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Managing Potential Fiscal Liabilities of PPP Projects
PIMAC
Prepared by Kang-Soo KIM Executive Director, PIMAC, KDI
22 Jan 2015
Youngsob YOO
Deputy Director, PPP Policy Division Ministry of Strategy and Finance
Background
Public –Private- Partnership (PPP) imposes an obligation on the Public (governments) by definition Financial commitment in the form of payment, guarantee, subsidy, etc.
Risk (demand (revenue), foreign exchange, termination liabilities..) bearing produces obligations like guarantees
2
Government Financial Support and Risk Sharing
Measure
Construction Subsidy
Early Termination Payment Minimum
Revenue Guarantee (1999-2009)
Risk Sharing
Tax incentives
Land Acquisition
Background
Why do governments bear the risks ? To proceed and get the project done
To apply the best way of allocating risks
Why do the risks arise more often than they should ? Any fiscal costs come due only if particular events occur and involve
no immediate cost to the government.
Governments are facing incentives to ignore long-term consequences of projects and to absorb risks that the private sector could/ should bear
Capacities are not adequate to analyze possible risks and to manage the PPP related liabilities
3
4
0.60.650.7
0.750.8
0.850.9
0.95
500 2,000 3,500 5,000 6,500 8,000 9,500
Succ
ess
rate
of R
e-el
ectio
n
Total Cost of Transport Projects Implemented in a constituency (100 million KRW)
17th NA18th NA4th Local5th Local
Source: Hojun Lee and Jaehoon Kim (2013)
Effects of the Transport Project implementation on Re-election
Background
Background
Why is fiscal management for PPPs is important ? To prevent their misuse and to enhance efficiency.
Not to bypass expenditure controls and ensure that full life-costs of PPPs projects
To prevent the substantial fiscal consequences.
PPPs may have been a significant source of (un)expected increases in governments’ debt and contingent liabilities.
To make PPP system long term sustainable
The fiscal burden (specially from MRGs) has been criticized by politicians, mass media, and civil society. Without persuading critical taxpayers, PPPs with the long term fiscal risk cannot be sustainable.
5
How to manage the fiscal liabilities of PPP projects ? Key Factors for managing Potential Fiscal Liabilities of PPP Projects
Recognition and Analysis of Potential Fiscal Liabilities at the up-front stage
Approval of the PPPs ( Who and How ?)
Accounting and Reporting of Potential Fiscal Liabilities
Setting a Fiscal Rule (or regulation) for PPPs
6
Background
7
Source: KDI, Major Indicators of Korean Economy (November, 2014)
Background
Both the concession-type (BTO) and the service purchase-type (BTL) projects are implemented in Korea
PPP Projects by Procurement Scheme (As of Jan. 2014)
8
Procurement Scheme Number of Project Total Project Cost Average
Project Cost % %
Concession-type
BTO 202 31.42% 679,549 69.00% 3,364
BOO 7 1.09% 12,318 1.25% 1,760
BOT 4 0.62% 6,580 0.67% 1,645
Subtotal 213 33.13% 698,447 70.92% 6,769
service purchase-type BTL 430 66.87% 286,401 29.08% 666
Total 643 100.00% 984,849 100.00% 1,532
Unit: One hundred million KRW
Korea’s PPPs in Figures
9
Facilities Number of Project % Total investment %
BTO
Road 56 28.14% 38,618 59.86% Train 9 4.52% 13,307 20.63% Port 17 8.54% 6,284 9.74%
Environment 71 35.68% 4,999 7.75% Airport 14 7.04% 767 1.19% Garage 26 13.07% 316 0.49%
IT 1 0.50% 100 0.16% Culture 4 2.01% 100 0.16% Univ. 1 0.50% 20 0.03%
Sub-total 199 100.00% 64,511 100.00%
BTL
Education 194 45.75% 8,071 29.97% Environment 92 21.70% 6,687 24.83%
Military 71 16.75% 5,575 20.71% Train 4 0.94% 4,030 14.97%
University 15 3.54% 943 3.50% Culture 25 5.90% 851 3.16%
IT 4 0.94% 239 0.89% Social Welfare 10 2.36% 234 0.87%
Mixed use 4 0.94% 184 0.68% Science center 5 1.18% 112 0.41%
Sub-total 424 100.00% 26,925 100.00% (As of December 2013)
Korea’s PPPs in Figures
10
Classification FY2010 FY2011 FY2012 FY2013
□ PPP related gov’t expenditures(A) 2.3 2.8 3.7 4.3 ○ BTO - Land Acquisition - Construction Subsidy - MRG
1.5 0.2 0.8 0.5
1.5 0.3 0.7 0.5
2.0 0.6 0.7 0.7
2.4 0.8 0.7 0.9
○ BTL - Lease - Operation Cost - Land Acquisition Cost, etc.
0.8 0.7 0.1
0.01
1.3 1.0 0.2
0.04
1.7 1.3 0.3 0.1
1.9 1.6 0.3
0.03
□ Net Budget Expenditure(B) 319.3 330.8 348.5 374.5
□ PPP expenditure ratio(%, A/B) 0.72 0.84 1.06 1.15
< PPP related gov’t expenditures FY2010~FY2013 >
(trillion KRW)
Korea’s PPPs in Figures
Up front budget Recognition and Analysis (1); Unified Framework
Competent Authority
Solicited project Unsolicited Project Private Sector →
Competent Authority
VFM Test VFM Test Competent Authority Review by PIMAC PIMAC
Selection of PPP Project Submission of Project Proposal
Designation as the PPP Project
Notification of Project Implementation Competent Authority Competent Authority →
Proponent
Announcement of RFPs
Evaluation and Selection of preferred Bidder and Negitiation
Construction and Operation
Competent Authority
Competent Authority
Concessionaire
11
Unified framework helps not to bypass expenditure controls and ensure that full life-costs of PPPs projects are taken into account at project approval stage !!
Fiscal regulation for project assessment with the same methods applied to Conventional Procurement is important to manage fiscal liabilities !!
Phase 1: Feasibility study (Decision to Invest) The cost- benefit analysis is conducted to determine feasibility of the
project from a national economy perspective.
Phase 2: Value for Money Assessment (Decision on PFI) The government payment of PSC (Public Sector Comparator) is
compared against that of PFI (Private Finance Initiative) to assess whether the PFI achieves VFM.
Budget recognition for all financial commitments, however, no risk or contingent liabilities estimation
Phase 3: Formulation of PFI alternatives Based on the results of phase 2, an appropriate PFI alternatives are
formulated The level of project cost, user fee, subsidy scale, etc. are suggested from
the government.
Up Front Budget Recognition and Analysis (2); Scope of a VFM Test
12
13
Distribution of Traffic Forecasting Errors
Optimism Bias in Traffic Forecasting
Up Front Budget Recognition and Analysis (3) ; Optimism Bias
Forecasting Fiscal Burden from MRG
14
Among operating 633 PPP projects as of end of 2012, 39 projects generated MRG payments. The payment is increasing from 2008 (366.3 billion won) and expected to be the highest at 2020 (1290.2 billion won)
Up Front Budget Recognition and Analysis(4) ; Excessive Fiscal burden ; MRG (1999~2009)
Up Front Budget Recognition and Analysis (5) ; Preventing Optimism Bias in Traffic Forecast
15
The role and function To review the over-estimation possibility
on the result of traffic forecast based on the expert's insight and experience, and the empirical results presented in a similar project case
Review Committee Members Experts with experienced and
professional expertise in order to review independently with balanced position and express own opinion
Equivalent or higher level of profess or Senior Fellow with having equivalent expertise and insight
Traffic Forecast Review Committee - Reflection of Outside View to Prevent Optimism Bias in Traffic Forecast -
Budget Authorization for PPPs by National Assembly and PRC National Assembly
Approves aggregate ceiling on annual total amounts of PPP project (BTL)
PRC (PPP Review Committee) Approves major PPP projects and monitors their implementation process
step by step. Reviews and approves the expenditures and contingent liabilities.
Recognition for the Long-Term Budget affordability Adopting Accrual basis accounting for PPP projects, instead of cash
basis accounting Incorporation into Medium-term expenditure framework (MTEF)
16
Approval and Reporting ; To Ensure Fiscal Sustainability
17
Class. 2006 2007 2008 2009 2010 2011 2012 2013
Central
94 1,299 3,468 5,204
1,291 3,131 5,928 7,969
Local
(supported by
Central)
7,222 9,096 10,162 11,308
계 94 1,299 3,468 5,204 8,513 12,227 16,090 19,277
Approval and Reporting ; To Ensure Fiscal Sustainability
• BTL Payment for FY 2006~ FY 2013 (100 million KRW)
Note: 1) Central government payment only (excluding payments by the local governments) 2) Individual statistics from central and local government payments for 2006~2009 not available
18
Classification 2014 2015 2016 2017 2018 Total
Central
Lease 5,830 6,730 7,840 8,164 8,159 36,724
Operation Cost 890 1,032 1,218 1,307 1,344 5,792
Subtotal 6,720 7,762 9,059 9,472 9,503 42,515
Local
(supported by
Central)
Lease 3,772 3,945 4,042 4,133 4,133 20,025
Operation Cost - - - - - -
Subtotal 3,772 3,945 4,042 4,133 4,133 20,025
Total 10,492 11,707 13,100 13,604 13,636 62,540
Note: 1) Central government payment only (excluding payments by the local governments) 2) For the approved BTL projects as of June 2014
< Estimated Government Payment for BTL projects 2014~2018 >
(100million KRW)
Approval and Reporting ; To Ensure Fiscal Sustainability
Fiscal Rule ; To Ensure Fiscal Sustainability
Budgetary Limits ; 2% limit rule for PPP Annual government payment PPP should be limited to less than 2% of
total annual government expenditure
Payments for PPPs / Net Government expenditure
PPP government payment: lease payment for BTL, land acquisition for BTO , construction subsidy, and MRG
(Trillion KRW)
19
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Net Gov. Expenditure(A) 324.0 319.2 330.7 339.8 374.3 392.1 406.0 420.7
PPP Expenditure(B) 2.8 2.3 2.8 3.7 4.4 5.9 5.0 5.1
-BTO 2.3 1.5 1.5 2.0 2.3 3.6 2.7 2.6
* MRG 0.5 0.5 0.5 0.7 0.8 1.0 1.1 1.1
-BTL 0.6 0.8 1.3 1.7 2.1 2.3 2.3 2.5
Ratio(%, A/B) 0.9 0.7 0.8 1.1 1.2 1.5 1.2 1.2
(Adequate) Risk sharing for PPPs is a key requirement for the implementation Public –Private- Partnership (PPP) impose an obligation on Public
(governments) by definition
Construction and operating risks are typically borne by the private sector, whereas the political, exchange rate, force majeure risks are generally borne by the public sector
Fiscal implications of PPPs should be properly accounted for and reported
To prevent their misuse and to enhance efficiency
To prevent the substantial fiscal consequences.
To make PPP system long term sustainable
Final Remarks
20
To manage fiscal liabilities and burden, it is important to
Recognize and Analyze Potential Fiscal Liabilities at the up-front stage
Account and Report Potential Fiscal Liabilities
Setting a Fiscal Rule (or regulation) for PPPs
(For sustainable PPPs in Korea) the fiscal management for PPPs is strengthened by (1) Establishing an Unified Framework for Budgeting ; It helps not to
bypass expenditure controls, It ensures that full life-costs of PPPs projects are taken into account at project approval stage
Though budget for all financial commitments is recognized, however, risks or contingent liabilities are not fully estimated due to the lack of capacities.
Final Remarks
21
(For sustainable PPPs in Korea) the fiscal management for PPPs is strengthened by (2) Establishing Multistage scrutiny system for approval and disclosing;.
National Assembly : Approves aggregate ceiling on annual total amounts of PPP projects (BTL)
PRC (PPP Review Committee) ; Reviews and approves the expenditures and contingent liabilities.
Adoption of Accrual basis accounting including PPP projects, instead of cash basis accounting
Incorporating (Future) Payment for PPPs into Medium-term expenditure framework (MTEF) for recognition of the Long-Term Budget affordability
Final Remarks
22
(For sustainable PPPs in Korea) the fiscal management for PPPs is strengthened by (3) Setting a Safeguard ceiling for PPPs ; Aggregate fiscal
commitment limited to a sustainable level for maintaining fiscal soundness and stability.
Annual government payment : 2% of total government budget expenditure
PPP investment : 10% to 15% of total public investment
Final Remarks
23
FY95-FY00 FY02 FY04 FY06 FY08 FY10 FY11 FY12
Total SOC Investment 72.4 17.2 19.1 21.3 24.3 27.2 26.6 25.5
Government Investment (A) 69.7 16.0 17.4 18.4 20.5 24.5 24.4 23.1
PPP Investment (B) 2.7 1.2 1.7 2.9 3.8 2.7 2.2 2.4
B / A (%) 3.9 7.5 9.8 15.8 18.5 11.0 9.0 10.3
Thank you
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