2005. 5. 24. Korea Development Institute Public and Private Infrastructure

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

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

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.

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

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

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

2. PFS Overview(3) Comparisonof PFS and Feasibility Study

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

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

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)

4. PFS Methodology (3) 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

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

5. Case Study 1 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 (2) • Site Map

5. Case Study 1 (3) • Route Map

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

5. Case Study 1 (5) • 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

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

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)

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 (5) Travel Demand • 80-90 thousand daily passengers Summary of Economic Analysis (Billion Won)

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.

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

2005. 5. 24. Korea Development Institute Public and Private Infrastructure