. Examples of Travel Demand Guidelines
　 2. Problems of Existing Analysis of PPP Projects
　 3. Study of Korea Transportation Database (KTDB)

III. Basic Directions for Travel Demand Forecast Guidelines

　 1. General Process of Travel Demand Forecasting
　 2. Basic Direction for Step-by-Step Guide to Travel Demand Forecast

IV. Conclusions and Policy Suggestions

　 1. Conclusions
　 2. Policy Suggestions

Part 2. Guidelines for Travel Demand Forecast

V. Traffic Survey and Analysis

　 1. Overview of Traffic Survey
　 2. Road Traffic Survey
　 3. Intersection Traffic Survey
　 4. Traffic Facilities Survey
　 5. Speed and Delay Survey
　 6. Traffic Behaviour and Preference Survey

VI. Review of Preceding and Related Plans

　 1. Overview
　 2. Conformity with Preceding Plans
　3. Review of Transportation Facilities Plans
　 4. Review of Housing Development and Industrial Complex Development Plans

VII. Current Status and Forecast for Social·Economic Indicators

　 1. Overview
　 2. Data Collection for Social·Economic Indicators
　 3. Incorporating Housing and Industrial Complex Development Plans
　 4. Forecast of Social·Economic Indicators

VIII. Origin/Destination (O/D) Data and Network Establishment

　 1. O/D and Network
　 2. Calibration and Validation

IX. Travel Demand Forecasting

　 1. Overview of Travel Demand Forecasting
　 2. Traffic Generation
　 3. Traffic Distribution
　 4. Mode Choice
　 5. Traffic Assignment
　 6. Documents for Submission

X. Toll-based Travel Demand Forecast

　 1. Overview of Toll-based Travel Demand Forecast
　 2. Review of Method for Toll Charge
　 3. Toll Determination
　 4. Demand Forecast according to the Level of Toll
　 5. Analysis of Toll Elasticity
　 6. Toll Appropriateness Review
　 7. Analysis of Travel Demand when Toll is Charged

Summary

Working Paper Infrastructure Development and Its Financing in Korea

This paper attempts to provide the past and current trends
of infrastructure development and financing in Korea. Section Ⅱ
explains the relationship between economic development and
infrastructure investment. In Section Ⅲ, several characteristics of
infrastructure financing is described. Section Ⅳ illustrates the
future infrastructure projects in preparing for the 21st century,
and Section Ⅴ discusses the methods for their resource
mobilization. The issue of international cooperation among the
APEC member countries is included in the final section.

(※서문에서 발췌한 내용임)

Summary

Policy Study The Current Potable Water Situation and Home Water Use Pattern in Rural Korea

As pointed out in the beginning, the piped water supply rate
is currently much higher in rural areas than in urban
areas--particularly rapidly growing small and medium size cities.
The low piped water supply rates in urban areas are due mainly
to the inability of water supply system expansion to match the
rapid increase in water demand. The capacities of the existing
water supply systems are inadequate to the needs of the current
population in most urban areas.

In many cases, existing urban piped water system have
deteriorated with further aggravates their undercapacity. The
rapid increase in water demand in Korean cities is attributable
not only to rapid population increase but also to per capita
increases in water consumption increase in water consumption
paralleling the rising standard of living in recent years.

While the piped water supply rates in urban areas are
chiefly determined by supply side constraints, the rates in rural
areas have been largely determined by demand-side factors,
particularly the characteristics of rural residents. In urban areas,
access to the piped water supply system has become an
essential necessity of life because of both the limited availability
of alternative water sources and the worsening pollution of these
sources. Unlike in urban areas, the use of piped water in rural
areas is still largely a matter of preference than a necessity.
Industrial pollution has not yet so widely and deeply permeated
the existing ground water sources in the rural survey areas, and
this remains sufficient to serve current demand and continue to
be of generally good quality. In other rural area, however,
pollution of ground and surface water by industrial wastes,
fertilizer, herbicides, and biological contaminants is already a
serious problem.

For these reasons, the piped water supply rates in the rural
areas are generally determined by the socio-economic
characteristics of rural households and their preferences. The
average piped water subscription rates differ average among
household income groups, between farm and non-farm rural
households by the educational level of the housewife, and
between households with and without private water sources etc.
The survey findings indicate that the subscription rate is higher
for upper household income group than for lower income groups,
higher for non-farm households than for farm households, higher
for households where the housewife enjoys a higher level of
education than where her education is more limited, and so on.

The establishment of piped water systems in tradition -
oriented rural areas has brought about concomitant impact at the
individual household level as well as at the community level.

On the one hand, the piped water systems have considerably
improved public health through a substantial reduction in the
incidence of illness and death due to water-borne diseases
among community residents. On the other hand, at the individual
level the rural population has directly benefited from improved
personal hygiene, and the saving of effort and time formerly
required to carry water, etc. The rural residents have also
indirectly benefited from changes in home life style that have
followed upon the installation of piped water systems.

In conclusion, from the general perspective of modernization,
the construction of piped water systems may be viewed as the
introduction of a modern innovation into tradition-oriented rural
areas, and the gradual increase in piped water use in rural areas
may similarly be regarded as the adoption of a modern
innovation by rural people. In this regard, changes in social
values and individual attitudes must be promoted to accelerate
behavioral changes among the target population in the context of
specific development programs such as the rural potable water
program. It is noteworthy that the CARE education program
proved to have strongly affected the piped water subscription
rates and consequent changes in water use facilities and water
use habits.

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