KDI - Korea Development Institute - RESEARCH - Research Areas - Public and Private Infrastructure Investment

Summary

Research Monograph KOR A Study on Local Acceptance of Renewable Energy Installations: Focusing on Externalities

By providing externality estimates, and analyzing the determinants of the time period for renewable project preparation, this study aims to contribute to rationalizing measures for improving the local acceptance of renewable-energy power plants. To that end, the analysis is divided into three main parts. Chapter 2 reviews contemporary literature to identify the elements that form local acceptance and summarizes Korea’s key policies in relation to local acceptance before presenting two major empirical analyses. Chapter 3 quantitatively estimates the externality of renewable energy capacities―a source of many community-level complaints―in order to provide empirical findings for the rationalization of regulations and incentives. Chapter 4 empirically analyzes the causes of delays during a project preparation period, and verifies the impact of factors that form local acceptance, including the externalities. Based on the above analyses, Chapter 5 summarizes the results and draws on the policy implications.

Chapter 2 examines preceding studies and finds the main determinants of local acceptance of renewable energy capacities to be 1) the costs of negative externalities borne by individuals and; 2) fairness issues with respect to spatial proximity and fair procedures. This is followed by a review of major policies designed to improve local acceptance which are divided into three main types: i) site standards such as separation distance regulations implemented by local governments; ii) compensation strategies for local residents who are directly affected including support programs under the Act on Assistance to Electric Power Plants-neighboring Areas and the benefit-sharing schemes at individual power plant projects; and iii) project procedures such as locating planning systems that aim to guarantee fairness. Reviewing these policies, this chapter confirms that, in order to enhance the effectiveness of relevant measures designed to improve local acceptance, it needs to understand the factors that cause delays in project planning as well as on the negative externalities on areas near plants.

Chapter 3 attempts to estimate the scale of the externalities through the difference-in-differences method under the hedonic model after identifying negative externalities from solar and wind plants, respectively. In this analysis, the treatment effect on housing prices is defined as the effect of the ‘aggregate capacities within a 2km of each house at the time of its transaction.’ The unique housing transaction dataset, covering the period 2006-2019, is used, as well as the size and location of renewable plants in operation during the period. To minimize possible interference from other energy sources, the regional scope for the estimation was narrowed to area where each type of plants is concentrated: Jeollabuk-do, Jeollanam-do, and Gwangju-si for solar farms, and Gangwon-do, Gyeongsangbuk-do, and Ulsan-si for wind farms. Key analysis findings confirmed that both solar and wind capacities produced negative externalities in the vicinity. In addition, the effective radius and size of the externalities were found to vary from each other.

Chapter 4 outlines the typical process of large-scale renewable energy projects, including licensing/permits. As a new attempt, a survival analysis was carried out based on the information on the duration of the project preparation―the time period taken to start operations after being permitted. In doing so, explanatory variables reflecting the determinants of local acceptance are set where, in particular, based on the analysis results of Chapter 3, explanatory variables for the environmental impacts are included. The analysis utilized the data on project details and related regional characteristics of 390 solar and wind projects of which installed capacities are over 3MW and for which business permits are obtained during 2004-March 2020. According to the analysis higher capacities entail more delays, and this pattern can be observed in both solar and wind projects. In the case of large-scale solar energy projects (e.g., capacities exceeding 50MW), it was confirmed that the preparation period takes significantly longer when there are more housing within the 2-5km radius which has little relevance to direct externality.

The policy implications are summarized in Chapter 5. Factors that have a major impact on the local acceptance of renewable energy projects can be largely divided into i) ‘negative externalities that occur disproportionately according to proximity’ and ii) ‘fairness in procedures related to community participation,’ where the latter is associated with broader geographic proximity. To substantially improve local acceptance, a dual strategy can be useful. It entails government supports that compensate environmental effects for local residents who are directly exposed to the externalities, in collaboration with benefit-sharing schemes that induce participations of local residents with a wider geographical area. More specific policy suggestions are two-fold: i) support programs for neighboring areas under the Act on Assistance to Electric Power Plants-neighboring Areas need to provide concentrated assistance to a narrower scope of targets than the current 5km. In the case of the benefit-sharing approaches, participation should be facilitated by sharing necessary information on the revenue generation mechanism and by broadening the spatial scope eligible for participation.

Summary

Policy Study KOR Political Economy of Public Investment Projects

In this study we show that a politician’s local public good provision such as large-scale public projects funded by central government has positive impact on his reelection. This result confirms widely-held belief that hosting large-scale public projects is effective for electoral campaign. It also implies that politicians are trying to attract large-scale public projects to their own electoral districts for their political interests. Hence decision on whether to invest in a large-scale project and its location is much more likely to be affected by political interests. Ideally such a decision must be objective and based on which project and location is most effective and efficient to achieve policy goal. More importantly, it should not be based on personal interests. In order to reduce excessive competition among local governments and minimize unnecessary political influence, we suggest the following institutional changes: central government needs to (1) enhance fiscal accountability of local politicians, (2) increase cost share ratio of large-scale public projects by local government depending on project characteristics, (3) require detailed financing plan for local government’s share.

Summary

Policy Study KOR Analysis on Determinants of Winner in Public Procurement Auction

The present study tries to identify determinants of winner in public procurement auction. In most public procurement auction systems, such as turkey, qualification, and BTL(build-transfer-lease), evaluation of a bid is not limited to price factor, rather applied to non-price factor. Recently multi-dimension auction theory has been developed to analyze those auction systems. Theoretically, scoring auction which evaluates price and non-price factors at the same time turns out to be superior to price competition after pre-qualification. However there is explicit limit to apply this result to practical operation.

Qualification is one of multi-dimension procurement auction systems in Korea, which covers projects less than 30 Billion KRW. Empirical result shows that price factor is the main determinant of winner in qualification. However, current qualification system is criticized since non-price factor has negligible effect in determining winner while score in price factor tends to be given randomly. This fact indicates that improvement of current qualification system should be needed.

In the case of turnkey, both price factor and non-price factor have significant effect on determining winner. Under turnkey system, collusion among bidders are possible and several collusion cases have been detected. If weight of score on price factor were increased, then possibility of collusion would be decreased. As score in non-price factor is given by qualitative evaluation of evaluators, decreasing weight of score on non-price factor could enhance transparency and fairness in evaluation process.

Under BTL evaluation system, both price factor and non-price factor are determinants of winner or of preferred bidder. Interestingly, score in price factor and that in non-price factor are positively correlated, which indicates that a bidder with high score in price factor tends to get high score in non-price factor in bidding stage.

This study provides empirical results on multi-dimension procurement auction and explains bidding behavior during bidding process. Further research should focus on linking bidding behavior in a certain procurement system with purpose of that system.

Summary

Policy Study KOR Rationalization for Decision-making on SOC Investment(Ⅱ): Risk Analysis of Estimated Subway Ridership

This study analyzes the risk of subway ridership in the metropolitan areas and seeks for measures that take into account such risks. To do this, risk of estimated ridership is first analyzed according to the changes of given origin-destination demand, then compares the ridership estimation of the feasibility study with the real ridership.

The result shows that the estimation risk (the dispersion of estimated ridership) is very high and the risk of the station ridership is much higher than that of whole line. Therefore, this study suggests interval estimated ridership instead of point estimated ridership in the appraisal of the construction of subway.

Other major studies include factual analysis on the risk of forecasted ridership centering on the differences between estimation before opening the subway and the real ridership after the subway has been opened to the public. The analysis shows that the average real ridership is only 26% of the forecasted ridership after the subway has been opened to the public. The subway constructed in the local metropolitan area is found to have much difference, while the Seoul metropolitan area shows that the average real ridership is 32% of the forecasted ridership, meaning the forecasted ridership in the local metropolitan area tends to be more optimistic. However, as basic data for forecasting ridership accumulates and analysis method develops with time, the accuracy of forecasting increases.

Based on the confirmed factors of estimation risks, this study seeks for consideration methods for the ridership estimation risk in feasibility studies. In order to avoid the inclination of optimistic assumption and implementation of the project, a measure is provided to systematically include objective outside views regarding ridership demand estimation in feasibility studies. Also, the sensitivity analysis of estimation of ridership demand is suggested.

The transparency of the estimation process is also emphasized. Recognizing that the accuracy of estimation has its own fundamental limitations, it is important to make the estimation process open and free for discussion.

Lastly, this study suggests management measures for risks of estimated ridership In order to reduce potential risks in the future, it is necessary to strengthen training programs for ridership demand analysts in order to heighten the confidence on estimation results, and to provide opportunities for related organizations to share the importance of the risk analysis of the forecasted ridership demand.

Summary

Policy Study KOR A Study on Valuation Measurement of Non-market Goods: Focusing on the Bid Design of Double-bounded Dichotomous Choice Contingent Valuation Method(CVM)

The contingent valuation method (CVM) is a technique which calculates the economic value of intangible goods in the manner of relative easiness and effectiveness. However, there are critics arguing that the result might be somewhat detached from the actual preference in reality and that the valuation result suggested by respondents on non-market goods could turn out differently depending on the survey design. This study examines the bid price setting of the double-bounded dichotomous choice CVM. To put it another way, this study suggests the following stage-by-stage methods: 1) to set the first lowest bid and the first highest bid within a certain scope; 2) to divide the amount between the highest and the lowest into a few temporal sections; 3) to compare and analyze the methods between i) providing respondents with the prices of each sector as the first bid and ii) calculating the optimal bid to be suggested to respondents, from the perspective of the estimated willingness to pay; and 4) to mix all bids.

According to the simulation analysis, a higher standard deviation of the pre-research data accompanies not only high bias on the willingness to pay but also a significantly high distribution on it, regardless of the bid suggestion methods. In other words, as the standard deviation of the pre-research data grows higher, the bias and distribution on the estimated willingness to pay tends to increase, but at the same time the bid price setting method of suggesting the optimal bid price turns out to be relatively superior, indicating its higher effectiveness in estimating the willingness to pay. However, on the bias side of willingness to pay, no meaningful differences are found depending on the suggestion methods.

It is possible that the bid price itself is wrongly set or set without sufficient available information on the concerned business. Despite that—the bid price might cause a decisive impact on the effectiveness of the willingness to pay—no opportunities for correction is given. Considering this study was conducted one time only and collectively, this study suggests a step-by-step research method which in sequence corrects the bid prices, a critical determinant to the effectiveness of the estimated willingness to pay.

Summary

Policy Study KOR Analysis on the Life-cycle Cost in Public Procurement Auction: Focusing on Road Projects

It is known that the costs of PPP projects could vary depending on different bidding systems. Such result is often found in the study of the successful bid rate on the procurement phase. As for the PPP projects, however, their costs continue to grow as the project goes through the phases of procurement, construction, and operation. This is the reason that in-depth studies should be conducted on the total life-cycle of PPP projects. This study attempts to look into the life cycle cost of road projects whose data accessibility is easy and the business is considered to be relatively standardized.

As for road projects, it is analyzed that the lowest bid system recorded the successful bid rate of 63~64%, while 87% for the turnkey and 83% for alternative bidding system, indicates that there are considerable differences depending on the type of bidding and awarding systems. From the procurement phase to the construction completion phase, the project cost has risen by 31.84% on average, and when excluding the amount of price fluctuation, the figure reached 27.98%. The costs of projects subject to the lowest bid system or the VfM test change after the construction is completed, and in this case, their adjusted rate of successful bid, which considers the changes in the total project cost, is estimated to register at 80.6%~81.8% or at 95.9%~99.7%. Considering that projects that are subject to the turnkey or alternative bidding systems have strictly limited scale of a change in their project costs, it is estimated that the differences in the successful bid rate depending on the type of bidding and rewarding systems will turn out to decrease significantly. Meanwhile, with the focus on the maintenance costs of road projects, the study analyzes the expense level which is observed on the operation phase. The result shows that the maintenance cost level during the period of operation phrase is on par with the level of the total project cost-including construction costs spent until the completion. Such a result implies that the management of project and its cost is necessary for PPP projects throughout the total life-cycle of the project including the operation phase.

This study is significant in that, for the first time, it attempts to analyze the total life-cycle cost using available data. It is, however, also true that the analysis has its own limitations due by building up DB of the total project cost,to imperfect data. It will be necessary to come construction period, etc. up with basic reference for policy improvement by building up DB of the total project cost, construction period, etc.

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