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Feb 19, 2010

PPP Investment in Educational Facilities in Korea. Feb 19, 2010. Hyung-Chul Lee Director, PPP Project Management Division. Ⅰ. PPP in Korea. Performance of Korean PPP. Ⅱ. Ⅲ. PPP in Educational Facilities. Contents. Ⅳ . Lessons from Experience. I . PPP in Korea. -Amendment of PPI Act

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Feb 19, 2010

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  1. PPP Investment in Educational Facilities in Korea Feb 19, 2010 Hyung-Chul Lee Director, PPP Project Management Division

  2. Ⅰ. PPP in Korea Performance of Korean PPP Ⅱ. Ⅲ. PPP in Educational Facilities Contents Ⅳ. Lessons from Experience

  3. I. PPP in Korea

  4. -Amendment of PPI Act -Introduced BTL scheme, Diversified facility types (35 → 44) January 2005 -Revision of PPI Act 『The Act on Private Participation in Infrastructure (PPI)』 -Introduced Private-Initiated Projects December 1998 -Enactment of PPI Act 『The Promotion of Private Capital into Social Overhead Capital Investment Act』 -Special law, Government-Initiated Projects August 1994 -Infrastructure projects were carried out based on individual laws Before August 1994 1. History of PPP Act - Introduced BTL Ceiling Approval System by the National Assembly 2009

  5. 2. Available Project Types • Available project types : BTO, BOT, BOO, BTL etc. • BTO and BTL are most popular BTO (Build-Transfer-Operate) • Road, Port, Rail, etc • User Fees, Minimum Revenue Guarantee (MRG) - • School, Sewer Pipe, Military Housing, Rail way, etc BTL (Build-Transfer-Lease) - • Lease Payment, No Demand Risk

  6. 3. BTO and BTL BTO BTL SPV SPV Right to operate Right to operate Lease Payment Service Service Ownership Ownership User Fee Community Government Community Government User Fee (When necessary)

  7. 4. Available Facility Types ◦ 46 Types of Infrastructure Facilities in 15 Categories. Public Housing (1) Welfare (3) Forestry (2) Road (3) Railway (3) 15 categories (facility types) Education (1) Port (2) Military Housing (1) Communication (4) Water Resources (3) Culture & Tourism (9) Energy (3) Airport (1) Environment (5) Logistics (3)

  8. 5. Process of PPP Project (1) • BTO(Government-Initiated Project) Stage 1 : Project Analysis Stage 5: Select preferred bidder Stage 2: Approval of PPP Stage 6 : Contract and approval (PPP Committee) (PPP Committee) Stage 3 : Approval of Project Plan Stage 7: Approval of Execution Plan (PPP Committee) Stage 4 : Request for Proposal Stage 8 : Construction / Operation

  9. 5. Process of PPP Project (2) • BTO(Private-Initiated Project) Stage 1 : Private proposal Stage 5: Contract and approval (PPP Committee) Stage 2: Project Analysis (VFM) Stage 6 : Approval of Execution Plan Stage 3 : Request for Proposal to 3rd parties (PPP Committee) Stage 7: Construction/Operation Stage 4 : Select preferred bidder

  10. 5. Process of PPP Project (3) • BTL (Government-Initiated Projects only) Stage 1 : Project Plan and Analysis Stage 5: Select preferred bidder Stage 2: Approval of BTL ceiling Stage 6 : Contract and approval (PPP Committee) (National Assembly) Stage 3 : Approval of project plan Stage 7: Approval of Execution Plan (PPP Committee) Stage 4 : Request for Proposal Stage 8 : Construction / Operation

  11. 6. Supporting Organizations (1) • MOSF : Two Divisions Under the Budget Office • PPP Policy Division • Design overall PPP policy and revise PPI Act, Presidential Decree and Finance ministry guidelines • Manage BTO projects e.g. Roads, rails, ports • PPP Project Management Division • Design BTL policy and manage BTL projects • Prepare and propose Annual BTL ceiling to the National Assembly

  12. 6. Supporting Organizations (2) • PPP Project Committee • 1 Chairperson (Mister of MOSF) and 17 members • Committee members : 9 Vice Ministers from PPP project-related Ministries and 8 private experts Examine and decide major PPP policy directions under the majority rule Approve important PPP projects and examine PPP contracts

  13. 6. Supporting Organizations (3) • KDI Public and Private Infrastructure Investment Management Center (PIMAC) • Technical support for PPP projects in central and local governments • Examine private-initiated projects and support “Value for Money Test” for PPP projects • Examine PPP project plans and contracts commissioned by the government • Education and PR of PPP

  14. 6. Supporting Organizations (4) • Social Infrastructure Guarantee Fund • Provide credit guarantee for SPV’s debts and Social Infrastructure bonds issued by SPV and financial institutions • Guarantee ceiling : up to KRW300bn per SPV • Guarantee Approval : KRW4.8trillion as of Dec 2009

  15. 7. Governance Structure for PPP PPP Project Committee MOSF (Overall Supervisor) National Assembly Approval of Policy & Project Approval Annual Ceiling Approval of Project / Guidelines & Regulations Funding BAI Project Audit SOCGF Competent Authority (Central or Local Gov.) Tech Support & Consulting PIMAC Technical Support Advisory Feedback End Users (The Public) Concession Agreement Credit Guarantee Infrastructure Service User Fee / Service Evaluation PUBLIC PRIVATE MOSF : Ministry of Strategy & Finance) BAI : Board of Audit & Inspection Competent Agency : Line Ministries in Central Gov’nt and Local Gov’nt (both municipal and state) SOCGF : Social Overhead Capital Guarantee Fund PIMAC : Public and Private Infrastructure Investment Management Center NOTE : CURVERD RECTANGLE IS PRIVATE OR QUASI-GOVERNMENT ENTITY SPV (Special Purpose Vehicle as Concessionaire) Financial Institution Project Financing Sponsoring / Contracting Construction Company Operation Company Maintenance Company Design Company

  16. 8. Government Supports • Construction Subsidy : 30~50% of Total Investment • Roads : Less than 30% of Total Investment • Rails : Less than 50% of Total Investment • Ports : Less than 30% of Total Investment

  17. 9. Minimum Revenue Guarantee (MRG) • Government compensates for a portion of the shortfall in the pre-set revenue May 2003 ~ December 2005 Starting January 2006 Government-Initiated Projects Private-Initiated Projects Period 15 years 10 years Abolished Guarantee First 5 years : 90% Next 5 years : 80% Last 5 years : 70% First 5 years : 75% Last 5 years : 65% Condition Revenue > 50% Forecasted Revenue

  18. 10. Tax Benefits • Exemption of Acquisition and Registration Tax for Land Acquisitions for BTO Projects • Application of 0% Tax Rate on VAT for BOT, BTO, and BTL type projects • 14% Separate Taxation on Interest Income from Infrastructure Bond with maturities of 7 years or longer • Separate Taxation on Dividend Income from Infrastructure Fund

  19. 11. Credit Guarantee • Korea Credit Guarantee Fund (KCGF) provides credit guarantees for PPP projects • Guarantee for repayment of SPV’s loan, debts and social infrastructure bonds issued by SPV and financial institutions

  20. II. Performance of Korean PPP

  21. 1. PPP Complements Public Investments • Private Investment on Social Infrastructure

  22. 2. PPPInvestment (contracts signed) (As of Sep 2009) * Project number Investment (KRW trillion)

  23. 3. BTO Performance • 80% of BTO investment is in roads and railways projects (As of Dec 2008)

  24. Since 2005 investment total has reached KRW 12.4 trillion 4. BTL Performance

  25. III. PPP in Educational Facilities

  26. 1. Change in Educational Environment • Enrollment Ratio / No. of students per classroom • Space per student

  27. 2. Investment Needs in Schools • If public investment until 2005 in school had been maintained, it would have taken over 20 years to rebuild schools of more than 30 years old 100% Rebuild Ratio 5% More than 20 years 2025 (?) 2005

  28. 3. Finance Prospects and BTL • Fiscal Prospects • Expenditure side : Increasing fiscal demands in social welfare, social infrastructures, education and fiscal stimulus package to cope with economic downturn • Revenue side : Tax cut and revenue decrease as a result of economic downturn (2009 Growth rate : 5% (e)→ 0.2%) • Investment needs in schools • New schools for newly developed cities : approximately 100 schools per year • Continuous renovation demands for dilapidated schools • BTL as an alternative investment

  29. Introduction (2005) Stabilization (2006∼2008) Advancement (2009∼) • Set up PPP unit • Provide guideline • Feedback • Standardize LCC • Improve business structure First application in schools 4. BTL Investment • Investment Principle • In principle, new schools are constructed under the BTL scheme • Rebuilds or extension of old schools should be judged by fiscal status of provincial / regional education offices • BTL lease payments should be within the range of 2% of total government expenditure budget • BTL introduction and progress

  30. 5. Roles of Educational Authorities in BTL • Ministry of Education, Science and Technology (MEST) • Distribution of government finance/BTL, Approval of BTL Investment plan, Guidelines on school facility projects • Provincial/Regional Education Office (PEO/REO) • Set up investment plan (local assembly review), enforcement of plans • School Establishment and Operation • Secondary school : PEO • Primary school : REO • Finance • MEST : building new schools • PEO: rebuild, extension, operation

  31. 6. BTL Process in Education PEO School facilities investment plan Approve MEST • Student accommodation plan Consult Request for Proposal (RFP) EDUMAC/PIMAC • Performance & servicesrequirements • Appraisal methods for business proposals • Management of risks VFM (Value for money) TEST consign EDUMAC consign Appraisal of business proposals EDUMAC • Plans on design/construction/operation • Method of management, cost, risk control Consult EDUMAC/PIMAC Negotiation/Agreement • Settlement on design/construction/operation • Settlement in project cost/condition Monitoring • Maintenance & management

  32. [Ref] EDUMAC(Educational Facilities Management Center for Private Investment) • Established in June 2006 within Korea Educational Development Institute • Aims : Enhancing education service quality by developing educational facilities • Key functions • Research on policies of educational facilities • Developing working manuals and guidelines for school BTL projects • Conducting VFM TEST / evaluating private proposals / consulting negotiations and contract agreements • BTL education and PR

  33. 7. Features of BTL Projects • Bundling • Economies of scale is achieved by bundling 3~5 schools as one construction unit • KRW 30 ~ 50 bn Investment amount • Business scope of SPV • Construction : design, construction, supervision • Operation : security, maintenance and repair • Financing • Monitoring and Performance evaluation Self Evaluation Inspection Appraisal • SPV ⇒Weekly/Monthly • Local Agency ⇒monthly • Appraisal committee ⇒quarterly

  34. 7. Investment in Schools (2005-2009) • Elementary, middle and high schools : 880 schools • Public Investment (PI) : 203, BTL: 677 • KRW 8.0 trillion (PI: 2.0, BTL: 6.3) • University dormitory : 33 schools, KRW 0.7 trillion • University : 2 universities, KRW 0.6 trillion

  35. 8. Investment Needs in Education • Needs for new schools • In 2010, 45 schools will be built under the BTL scheme

  36. [Case 1] Shindorim High School

  37. [Case 1] Shindorim High School • Combined facilities • School + Gymnasium (1.7 bn) + Library (1.6 bn) financed by local government • Merits of Combined facilities • Maximize land usage • Maximize Private creativity and efficiency • Enhance local residents’ welfare and quality of school facilities • Cost reduction

  38. [Case 2] Ulsan National Institute of Science and Technology

  39. [Case] Ulsan National Institute of Science and Technology • History • 01/2006 : Established UNIST Project Organization • 02/2006 : Decided to establish UNIST • 03/2007 : Announced the UNIST BTL facility plan • 10/2007 : Signed the UNIST BTL project contract • 11/2007 : Commenced construction • 03/2009 : Constructed 1st stage buildings • 02/2010 : 2nd stage buildings construction expected • 06/2010 : 3rd stage buildings construction expected • Key features of UNIST BTL • Land space : 1,028,200 ㎡ • Building space : 154,659 ㎡ • Investment total : KWN 223 bn • Operation Period : 20 years

  40. 8. BTL Performance Appraisal(Survey Results on design quality) • Method of appraisal • Government-financed schools (GFS) : 21 applicants for Good Facility School Contest by MEST in 2006 • BTL schools : 90 schools in 2006 ※ Appraisal scale : 5 points (very satisfied / satisfied / ordinary / poor/ very poor) < Site Plan> < Floor Plan >

  41. 8. BTL Performance Appraisal(Survey Results on user satisfaction) • Method of appraisal • GFS : 7 schools opened after 2005 • BTL : 7 schools opened after 2007 • ※ Appraisal scale : 5 points • (very satisfied / satisfied / ordinary /poor / very poor)

  42. 9. Challenges Ahead • Financial Crisis and business practice • Aversion of Long-term investment commitment due to Global financial crisis • Development in project financing necessary • Excessive proposal costs and low competition • High cost for making business proposal and low profit structure lead to low competition Increase compensation for proposal costs and simplification of proposal • Operation and Performance Evaluation • 816 schools are operated by BTL SPV as of 2009 • Develop Real-time BTL Facility Management system • Good maintenance and fair performance evaluation • Resolution of Conflicts between authorities and SPV

  43. IV. Lessons from Experience

  44. 1. Clear and detailed regulatory frameworks • PPP is an unfamiliar and complicated process compared to traditional public service provision • Many stakeholders involved in a BTL project have different interests and expectations • Uncertainties and doubts at the initial stage Legal Frameworks Law Presidential Decree MOSF Guideline Manuals on VFM, proposal assessment, and operation and monitoring, BTL Model Contract Agreement etc.

  45. 2. Government Support and Policy Determination • Sluggish progress in the early years since 1994-> only 5 projects had been started in the first 5 years • In 1998, broad-scale revision of PPI Act • Minimum Revenue Guarantee (MRG) was introduced to induce PPP investment • Introduced various project types e.g. BTO, BOT, BOO • PPP unit was established • Introduced social infrastructure fund Before revision (1995-1997) After revision (2007) investment 0.3 trillion 3.0 trillion PPP/GF in SI 3.9% 17%

  46. 3. Special Organizations for PPP • PPP units in governmental organizations are essential • Organizations manifest policy determination • Organizations are critical to maintain institutional capacity • Role allocation between Finance Min. and Research Institutions • Legal frameworks and policy for PPP → MOSF Divisions • Technical guidelines and working manuals → Research institutions • Central and local government → KDIPIMAC • Each line ministries → e.g. EDUMAC (MEST)

  47. 4. Development of Financial Industry • Private finance is heavily dependent on the degree of financial industry development • Long-term project financing is still on the verge of burgeoning in Korea • Financing practice in banking sector is still dependant on secured loans rather than project financing • Governmental Guarantee for PPP investment can be powerful tools to supplement the weak financial industry • Direct government guarantee: Indirect credit guarantee: MRG (before 2006) SOC Guarantee Fund

  48. 5. Fiscal Integrity • Strict Management of Total Government Expenditure for PPP • National Assembly Approval as to Annual BTL ceiling since 2009 • 2% Rule • Government expenditure for PPP should be limited to 2% of total Annual budget • Current estimation • 1.0%(2009) → 1.7% (2015) → 1.8% (2020) * Government expenditure for PPP : Lease payment for BTL projects, Land acquisition cost for BTO, Construction subsidy and MRG

  49. Thank you

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