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SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development
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SMART International Symposium for Next Generation Infrastructure: Infrastructure planning and financing in Korea - Insight to economic development

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A presentation conducted by Dr Kang-Soo Kim, Executive Director, Korean Development Institute (KDI), Republic of Korea. Presented on Wednesday the 2nd of October 2013. …

A presentation conducted by Dr Kang-Soo Kim, Executive Director, Korean Development Institute (KDI), Republic of Korea. Presented on Wednesday the 2nd of October 2013.

Infrastructure development has played an important role in achieving a high rate of economic growth and improving
the quality of life for Koreans. Empirical studies show this to be true, and that such developments have produced a high rate of economic return. This presentation chronologically reviews the infrastructure development in Korea and focuses on how the transport infrastructure development plan was linked to the country’s economic development plan. In particular, this presentation will provide insights on measures to tackle the lack of available resources for the infrastructure development. For example,
earmarked transport taxes, creation of special accounts and PPPs, which enhance Korean government’s fiscal flexibility will be introduced. This presentation will also
provide some experiences and lessons focusing on the infrastructure planning and financing for the infrastructure development.

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  • 1. ENDORSING PARTN ERS Infrastructure planning and financing in Korea an insight to economic development The following are confirmed contributors to the business and policy dialogue in Sydney: • Rick Sawers (National Australia Bank) • Nick Greiner (Chairman (Infrastructure NSW) Monday, 30th September 2013: Business & policy Dialogue Tuesday 1 October to Thursday, gue 3rd October: Academic and Policy Dialo www.isngi.org Presented by: Dr Kang Soo Kim, Executive Director, Korean Development Institute (KDI), Republic of Korea www.isngi.or
  • 2. INFRASTRCUTIRE PLANNING AND FINANCING IN KOREA - Insight to Economic Development DR. Kang-Soo Kim Executive Director Public and Private Infrastructure Investment Management Center (PIMAC), Korea Development Institute (KDI) Oct. 2013
  • 3. Part-01 Infrastructure Development and Economic Growth
  • 4. Infrastructure Development and Economic Growth  Infrastructure development has played an important role in achieving high rate of economic growth and improving the life quality of Koreans   Empirical studies indicate that infrastructure development has been contributing to the economic growth in Korea The infrastructure investments in the past represent higher rate of economic return than the growth rates of Korea’s economy  This presentation provides some experiences and lessons based on the planning and financing for the infrastructure development in Korea.   3 Economic Infrastructures  Today’s focus: Transport (Roads, Rails, Airports and Seaports)  Industrial parks, Power plants and dams, Telecommunication Social Infrastructures  Schools, museums, hospitals, public housing and social welfare facilities
  • 5. Infrastructure Development and Economic Growth  After the Korean war(1950~1953), the Korean economy began making solid recovery  The recovery was achieved by the assistance of foreign countries, which continued only for a couple of years (the primary source of funds were during the 1960s)  In May 1961, General Park Chung Hee gave Korea strong political leadership that drove to economic development  The economic development was based on the “Five-year Economic Development Plan”  The infrastructure development was tied to the economic development plan  The first Five-Year Economic Development Plan (1962-66) period  Focused on developing light industries and the country’s import substitution capacity  Infrastructure to support these activities included the construction of 275 kilometers of railways and several highway projects  Rail was the main priority 4
  • 6. Infrastructure Development and Economic Growth  The second Five -Year Economic Development Plan (1967-71) period  Sought to stimulate exports, which grew nearly 50 percent per year during this period  Investment in railways continued, and highway construction were accelerated  The Seoul- Busan Highway was constructed (1968~1970)  Priorities shifted from rail to road because the government thought that investment in new rail capacity was too expensive 5
  • 7. Infrastructure Development and Economic Growth  The third Five - Year Economic Development Plan (1972-76) period  Increasingly difficult to remain competitive in labor-intensive light industries  Korea shifted its focus to heavy and chemical industries  Government identified that new infrastructure are needed to support such industries as petro chemicals, steel, and ship building  The government decided to develop major industrial estates with new deepwater harbors, along the Southeastern coast near the ports of Pohang, Ulsan, and Masan. In addition, the port authorities initiated major projects in Incheon and Pusan  The government undertook comprehensive programs to develop the country's airports, seaports, highways, railways to serve these industries 6
  • 8. Infrastructure Development and Economic Growth  During the first half of the 1980’s Infrastructure investment remained fairly high   Initiated several measures to stimulate the economy and established a supplementary budget to increase investment in infrastructure (’86 Asian, ’88 Seoul Olympic) These measures pushed the economic growth rate to unprecedented double-digit levels  In the mid-1990s, major bottlenecks started and negatively affected Korea's economic performance  Due to the rapid motorization which resulted from income growth, Korea faced a serious road congestion problem, which caused high logistical costs 1970 1980 1985 1990 1995 2000 2005 2010 1,000 Vehicles 130 190 530 1,110 3,390 8,470 12,060 15,400 17,940 V(t+1)/Vt 7 1975 - 1.5 2.8 2.1 3.1 2.5 1.4 1.3 1.2
  • 9. Infrastructure Development and Economic Growth - Physical Capacity and Infrastructure Use 1973~1992 Type Road transport Paved roads (thousands of kilometers) Motor vehicles (thousands) Passengers (billions of kilometers) Freight (billions of kilometers) Rail transport Track (thousands of kilometers) Passengers (billions of kilometers) freight (billions of kilometers) Subways Length of system (kilometers) passengers (millions of kilometers) Port Port freightb (millions of kilometers) Air transport Passengers (millions) Freight (thousands of tons) 1973 1978 1983 1988 1992 Average increase, 1973-78 (percent) 7.8 13.5 21.3 34.2 47.6 11.5 9.5 9.9 8.6 165.0 384.0 785.0 2,035.0 5,230.0 18.4 15.3 21.0 26.6 32.0 57.0 74.0 85.0 83.0 12.2 5.3 2.8 -1.0 3.1 6.8 5.9 8.6 11.4 17.0 -2.8 7.8 7.3 5.5 5.8 6.1 6.4 6.5 1.1 1.0 1.0 0.0 10.7 20.1 21.7 26.0 34.8 13.4 1.5 3.7 7.6 8.6 10.9 11.6 13.8 14.3 4.8 1.3 3.5 0.8 n.a. n.a. 42.3 138.1 155.8 n.a. n.a. 26.7 3.0 0.14a 0.78 1.6 8.6 13.0 53.6 15.4 40.0 10.9 49.0 95.0 147.0 246.0 371.0 14.1 9.1 10.8 1.8 2.7 4.2 6.1 12.6 25.8 9.2 7.7 15.6 19.6 67.0 153.0 309.0 619.0 1,079.0 18.0 15.1 14.9 14.9 n.a.: Not applicable. a: 1974. b: Includes coastal and ocean shipping. Source: National Statistical Office (1993). 8 Average increase, 1978-83 (percent) Average increase, 1983-88 (percent) Average increase, 1988-92 (percent)
  • 10. Infrastructure Development and Economic Growth  The 1993~97 Five-Year Economic Development Plan Period   The Transport Tax Act (1993. 12.) and the PPP Act (1994. 8.) were legislated as solutions to the infrastructure gap Government developed an ambitious program to improve living standards and expand social overhead capital (transportation, distribution, and communication) as an attempt to address infrastructure gap   9 As a result of the continuous efforts of the government, the increase rate of investment in infrastructure has reached over 20% each year, which exceeded the growth rate of the national budget Notably, for the first time in 1997, the size of budget for infrastructure exceeded KRW 10 Trillion Ratio to annual budget Ratio to GDP
  • 11. Infrastructure Development and Economic Growth  Korea's infrastructure encountered other problems  Increase of investment in social welfare and others, difficulty in maintaining the investment expansion as in the past  Rapidly rising of construction costs (particularly for land acquisition and domestic labor) ; ex) land prices increased the cost of the highway network from US$4 million a kilometer in 1985 to roughly US$26 million a kilometer by 1990  Financial crisis of 1997 and 1998  Started to reform investment of infrastructure   10 Planning and cost management on infrastructure Revitalizing Public-Private Partnership
  • 12. Infrastructure Development and Economic Growth  From 2004, the increase in transportation budget rate began to be lower than the rate of increase for general accounting, and the investment budget for transportation facilities has turned to the declining trend Trend of rate of increase for transportation facilities budget (Unit: %) Classification 1993~2000 2000~2003 2003~2005 Transportation facilities investment 19.0 6.5 -3.0 General accounting 12.9 10.0 5.5 Source: Ministry of Planning and Budget, 2005 11
  • 13. Infrastructure Development and Economic Growth - Physical Capacity and Infrastructure Use 1999~2005  Between 1999~2005, road, airport, and port sectors of Korea increased respectively 2.6% ~ 4.1%, and 5.9% Trend of the Expansion of Transport Facilities Classification 2004 2005 Average rate of increase per year 97,252 100,278 102,293 2.63 % 2,778 2,778 2,923 2,968 6.44 % 14,254 14,232 14,234 14,246 14,224 2.29 % 74,230 74,506 79,027 80,240 83,109 85,101 2.57 % 3,119 3,123 3,125 3,129 3,140 3,374 3,392 1.4 % - - - - - 239 240 3,119 3,123 3,125 3,129 3,140 3,150 3,168 0.3 % 247 274 284 303 310 314 314 4.09 % 409,205 410,135 422,642 461,652 478,049 501,319 578,145 5.93 % 1999 2000 2001 2002 2003 87,534 88,775 91,396 96,037 2,041 2,131 2,637 National Highway (㎞) 12,418 12,413 Provincial road and others(㎞) 73,076 Total length Road Expressway (㎞) Total length Railway Express railway (KTX) General railway Airport Port 12 Frequency (1,000 times) Loading (1.000 tons) -
  • 14. Infrastructure Development and Economic Growth – The Trend (1970~2004) - Source: Korea Research Institute for Human Settlements, Estimating SOC stocks in construction and transportation sectors, 2007.3 13
  • 15. Infrastructure Development and Economic Growth – Government Expenditure by Category (Unit: trillion won, %) Growth rate Classification 2005 2006 2007 2008 2009 1. Social welfare & health 49.6 54.7 59.6 64.1 70.5 9.2  2. Education 27.6 29.1 31.1 33.8 36.3 7.1 3. Transportation and water resource 18.3 17.8 17.8 18.2 19.2 1.3  4. Agriculture, maritime, and fishery 14.1 14.4 14.7 15.2 15.8 2.8 5. Industry․Small & medium companies 11.9 12.4 12.6 13.0 13.4 3.0 6. Environmental protection 3.6 3.8 4.0 4.4 4.9 7.7 7. Culture․tourism 2.6 2.9 3.0 3.2 3.3 6.0 8. National defense expense (general accounting) 21.1 22.9 24.9 27.3 30.0 9.1 9. Public order·safety 9.4 10.2 10.6 11.1 11.7 5.7 10. Unification․diplomacy 2.0 2.7 3.0 2.9 2.7 8.0 11. R&D 7.8 9.0 9.6 10.3 11.1 9.2  12. National balance development (special balance accounting) 5.5 5.9 6.7 7.1 7.8 9.1 Source: Ministry of Planning and Budget, 2005~2009 National Financial Operation Plan 14
  • 16. Infrastructure Development and Economic Growth - Investment to GDP  In the recent 10 years, the Korean infrastructure investment ratio to GDP ranged between 3.3% to 4.5%  The average of infrastructure investment to GDP ratio in the recent 10 years is 3.95%  They were higher in 2009 and 2010; during these two years the government used fiscal policy to overcome global financial crisis Infrastructure Investment to GDP Ratio 5.0% 4.54% 4.5% 4.23% 4.08% 4.0% 3.77% 3.97% 3.77% 3.92% 3.92% 3.5% 3.34% 3.0% 2.5% 2004 15 2005 2006 2007 2008 2009 2010 2011 Source: Comprehensive PPP evaluation (2013) Infrastructure investment and GDP amounts are calculated with constant numbers in 2005 price 2012
  • 17. Infrastructure Development and Economic Growth - Infrastructure Achievements  Compared to G-20 countries, Korea is in the high tier in terms of road stock   5th in total road length in proportion to the country area 1st in Highway, 3rd in National road International Comparison of Road Stock (G-20) (Unit:: km/1,000km2) Total Highway National Road Local Road others Length Rank Length Rank Length Rank Length Rank Length Rank Korea 1,045.3 5 34.6 1 139.4 3 182.4 6 688.8 6 Japan 3,167.4 1 19.5 5 143.8 2 342.1 4 2,661.9 1 United States 679.4 7 7.8 7 28.1 8 172.1 7 471.3 7 United Kingdom 1,635.2 3 14.6 6 191.9 1 470.7 3 958.0 4 France 1,725.3 2 19.9 4 13.7 10 694.5 1 997.3 3 Germany 648.3 8 34.6 1 114.8 4 242.4 5 256.5 10 Italy 1,618.4 4 22.2 3 71.3 6 489.1 2 1,035.7 2 Mexico 181.7 15 3.2 9 20.7 9 36.7 11 121.0 13 Australia 105.0 17 - - 2.4 15 15.8 14 86.8 15 16
  • 18. Infrastructure Development and Economic Growth - Infrastructure Achievements  Compared to OECD countries, Korea is in the middle tier in terms rail length. International Comparison of Railway Stock (OECD) (Unit:: km/1,000km2) Total Length Korea Japan United States United Kingdom France Germany Italy Spain Netherlands Norway Sweden Switzerland Denmark Greece 17 33.9 53.0 23.6 67.0 54.2 94.8 56.0 29.8 69.7 12.7 21.8 84.8 49.5 19.3 Rank 16 14 20 10 13 4 12 18 8 25 21 6 15 22 Dual Carriage Length Length Rank 14.4 21.8 49.5 31.2 50.7 24.6 9.6 47.7 0.7 4.0 44.5 21.5 3.9 15 12 4 7 3 9 17 5 24 20 6 13 21 Electric Railway Length Length Rank 26.8 32.4 22.2 27.9 55.0 39.6 17.4 52.9 7.9 17.2 84.8 14.5 2.0 14 10 15 13 4 7 16 5 21 17 3 19 23
  • 19. Part-02 Infrastructure Planning and Management
  • 20. Planning Process for Infrastructure Investment Major Players in Korea’s Infrastructure Budgeting Process Players Ministry of Strategy and Finance (MOSF) National Assembly Line ministries (Ministry of Land and Transport Affairs) 19 Roles • Aligns infrastructure investment to economic development goal • Focal point for inter-ministerial and inter- agency coordination • Compiles budget bids and prepares the draft budget. • Allocates funds to spending ministries. • Performance evaluation • Regulatory Activities : ex) Infrastructure pricing • Deliberates and votes on the budget. • Approves the transfers of funds between programs. • Reviews and approves audit reports. • Planning infrastructure • Execute the budget and manage infrastructure investment
  • 21. Planning Process for Infrastructure Investment  Strategic level : Comprehensive approaches under the guidance of a long-term vision  Transportation System Efficiency Act Twenty-Year National Intermodal Transport Plan (NITP) Draft plan prepared by Minister of Land, Transportation and Maritime Affairs (MLT) Reviewed by the Transportation Policy Committee (chaired by the Prime Minister) Five-Year Transportation Infrastructure Investment Plan Investment priorities, investment resource funding plan, etc. Facilities: National and local transportation facilities 20
  • 22. Planning Process for Infrastructure Investment Implementation of Mid-term Transport Infrastructure Investment Plan Various implementation plans are established and projects are implemented according to the plans. Investment requirements are reflected in the allocation of the special account for transport facilities. Performance Evaluation of Mid-term Transport Infrastructure Investment Plan The Transportation Policy Committee evaluates the implementation performance of the plan every year and provides feed-back. 21
  • 23. Planning Process for Infrastructure Investment Planning: by MLT Ex-Ante Project Approval Pre-Feasibility Study (PFS) : MOSF Feasibility Study (FS) : MLT Basic Design : MLT Intermediate Re-Assessment Study of Feasibility (RFS) : MOSF Re-Assessment Demand Forecast (RDF) : MOSF Detailed Design : MLT Construction Ex Post Completion Ex-Post Evaluation : MLT Within 5 years after project completion MLTM: Ministry of Land, Transport and Maritime Affairs, MOSF: Ministry of Strategy and Finance 22
  • 24. Pre-Feasibility Study (PFS) : Procedure PFS Procedure Line Ministry Submit PFS Projects Candidate Ministry of Strategy & Finance KDI (PIMAC) Select PFS Projects Request PFS Make Investment Decision Feasibility Study or Stop 23 Organize Teams/ Conduct PFS Submit PFS Report Announcement
  • 25. Total Project Cost Management System (TPCM)  TPCM  TPCM is a device used by the budget ministry to monitor expenditure on public investment and to check for increase in project cost throughout the project cycle from planning to construction completion  Principles of TPCM   The construction costs are not arbitrarily inter-changeable between project phases or between construction units  The minister in charge of the project is to consult with the Minister of Strategy and Finance about adjusting TPC, if TPC change is inevitable  24 Increase in construction size through design modification is not allowed except for inevitable events The line ministry is allowed to set construction contingencies for up to 8% of the contract price of a project to cope with inevitable design modification and amendment of the law and so on
  • 26. Project Evaluation at Ex-post : Operation  Coverage of EX – Post Evaluation Study  Infrastructure projects with total cost ≥ 500 billion won  Implementation Period  Conducted within three ~ five years of construction completion  Operation of Ex-Post Evaluation Study    25 Evaluation ownership : MLT No designated evaluation agency : Government Funded Institute or qualified Engineering Company The Construction Technology Management Act provides the legal framework
  • 27. Process of a PPP Solicited Project Solicited Project Competent Authority Selection of PPP Project Competent Authority Review by PIMAC VFM Test Competent Authority Designation as the PPP Project Announcement of RFPs Submission of Project Proposals Private Sector → Competent Authority Evaluation and Selection of Preferred Bidder Competent Authority Negotiation and Contract Award (Designation of Concessionaire) Competent Authority → Preferred Bidder Application for Approval of Detailed Implementation Plan Concessionaire → Competent Authority Construction and Operation 26 Competent Authority Concessionaire 26
  • 28. Process of a PPP Unsolicited Project Unsolicited Project Submission of Project Proposal VFM Test PIMAC Notification of Project Implementation Competent Authority → Proponent Announcement of RFPs Competent Authority Submission of Project Proposals Private Sector → Competent Authority Evaluation and Selection of Preferred Bidder Competent Authority Negotiation and Contract Award (Designation of Concessionaire) Competent Authority → Preferred Bidder Application for Approval of Detailed Implementation Plan Concessionaire → Competent Authority Construction and Operation 27 Private Sector → Competent Authority Concessionaire 27
  • 29. Part-03 Infrastructure Development Funding
  • 30. Sources of Funding (Overview)  Taxes  Tax revenue in general account  Earmarked Taxes: mainly transport tax for gasoline and diesel and car excise tax are revenue of transport facility special account  User Charge  User charge from expressway, rail, metro, port and airport users  Entities who operate transport facilities were encouraged to adopt cost recovery mechanism that enables them to finance their own capital needs  SOE (State Owned Enterprise) Bonds  SOEs who are responsible for construction and maintenance of transport facilities are allowed to issue bonds in domestic and international financial markets  Private Investment  PPP (Public Private Partnership) system was introduced in 1994  Foreign Aids in the 1960s and 1970s  29 IBRD, ADB, US and other developed countries provided aids for reconstruction in the aftermath of the Korean War during 1950-53
  • 31. TFSA(Transport Facility Special Account)  Transport facility special account was created in 1994 to vitalize infrastructure investment  Transport Facility Special Account aims to secure financial resources for the construction and operation of transport facilities and to enhance managerial efficiencies of facilities by applying user-charge principle  Road Special Account and Urban Metro Account were merged into Transport Facility Special Account  Revenue sources of transport facility special account  Transport Tax accounts for over 70% of total revenue of transport facility special account  Other examples of sources are Passenger Car Excise Tax, and Tariff on Train Cars and Their Parts  Tax Base and Rate  Excise tax on Gasoline : $0.43 /ℓ (specific duty, not ad valorem tax)  Excise tax on Diesel : $0.31 /ℓ ※ Tax rates on gasoline and diesel can be adjusted within 30% 30
  • 32. TFSA - Renewal of Transport Tax  In 2007, Transport Tax was changed into Transport, Energy and Environment (TEE) Tax  The expenditure of the tax revenue was redefined:   Improvement on public transportation  Support energy and natural resource related business   Construction and operation of transport facilities Environment conservation Expanding its spending targets helped to overcome the resistance of extending transport special account in 2007  The account has been extended three times in 2004, 2007, and 2009 and was deemed to be expired at the end of 2012  31 Initially, it was created as 10 year sunset account deemed to be expired in 2003
  • 33. TFSA - Sector Allocation in Percentage  TFSA was allocated in percentage as below  The share of road sector has decreased from 62.6% in 1994 to 50.6% in 2011  The share of port sector occupied substantial 13.1% in 2008  The share of urban metro is continuously decreasing, whereas the share of train is increasing (Unit: Trill. KRW, %) ’94 ’97 ’01 ’04 '08 '09 '11 Total (in Trill KRW) 4.5 8.3 12.5 13.6 13.2 17.0 14.5 Road (%) 62.6 62.3 64.6 58.3 52.7 52.8 50.6 Rail (%) 7.3 9.0 14.9 16.8 17.0 19.6 26.3 Urban Metro (%) 14.2 10.0 7.6 6.6 10.3 10.3 7.8 Airport (%) 7.1 7.4 2.7 2.7 1.7 0.5 6.0 Seaport (%) 8.8 11.2 8.1 12.4 13.1 10.5 9.3 Inter-jurisdictional(%) - - 2.0 3.3 5.2 6.2 - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 32
  • 34. TFSA – Trend of Sector Allocation in Amount (Unit: Trill. KRW) 25,000 20,000 Road 15,000 Rail Metro Seaport Airport 10,000 Water Sum 5,000 1970 33 1975 1980 Note: MTLM expenditure only 1985 1990 1995 2000 2005 2010
  • 35. SOEs(State Owned Enterprises) - SOE Bonds  SOEs have been playing important role as planning authorities and service delivery entities  SOEs are strong planning authority and service delivery entities that can construct, operate and maintain the infrastructure effectively in different sectors  They are responsible for providing public services at a fair market price  From 1989, issuing SOE bonds were promoted to fund infrastructure construction and management plans  For example, the Korea Expressway Corporation (KEC) was founded in 1969 for expressway construction, expansion, repair and maintenance  Before 1988, the government budget primarily took care of construction projects and the KEC only provided management service  After 1989, the KEC received a considerable level of autonomy in managing its own budget and implementing projects. It also contributed to the process of making comprehensive national development plans which to helped to smooth the implementation 34
  • 36. SOEs – Transportation Infra Related SOEs Foundation Korea Expressway Co. Duties 1969 Expressway construction and maintenance Korea Land and Housing Co. 2009 Land development and public housing supply. Merger of Korea Land Co (1975) and Korea Nat’l Housing Co.(1962) Korea Water Resources Co. 1967 Construction of dams and regional water supply network Korea Rail Network Authority 2004 Planning and construction of railroad network Korea Railroad 2005 Delivery of railroad services including KTX Port Authorities in Busan, Incheon, Ulsan and Yeosu 2004, 2005 2007, 1990 Planning, construction and promotion of respective ports Incheon Airport 1999 Planning, construction and operation of Incheon International Airport Korea Airports Co. 2002 Planning, construction and operation of Gimpo and local airports 35
  • 37. PPP - Legal Framework  In 1994, PPP Act was legislated (along with TFSA) because the ‘Infrastructure Gap’ was regarded as a main barrier of economic growth in the early 1990s  In 1999, PPP Act was amended to promote PPP market   Local financial sector was not matured enough to provide project financing Lost momentum in the wake of the Asian Financial Crisis in 1997 ~ 8  In 2005, PPP Act was re-amended to strengthen fiscal discipline Enactment Aug. 1994 『The Private Capital Inducement Promotion Act』 『The Act on Private Participation in Infrastructure 』 Revision Jan. 1999 Amendment Jan. 2005 36 · Unsolicited proposals, Minimum Revenue Guarantee · MRG abolished (unsolicited in 2006/ solicited in 2009) 『The Act on Private Participation in Infrastructure 』 · Diversified PPP-eligible Facility Types (35 -> 44) · Introduction of BTL Scheme
  • 38. PPP - Legal Framework  Hierarchy of legal framework of the PPP System  PPP Act  PPP Act Enforcement Decrees  Annual PPP Basic Plan  PPP Implementation Guidelines  The Legal Status of the PPP Act  The PPP Act and its Enforcement Decrees are the principal components of the legal framework of PPP  Eligible infrastructure types, Procurement types, Procurement process, Roles of the public and private parties, etc  The PPP Act is a special Act that precedes other Acts  Exempts PPP projects from strict regulations on land acquisition  Allows an SPC to play the role of competent authorities 37
  • 39. PPP – Track Record  As of 2012, Korea had 633 PPP Projects either in construction or in operation status, total value being 85 bil USD  209 BOT and BOO projects (60.4 bil USD of investment)  424 BTL projects (24.5 bil USD of investment) BTO & BOO BTL mil USD 60.4 bil USD mil USD 24.5 bil USD (*) All the figures are contract basis and thus real investment balance may be different 38
  • 40. PPP – Track Record  The infrastructure investments through PPP dramatically increased from 1999 to 2007, since then the trend has been stabilized  MRG was abolished in 2006, and financial crisis occurred in 2008  As considerable level of infrastructure are equipped, growth ratio of PPP investment began to decrease Number bil USD 39 (*) All the figures are contract basis and thus real investment balance may be different
  • 41. PPP – Contribution to Government Budget  PPP has alleviated the government’s burden on infrastructure investment from 5% to 36% per year ( Average: 21% per year )  The promotion of PPP has helped ease constraints on the government’s financial resources, enabling it to secure resources for sectors other than SOC bil USD 40 % of PPP (*) All the figures are contract basis and thus real investment balance may be different
  • 42. Part-04 Lessons Learned
  • 43. Lessons Learned – Linkage to Economic Development  Government identified that infrastructure are needed to support economic development  Economic planning ministry played an important role in the decision–making process for infrastructure investment  For infrastructure investment at the early stage of economic development strong political leadership is critical  Capability to adjust infrastructure investment along with the economic development stage  The infrastructure investment has been allocated to meet economic and social needs, often over short periods of time in Korea  Infrastructure development was guided by a strategic vision of economic development  42 Continuous commitment to high quality infrastructure was possible by a longterm vision which was to maintain the competitiveness in export markets, and to support more balanced social development
  • 44. Lessons – Infrastructure Funding  Earmarked transport tax and creation of special account for infrastructure development may be effective  Government-wide consensus is necessary  If not aligned with government (economic) policy goal, the MOSF tends to be against setting a special account which would out of its control  SOEs can play an important role as service delivery entities and funding sources for infrastructure through SOE bonds  SOEs can be strong planning authorities and service delivery entities that can fund, construct, operate and maintain infrastructure effectively in each sector  PPP could be one of the solutions, but Capacity building is a prerequisite for PPP   43 PPP can save lifetime cost by bringing private sector’s efficiency (VFM) PPP may ease the constraints on the government’s financial resources However, in many instances, public and private can be in negative sum situation rather than positive-sum PARTNERSHIP situation
  • 45. Lessons – Infrastructure Funding  Infrastructure management as well as infrastructure funding is crucial to enhance fiscal efficiency  Increasing role of MOSF in infrastructure investment could strengthen fiscal efficiency  Regionalizing the investment and management function of infrastructure may be more effective than centralized control  Inefficiency or moral hazard may occur in budgeting and managing infrastructure development process if central government controls all budget, while local government just propose and manage projects  It may be efficient to enable municipal government to raise tax and to develop investment plan  To sustain infrastructure development in a long term, government Think-Tank is a practical device 44

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