The ‘Act on Private Participation in Infrastructure’ was enacted to contribute to the national economy by operating and expanding infrastructure creatively and effectively by facilitating private investment in infrastructure. However, some privately financed initiatives under the act are less efficient than government-run initiatives and are being criticized for their onerous tolls, which has increased the burden on end-users. This report evaluates the current eligibility survey used to initiate and maintain privately financed infrastructure projects, and provides recommendations for improving the survey.
The results of this evaluation are as follows:
First, the Public & Private Infrastructure Investment Management Center determines the initiation of privately financed projects only through a cost review during the eligibility survey; it does not consider increases in end-user costs. Private investment in infrastructure should be undertaken with the purpose of contributing to the development of the national economy. While economic growth represents a quantitative increase in national economic output, economic development refers to qualitative development of the national economy. Therefore, private investment should focus not on increasing the volume of goods and services but rather on the development of the economy, which can improve the standard of living for all of the nation’s people.
Nonetheless, at present, in the eligibility survey for privately financed initiatives there is no consideration of increases in end-user costs. The Public & Private Infrastructure Investment Management Center, which conducts the survey, stipulates in its guidelines that the eligibility of an initiative is determined during the second stage of the survey by comparing the government’s expense burden in the government-run scenario versus the privately invested scenario. During this review process, there is no opportunity to compare the reduction in the government’s financial burden by private investments with increases in end-user costs.
Second, it has been confirmed that the government is not fully reviewing the conversion of ongoing privately financed initiatives with minimum revenue guarantees into government-run businesses. As the government provides Minimum Revenue Guarantee (MRG) to private investment initiatives, which resulted in increases in the national financial burden and has become a social issue, the National Assembly’s Special Committee on Budget & Accounts, during its settlement of financial accounts for fiscal year 2010, instructed the government to review the conversion of MRG private initiatives to government-run businesses. In response, the Ministry of Land, Infrastructure and Transport, in its ‘Study on medium- to long-term development of privately financed highways,’ reviewed the possibility of converting privately financed businesses such as the ‘Incheon International Airport Expressway’ and the 'Seoul Outer Ring Highway' into government-run businesses. According to the report, "the conversion of the privately financed highways into government-run highways should be carried out for all nine routes in order to provide a regional balance in terms of highway toll fees. If existing contracts for the nine routes are terminated, large-scale financial support would be needed, which would in turn increase the government's financial burden."
While it may be difficult to convert all privately financed highways to government-run operations, not converting the privately financed highways with cost reduction potential into government-financed businesses does not seem rational. This is because privately financed highways cannot resolve the imbalance in regional tolls. If it is difficult to arrange the subsidies needed when contracts are terminated, the public Korea Expressway Corporation can take over the private initiatives by maintaining the privately run system, as in the case of the Incheon International Airport Railway. This is possible since the Korea Expressway Corporation can fund its businesses at a lower cost than private investors can. Thus, if the Korea Expressway Corporation takes over privately financed highways, it can lower tolls after the acquisition. The Korean government needs to improve its eligibility survey system with such a possibility in mind.
To carry out a privately financed initiative in a more rational manner, going forward the Korean government need to improve its current process by introducing a 'committee review' or 'local resident survey' when setting the maximum end-user fees for privately financed infrastructure. Moreover, as the government covers all land compensation costs and part of the construction costs for private initiatives, and since the 'payment at termination' described in the contract can be interpreted as 'payments to be borne by the nation,' as in the case of the Minimum Revenue Guarantee, the National Assembly should reinforce its review of private initiatives.
Ahn Taehoon
The results of this evaluation are as follows:
First, the Public & Private Infrastructure Investment Management Center determines the initiation of privately financed projects only through a cost review during the eligibility survey; it does not consider increases in end-user costs. Private investment in infrastructure should be undertaken with the purpose of contributing to the development of the national economy. While economic growth represents a quantitative increase in national economic output, economic development refers to qualitative development of the national economy. Therefore, private investment should focus not on increasing the volume of goods and services but rather on the development of the economy, which can improve the standard of living for all of the nation’s people.
Nonetheless, at present, in the eligibility survey for privately financed initiatives there is no consideration of increases in end-user costs. The Public & Private Infrastructure Investment Management Center, which conducts the survey, stipulates in its guidelines that the eligibility of an initiative is determined during the second stage of the survey by comparing the government’s expense burden in the government-run scenario versus the privately invested scenario. During this review process, there is no opportunity to compare the reduction in the government’s financial burden by private investments with increases in end-user costs.
Second, it has been confirmed that the government is not fully reviewing the conversion of ongoing privately financed initiatives with minimum revenue guarantees into government-run businesses. As the government provides Minimum Revenue Guarantee (MRG) to private investment initiatives, which resulted in increases in the national financial burden and has become a social issue, the National Assembly’s Special Committee on Budget & Accounts, during its settlement of financial accounts for fiscal year 2010, instructed the government to review the conversion of MRG private initiatives to government-run businesses. In response, the Ministry of Land, Infrastructure and Transport, in its ‘Study on medium- to long-term development of privately financed highways,’ reviewed the possibility of converting privately financed businesses such as the ‘Incheon International Airport Expressway’ and the 'Seoul Outer Ring Highway' into government-run businesses. According to the report, "the conversion of the privately financed highways into government-run highways should be carried out for all nine routes in order to provide a regional balance in terms of highway toll fees. If existing contracts for the nine routes are terminated, large-scale financial support would be needed, which would in turn increase the government's financial burden."
While it may be difficult to convert all privately financed highways to government-run operations, not converting the privately financed highways with cost reduction potential into government-financed businesses does not seem rational. This is because privately financed highways cannot resolve the imbalance in regional tolls. If it is difficult to arrange the subsidies needed when contracts are terminated, the public Korea Expressway Corporation can take over the private initiatives by maintaining the privately run system, as in the case of the Incheon International Airport Railway. This is possible since the Korea Expressway Corporation can fund its businesses at a lower cost than private investors can. Thus, if the Korea Expressway Corporation takes over privately financed highways, it can lower tolls after the acquisition. The Korean government needs to improve its eligibility survey system with such a possibility in mind.
To carry out a privately financed initiative in a more rational manner, going forward the Korean government need to improve its current process by introducing a 'committee review' or 'local resident survey' when setting the maximum end-user fees for privately financed infrastructure. Moreover, as the government covers all land compensation costs and part of the construction costs for private initiatives, and since the 'payment at termination' described in the contract can be interpreted as 'payments to be borne by the nation,' as in the case of the Minimum Revenue Guarantee, the National Assembly should reinforce its review of private initiatives.
Ahn Taehoon