Managing Public Investment Projects

2005. 5. 24.
Korea Development Institute
Public and Private Infrastructure
Investment Management Center
Hyeon Park (hpark@kdi.re.kr]
Management of Public Investment Projects in Korea

1. Introduction Contents 3. PFS Implementation 2. PFS (Pre-Feasibility Study) Overview 5. Case Study 1: PFS on Dang-jin ~ Cheon-an Freeway Construction Project 7. Further Issues in PFS 6. Case Study 2: PFS on Light Rail Transit Project in Kang-Nam Gu, Seoul 4. PFS Methodology

Introduction
Establishment of Integrated Public Investment Management
A Pre-feasibility study (PFS) was introduced in April 1999 as a public sector reform initiative in the wake of the financial crisis of 1997 and 1998.
Since the 1970s, line ministries have implemented Feasibility Studies to get government budget funding.
Criticism of feasibility studies for the Seoul-Busan Express Rail project and other large-scale construction projects.
A Total Project Cost Management (TPCM) System was established in 1994.
During the design and construction phases of a project, the change in construction costs is monitored by the Ministry of Planning and Budget.
If the total costs of a project increase by more than 20%, the feasibility study is re-inspected. In April 2005, re-inspection guidelines were established
Performance evaluations for several road construction projects have been recently conducted.

1. Introduction (2)
Public Investment Management Process
Planning PFS (Pre-Feasibility Study) Draft Design Operation/ Maintenance Blueprint Design Feasibility Study Land Acquisition/ Construction Ex Ante Intermediate Ex Post Total Project Cost Management Re-inspection of Project Feasibility Performance Evaluation

2. PFS Overview
Purpose of PFS
PFS aims to enhance fiscal productivity by launching large-scale public investment projects based on transparent and objective ex ante project evaluations.
Coverage of PFS
All new infrastructure projects with total costs amounting to 50 billion Korean Won ($50 Million USD) or more are subject to PFS.
Local government and private investment projects are subject to PFS if central government subsidies exceed 30 billion Won.
Exemptions from PFS
Legally necessary facilities
Rehabilitating facilities
Military facilities

PFS Procedure
2. PFS Overview(2) Submit PFS projects candidate Line Ministry Ministry of Planning & Budget KDI Select PFS Projects Request PFSs Organize Teams/ Conduct PFS Submit PFS Report Announcement Make Investment Decision Feasibility Study or Stop

2. PFS Overview(3) Comparison of PFS and Feasibility Study 300 million - 2 billion won Depending on the project 80 – 100 million won Approximately 6 months Research fund/duration Spending Agency (Line Ministries) Ministry of Planning and Budget Evaluation Ownership Various detailed analyses including soil analysis and analysis of engineering techniques. Detailed analysis is not required. Replaced by expert's consulting. Technical feasibility analysis Not applicable except for detailed environmental impact assessment and analyses of some related issues that have significant expected impacts Examination of macro aspects of the project, such as necessity of the project in a national-economy perspective, correspondence with higher level plans, and balanced regional development. Policy Analysis Precise and detailed analyses to decide whether construction should be started. Analysis focuses on a given alternative. Broad analyses to decide whether the next phase of detailed feasibility study is necessary. Finding alternative way to achieve the project goal. Economic Analysis Detailed analyses of economic and technical feasibility before beginning construction of the projects that have already met the criteria of the preceding PFS An overview survey preceding a detailed feasibility study aimed at budget planning and setting priorities Definition Feasibility Study PFS

2. PFS Overview(4)
<Table 1> Number of PFS Conducted
Evaluation Results
About half of the projects were evaluated as being ‘Not-Feasible.’.

3. PFS Implementation
Pillars of PFS Implementation
Objectivity, consistency, and transparency
Development of Evaluation Guidelines
Detailed description of methodology and procedures of PFS implementation
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

3. PFS Implementation (2)
Multi-disciplinary Research Team
Three or more organizations are involved including KDI
e.g. KDI (Project manager), University professors (Transportation demand analysis), and Engineering firms (Cost estimation)
Induce balanced decision-making
PFS Committee
Members: Staff from the MPB and line ministries, PIMAC, the PFS team, and field specialists
Open discussion on mid-term and PFS final reports

4. PFS Methodology
[Figure 1] PFS Flowchart
Policy Analysis Balanced Regional Development Regional Economic Impact Consistency with Higher-level Plan Environmental Impact Assessment Regional Preference Financial Feasibility Project Proposal Background Study Review of statement of purpose Collect Socio-economic, geographic, and technical data Brainstorming Raising issues concerning PFS Economic Analysis Demand Analysis Cost Estimation Benefit Estimation Cost-Benefit Analysis Financial Analysis Multi-Criteria Decision Analysis (AHP) Overall Feasibility

4. PFS Methodology (2)
Economic Analysis
Methodology: cost-benefit analysis
Criteria: B/C, NPV (Net Present Value), IRR (Internal Rate of Return)
Social Discount Rate: 6.5%
Duration: Roads, rail and seaports (30 yrs), Dams (50 yrs)
Tax is excluded but salvage value is included
Benefit of road project
Valuation of changes in route, and travel speeds due to the project
Savings in travel time, vehicle operation costs, traffic accidents, and environmental costs (air and noise pollution)

AHP (Analytic Hierarchy Process)
A multi-criteria decision-making approach
Combines quantitative and qualitative criteria for decisions under a hierarchical structure
A group decision support system
Characteristics
Hierarchical structuring
Pair-wise comparison

[Figure 2] AHP Structure of PFS (Prototype)
Pre-Feasibility Economic Analysis Policy Analysis Project-specific Criteria Common criteria Balanced Regional Development Funding Source Availability Regional Preference Regional Economic Impact Environmental Impact Assessment Consistency with H-L Plan PSC 1 PSC 2 PSC 3 PSC 4

Dang-jin ~ Cheon-an Freeway Construction
Objectives
To relieve traffic congestion
To improve accessibility to Cheong-ju International Airport
Project Scope
Length: 45.0 km (4 lane)
Estimated Total Cost: 900 Billion Won
Construction Period: 2008~2013
5. Case Study 1

Site Map
5. Case Study 1 (2)

Route Map
5. Case Study 1 (3)

Demand Forecast
10,000~40,000 vehicles/day (2014)
5. Case Study 1 (4)

Estimate of Benefits
Estimating changes in choice of route and travel speeds
Savings in travel time, vehicle operating costs, traffic accidents and environmental costs (air and noise pollution)
Estimate of Costs
Estimating Construction Costs, Land Acquisition Costs, Accessory Costs, Contingency Costs, Operating Costs
Economic Analysis
5. Case Study 1 (5) 10.2 10.9 IRR (%) 152.9 1.26 11,271 32,966 Route 2 213.1 1.36 11,791 37,233 Route 1 NPV (Billion won) B/C Costs (Billion won, Not Discounted) Benefits (Billion won, Not Discounted)

Policy Analysis
AHP
Weights on economic analysis & policy analysis results
Final results
5. Case Study 1 (6) Economic Analysis Policy Analysis Average 0.614 0.386 Person 1 0.600 0.400 Person 2 0.700 0.300 Person 3 0.550 0.450 Person 4 0.600 0.400 Feasible Non-Feasible Average 0.779 0.221 Person 1 0.771 0.229 Person 2 0.804 0.196 Person 3 0.799 0.201 Person 4 0.757 0.243

6. Case Study 2
Light Rail Transit (LRT) Project in Kang-Nam Gu, Seoul
Construction of a Light Rail Transit (LRT) System in the Kang-Nam Gu Area, a sub-center in southern Seoul.
Objectives
Relieve traffic congestion and mitigate air-pollution emission
Provide public transportation to manage travel demand
Enhance high-tech image of the international business district
Length: 4.9km; No. of Stations: 13
System: Seat-type monorail / AGT (Automated Guideway Transit)
Cost Estimate: 300 Billion Won / 240 Billion Won

6. Case Study 2 (2)
Route Map of LRT

6. Case Study 2 (3)
Seated-Type Monorail

6. Case Study 2 (4)
AGT (Automated Guideway Transit)

6. Case Study 2 (5)
Travel Demand
80-90 thousand daily passengers
Summary of Economic Analysis
(Billion Won)
System Benefits Costs B/C NPV Monorail 180.4 256.9 0.70 -76.4 AGT 180.4 192.6 0.94 -12.2

6. Case Study 2 (6)
Conclusion
This project is not economically feasible (B/C <1).
The major beneficiaries of this project would be local residents in Kang-Nam Gu, which is the wealthiest local government in Korea and already has a well-developed subway system. Hence, central government subsidies for this project would widen regional disparities between Kang-Nam Gu and other areas in Seoul as well as the rest of Korea.
The research team recommends ‘not to provide’ a central government subsidy for this project.

Expansion of PFS Coverage
Continuous Standard Guidelines Revision
Database Building
7. Further Issues in PFS

Managing Public Investment Projects

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