Lessons from PPP Fiscal Stimulus in Korea
Transcript of Lessons from PPP Fiscal Stimulus in Korea
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2011/FMP/CON/010 Session 4
Lessons from PPP Fiscal Stimulus in Korea
Submitted by: Korea Development Institute (KDI)
Conference on the Framework and Options for Public and Private Financing of
Infrastructure Washington, D.C., United States
22-23 June 2011
Jay-Hyung Kim ([email protected])
Public and Private Infrastructure Investment Management Center (PIMAC)
Korea Development Institute (KDI)
APEC Finance Ministers’ Process Conference on
The Framework and Options for Public and Private Financing of Infrastructure
June 22-23, 2011, Washington DC
Lessons from
PPP Fiscal Stimulus in Korea
1. Global Financial Crisis and Fiscal Stimulus
2. Fiscal Stimulus and PPP
3. PPP Revitalization Initiatives
4. Lessons Learned
• Korean economy is showing signs of a continued recovery, pulling
out from the serious recession caused by the global financial crisis.
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GDP and Manufacturing Sector Growth Rates (at 2005 Constant Prices)
Source: KDI, Monthly Economic Trends (March, 2011)
1. Global Financial Crisis and Fiscal Stimulus
Economic Recovery in Korea
2
• Estimated size of fiscal stimulus package
An official report from the Ministry of Strategy and Finance (April,
2010) confirmed that the size of fiscal stimulus package was 38.8
trillion KRW (3.6% of GDP) in 2009.
It also announced that additional 17.1 trillion KRW (1.5%) would be
used in 2010.
• The fiscal stimulus package consists of various fiscal items but
seems to concentrate more on social-overhead-capital (SOC)
investment and support for SMEs and the self-employed.
These are the items known to have bigger or more persistent
multiplier effects.
• Simultaneous implementation of the expanded fiscal expenditure
appears to have contributed to a recovery of the economy.
Fiscal Stimulus Package Appears to Contribute the Recovery
1. Global Financial Crisis and Fiscal Stimulus
3Source: KDI, Monthly Economic Trends (March, 2011)
Trends of Construction Investment
• During the period of financial crisis in 2008-2009, other construction
investment including civil construction by the government increased
sharply, while private building construction decreased abruptly.
1. Global Financial Crisis and Fiscal Stimulus
Trends of Construction Investment
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• Proportion of PPP investment to government investment in
infrastructure was merely 0.5% in 1997, but dramatically increased to
18.4% in 2008. In 2009 after Global Financial Crisis, the proportion
decreased to15.4%, and is expected to be around 16.3% in 2010.
Footnote: 2010 estimate is the government forecasted figure.
Source: Ministry of strategy and Finance
2. Fiscal Stimulus and PPP
Trends of PPP investment to government investment
BTO
BTO Total BTL TOTALNational Projects
Local Covernment
Projects
Under Operation45
(233,301)
86
(38,133)
131
(271,433)
214
(85,252)
345
(356,685)
Under Construction29
(198,054)
14
(12,066)
43
(210,120)
119
(91,078)
162
(301,198)
Preparing
Construction
9
(78,501 )
5
(5,460)
14
(83,961)
35
(21,082 )
49
(105,044)
Negotiating19
(112,366)
15
(18,192)
34
(130,558)
22
(50,165)
56
(180,722)
Inviting Participants -5
(5,870)
5
(5,870)
11
(9,514)
16
(15,384)
TOTAL102
(622,222)
125
(79,721)
227
(701,943)
401
(257,091)
628
(959,034)
* PPP projects that were publicly announced as of end of September 2010
PPP Projects by Implementation Scheme and Phase
• Total PPP Projects: 628 publicly
announced projects with total investment
amount of 95.9 trillion KRW.
• Concession Awarded: 556 projects that
reached concession agreement with total
investment amount of 76.3 trillion KRW.number of projects
(amount in 100 million KRW)
• under operation: 345 worth 35.7 trillion KRW
• under construction: 162 worth 30 trillion KRW
• preparing construction: 49 worth 10.5 trillion KRW
• BTO projects: 227 worth 70 trillion KRW
• BTL projects: 401 worth 25.7 trillion KRW
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Status of PPP Projects (BTO and BTL, as of September 2010)
2. Fiscal Stimulus and PPP
Public Announcement of PPP Projects
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• Total 628 PPP projects were publicly announced
17 PPP projects in 1999 (implementation as unsolicited projects was first introduced),
which increased to 20 and to 25 in 2000 and 2001, respectively.
Number of PPP projects increased drastically to 92 in 2005 (implementation as BTL
projects was first introduced) and to 136 in 2006, but are in decrease since 2007.
Nu
mb
er o
f Pro
jects
Introduction of BTL
Introduction of unsolicited project proposal
Total Public
Announcement
BTO Project
Announcement
BTL Project
Announcement
* PPP projects that were publicly announced as of end of September 2010
2. Fiscal Stimulus and PPP
Public Announcement of PPP Projects by Year
• To ease the financial burdens from the Global Financial Crisis, the first
revitalization initiative, which revised the PPP Basic Plan, was announced in
February 2009.
• Reducing Financial Burdens : Ease the financial burdens on concessionaires by lowering the equity
capital requirement ratio.
Expand the upper limit of the payment guarantee provided by the
Infrastructure Credit Guarantee Fund by 50% to help ease difficulties in
debt financing.
Ease regulation in case of change in composition of equity investors:
projects that do not have MRG provisions are now exempt from refinancing
profit sharing obligation in the case of simple changes in composition of
equity investors.
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Classification Before After
Build-Transfer-Operate (BTO) 25% 20%
(when financial investors account for 50% or more) (20%) (15%)
Build-Transfer-Lease (BTL) 5% - 15% 5%
Lowering Required Equity Capital Rato
3. PPP Revitalization Initiatives
The First Revitalization Initiative in February 2009 (Ⅰ)
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• Easing Burdens from Abrupt Changes in Interest Rates:
For BTO projects, when there is a change of 0.5 percentage point or more
in the base interest rate, the government can make up for the change. The
level of compensation depends on the extent of interest rate fluctuation.
For BTL projects, the government has reduced the period for readjusting
the benchmark bond yield from 5 years to 2 years, while replacing or
redeeming 60%-80% of excesses or shortages based on the interest rate
gap of 50 basis points between government bonds and bank bonds.
• Shortening of the Project Implementation Periods:
To prevent delay in the negotiation period, competent authorities are
required to complete the settlement of various points of contention and
civil petitions through consultation with related agencies.
3. PPP Revitalization Initiatives
The First Revitalization Initiative in February 2009 (Ⅱ)
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• The government further announced in August 2009 measures to
create an enabling environment for active private investment through
PPPs.
• Improvement of PPP Project Structure:
Revitalize supplementary and ancillary projects. The private
concessionaire needs to be provided with a motive to maximize the use of
supplementary and ancillary projects in connection with the main projects
so that user fees can be lowered.
Permit special cases of estimating compensation for termination of
agreement.
Introduction of new investment sharing method with abolishment of
minimum revenue guarantee (MRG). Under the new risk-sharing structure,
the government shares investment risk with the private company by
compensating the base cost of the project, calculated as the sum of
private investment cost and the amount of shortfall in the actual
operational revenue compared to the share of investment risks by the
government.
3. PPP Revitalization Initiatives
The Second Revitalization Initiative in August 2009 (Ⅰ)
• Improvement of Conditions for Funding :
Improve investment environment at financial institutions and others by
reducing burdens caused by diverse regulations and restrictions of
financial institutions.
Regulation of refinancing is eased in order to facilitate financing. As a
temporary measure, refinancing gains will not shared with the government
if the following conditions are satisfied: ⅰ) the expected ROI after
refinancing is smaller than ROI in the financial model of concession
agreement, ⅱ) no MRG is provided ; and ⅲ) the level of user fee is
lower than 1.2 times that of government procured projects.
• Enhancement of Reliability
To reduced MRGs through refinancing, a system for requesting
refinancing by the competent authority needs to take place.
• Expand Eligible Infrastructure Types for Green-Growth Fields:
renewal energies, etc.
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3. PPP Revitalization Initiatives
The Second Revitalization Initiative in August 2009 (Ⅱ)
• After the First and the Second Revitalization Initiatives, the government
worked out the Third Initiative to further promote private financing for PPPs.
• Easing the regulations on termination payment, equity capital ratio, and
refinancing:
Along with a temporary arrangement for termination payment as one of the special
cases in the Second Initiative, the Third Initiative adjusted calculation method of
termination payment from the declining balance depreciation to the straight line
depreciation.
To further ease the regulation on equity capital requirement, the government
allowed the concessionaire to submit construction performance bond in place of
equity within the limit of 5%.
To ease the regulation on refinancing profit sharing (50:50), public share shall be
less than 50% in cases of projects without MRG.
• Diversifying the Type of Infrastructure Fund:
Expand the type of infrastructure fund from mutual fund to investment trust type.
• Establishing the Dispute Mediation Committee for PPP projects:
PPP Act revision is currently under review by the National Assembly.11
The Third Revitalization Initiative in December 2010
3. PPP Revitalization Initiatives
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4. Lessons Learned (Ⅰ)
2005 2006 2007 2008 2009 2010.9
BTO 9(16) 11(12) 18(17) 14(15) 13(10) 14(0)
BTL 83(8) 125(66) 76(104) 60(64) 46(89) 11(37)
Total 92(24) 136(78) 94(121) 74(79) 59(99) 25(37)
• The effects of fiscal stimulus packages have contributed to
moderating the serious contraction in the economy.
• The active role and policy support of the government, shown in a
series of PPP Revitalization Initiatives, have demonstrated a strong
commitment to the PPP program, thus strengthening the private
sector’s confidence in participation.
• Still some decline in new PPP announcements and delay in financial
closure.
Unit: number of new project announcements (number of concession awards)
Trends of New PPP Projects and Concession Awards
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• Less trouble in financing was found in BTL (low-risk, low-return)
than in BTO (high-risk, high-return) procurement.
• Interest rates and access to financing were identified as the main
channels through which the financial crisis has affected or is
expected to affect PPP projects.
• A new model of PPP scheme, such as a combination of BTO and
BTL type, is currently under review to provide better value for
money.
4. Lessons Learned (Ⅱ)