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The views expressed in this paper/presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequence of their use. Terminology used may not necessarily be consistent with ADB official terms.



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Public and Private InfrastructureInvestment Management Center

PPP LEGAL AND REGULATORY

FRAMEWORK IN KOREA

Sanghoon Ahn

Head, Policy & Research Division



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1. PPP Act and Legal Framework

2. Implementation Procedure

3. Major Players

4. Framework for Government Support



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Part-01 PPP Act and Legal Framework



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- Infrastructure projects were carried out underindividual laws

- Enactment of PPP Act 『The Act on Promotion ofPrivate Capital into SOC Investment』

-Revision of PPP Act

『The Act on Private Participation in Infrastructure』-Introduced Unsolicited project, Risk sharing scheme,Establishment of PICKO

- Amendment of PPP Act- Introduced BTL method, Diversified facility types (Social Infra)- PICKO of KRIHS + PIMA of KDI => PIMAC of KDI

January 1999

January 2005

Before August 1994

August 1994

History of PPP Act



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Hierarchy of legal and administrative framework of PPP System

PPP Act

PPP Act Enforcement Decree

PPP Basic Plan

PPP Implementation Guidelines

The Legal Status of the PPP Act The PPP Act and Enforcement Decree are the principal components of the legal

framework of PPP.

They define eligible infrastructure types, procurement types, procurementprocess, the roles of the public and private parties, policy supports, etc.

The PPP Act is a special Act that precedes other Acts:

Exempts PPP projects from strict regulation in national property management

Allows a special purpose company (SPC) to play a role of competent authority

Legal Framework of the PPP System (1)



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Legal Framework of the PPP System (2)

PPP Basic Plan and Implementation Guidelines

The PPP Act directs the MOSF and PIMAC to issue the PPP Basic Plan.

The Basic Plan provides: PPP policy directions Details in PPP project implementation procedure Financing and re-financing directions Risk allocation mechanism

Payment scheme of government subsidy Documentation direction

PIMAC has developed PPP Implementation Guidelines: guidelines for value for money (VFM) test guidelines for RFP preparation

guidelines for standard output specification by facility guidelines for tender evaluation guidelines for standard concession agreement guidelines for refinancing

PPP Basic Plan and Implementation Guidelines are annually updated, reflectingrelevant changes and market conditions.



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Part-02 Implementation Procedure



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PPP Facility Types

Sector Facility Type

Road(3) Road, Ancillary Facilities, Non-road Parking Facilities

Rail(3) Railway, Railway Facilities, Urban Railway

Port(3) Port, Fishing Port Facilities, New Port Construction Facilities

Communications(5)Telecommunication Facilities, Information Communication System,

Information Super-highway, Map Information System, Ubiquitous City Infrastructure

Water Resources(3) Multi-purpose Dam, River-affiliated Ancillary Structures, Waterworks

Energy(3) Electric Source Facilities, Gas Supply Facilities, Collective Energy Facilities

Environmental(5)

Waste Treatment Facilities and Public Livestock Wastewater Treatment Facilities,

Waste Disposal Facilities, Wastewater Treatment Facilities, Recycling Facilities,Public Waste-water Treatment Facilities

Logistics(2) Distribution Complex, Cargo and Passenger Terminals

Airport(1) Airport

Culture and Tourism(10)

Tourist Site or Complex, Youth Training Facilities, Public Sports Facilities,

Libraries, Museums and Art Galleries, International Conference Facilities,

Culture Centers, Science Centers, Urban Parks, Professional Training Facilities*

Military Housing (1) Military Housing

Education(1) Schools

Forestry(2) Natural Recreational Resorts, Arboretums

Public Housing(1) Public Rental Housing

Welfare(4) Child-care Facilities, Senior Homes, Medical Facilities, Facilities for the Disabled*

* Expected to be included in the 2009 revised PPP Act Enforcement Decree



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Project Initiation

Solicited Projects

A solicited project is that the competent authority identifies a project for

private investment and announces a RFP

Unsolicited Projects For an unsolicited project, a private company (project proponent) submits a

project proposal, and then the competent authority examines and

designates it as a PPP project



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Procurement Schemes

BTO (Build-Transfer-Operate) Scheme

Both solicited and unsolicited projects are eligible

Roads, seaports, and railway projects, etc

User-fees, Minimum Revenue Guarantee (MRG) for solicited projects

BTL (Build-Transfer-Lease) Scheme

Only solicited projects are eligible

School, dormitory, military housing, etc

Government payments (Lease rent +operating costs)

Low risk-low return

Other Schemes

BOT (Build-Operate-Transfer)

BOO (Build-Own-Operate)



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Comparison of BTO and BTL Schemes

Private Sector(SPC)

End-user Government

ProvidesServices

PaysUser Fee

Grants

Operational

Rights

Transfers

Ownership

BTO

Private Sector(SPC)

End-user GovernmentPays

User Fee(If necessary)

Transfers

Ownership

ProvidesServices

BTL

Grants OperationalRights/

Pays GovernmentPayment

Structure



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Characteristics of BTO and BTL Scheme

BTO BTL

InvestmentRecovery

User feesConstruction subsidy

MRG

Lease payment(Fixed Revenue)

Project risk Demand risk on concessionaire Little demand risk on concessionaire

Return High risk, high return Low risk, low return

EligibilityBoth solicited and unsolicited

projectsSolicited projects only



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Implementation Process (BTO)



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Implementation Process (BTL)



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Part-03 Major Players



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Major Players in the PPP System (1)

Ministry of Strategy and Finance (MOSF) Major players in the PPP program include MOSF, concerned line

ministries, and the private sector.

MOSF is responsible for managing the PPP Act, Enforcement Decree,and the Basic Plan for PPP.

MOSF is also responsible for preparing the draft budget for PPPs.

MOSF plays a central role in budgeting as well as in preparing and

implementing PPP investment plans. Main budgeting decisions are made in bilateral negotiations between

MOSF and the spending ministry.



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PPP Review Committee (PRC) Organized and managed by the MOSF. Deliberates the matters concerning the establishment of major PPP

policies and key decisions in the process of implementing large scalePPP projects.

Consists of: (i) the Minister of Finance and Strategy (Chairperson); (ii)vice ministers of line ministries in charge of implementing PPP projects;and (iii) private sector experts with knowledge and experience in PPP

Main responsibilities of PRC are deliberation on: Establishment of major PPP policies Establishment and modification of the Basic Plan for PPP Designation and cancellation of a large (total project cost with KRW 200

billion or above) PPP project

Formulation and modification of the RFP for a large PPP project Designation of a Concessionaire of a large PPP project Other matters which MOSF proposes for the active promotion of the

PPPs.



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Public and Private Infrastructure Investment ManagementCenter (PIMAC) In order to provide comprehensive and professional support for the

implementation of PPP projects, PIMAC was established under the PPP Act

The mission and roles of PIMAC are prescribed in the PPP Enforcement Decree:

Supporting MOSF in the formulation of the Basic Plan for PPP

Supporting the competent authorities and ministries in the procurement process

– Assessment of feasibility and value for money for potential PPP projects – Formulation of the request for proposal

– Designation of the concessionaire

– Evaluation of project proposals by private companies

– Negotiation with potential concessionaire, etc

Promoting foreign investment in PPP projects through consultation services

Developing and operating capacity-building programs for public sectorpractitioners



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Special Purpose Company (SPC) Private sector participants who intend to implement a PPP project shall establish

a PPP project company, a legal entity which is to be designated as

concessionaire upon PPP contract award. In general, construction companies, financial investors, and professional operators

form a special purpose company (SPC) for the associated PPP project.

In many cases, a project proponent is a would-be company when it submits aproject proposal.

In such case, it shall include a corporate establishment plan in the project proposaland, when designated as a potential concessionaire, establish the company whichis to conduct the designated PPP project.

The SPC shall not engage in businesses other than those acknowledged by thecompetent authority at the time of designation of the concessionaire except

insignificant businesses approved by the competent authority.



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Part-04 Framework for

Government Support



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Government Support (1)

Acquisition of land by the concessionaire Granting of land expropriation rights to the concessionaire

National or public property in designated areas may be sold to theconcessionaire

Concessionaires are allowed to use national or public property withoutcharge or at lower price

Financial support Construction subsidy: The government may grant construction subsidy to the

concessionaire, if it is inevitable to maintain the user fee at a reasonablelevel

Tax incentive Exemption from acquisition and registration taxes on real estate for BOT

projects

0% VAT on construction services

Tax reduction for infrastructure bond



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Government Support for Land Acquisition

In order to facilitate PPP implementation, the PPP Act grantsland expropriation right to the concessionaire. The concessionaire may entrust the competent authority or the local

government with the execution of land purchase, compensation for loss,resettlement of residents, etc. The PPP Enforcement Decree regulates that detailed contents, terms, and

fees for such entrustment shall be determined by contract between theconcessionaire and the relevant authorities.

Notwithstanding the related provisions of the State Properties Act and the

Local Finance Act, national or public property may be sold to theconcessionaire by contract ad libitum.

Competent authority may allow the concessionaire to useand benefit from such national or public property withoutcharge.

In many PPP projects, the entire or part of land acquisitioncosts are compensated by the competent authority exceptfor a few highly profitable projects.



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Financial and Tax Incentives for PPP Projects

Construction Period

(1) Construction Subsidy

Operating Period

(2) Minimum Revenue Guarantee (MRG)

(3) Infrastructure Credit Guarantee via Infrastructure Credit Guarantee Fund

Subsidy:

Guarantee System:

(4) Special Taxation, Corporate Tax, Local Tax, exception from chargeTax Incentives:

Types

(5)Guidelines for Early TerminationEarly Termination



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Special Taxation for PPP Projects

Type Contents

InfrastructureBond

The concessionaire and other parties may issue Infrastructure Bond for implementing PPP projects. A separate tax

rate of fourteen percent (14%) shall be applied to the interest revenue from such bonds with fifteen years of maturity

or more (such application has been extended through December 31, 2009: Article 29 of the Restriction of Special

Taxation Act).

VAT

A zero percent (0%) tax rate is applied on value-added tax for infrastructure facilities or construction services of such

facilities provided to the central or local governments pursuant to Article 4 Subparagraph 1 (BTO), Subparagraph 2

(BTL) and Subparagraph 3 (BOT) of the PPPAct or for the construction services with the purpose that the

concessionaire under Article 2 Subparagraph 7 intends to operate a project that is charged with VAT (such

application has been extended through December 31, 2009: Article 105 Paragraph 1 Subparagraph 3-2 of the

Restriction of Special Taxation Act).

A zero percent (0%) tax rate is applied on value-added tax charged on urban railway construction work provided

directly to the concessionaire under Article 2 Subparagraph 7 of the PPPAct (such application has been extended

through December 31, 2009: Article 105 Paragraph 1 Subparagraph 3 of the Restriction of Special Taxation Act)

ForeignInvestment

Zone

Reduction and exemption on taxes, including corporate tax, income tax, acquisition tax, registration tax, and propertytax, are applied to foreign investment who invest USD 10 million to newly establish private investment facilities in the

Foreign Investment Zone (Article 116 Paragraph 2 Subparagraph 3-3(e) of the Restriction of Special Taxation Act)

Infrastructure

Fund

With respect to the dividend income distributed for the Infrastructure Fund, 5% tax rate shall apply to the dividend

income from the equity investment portion up to 300 million KRW and 14% tax rate shall apply to the dividend income

from the equity investment portion exceeding KRW 300 million(such application has been extended through

December 31, 2009; Article 91-4 of the Restriction of Special Taxation Act; Article 129 Paragraph 1 Subparagraph 2

of the Income Tax Act)



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Corporate Tax for PPP Projects

Type Contents

Infrastructure

CreditGuaranteeFund

The bad debt allowance for redeemable liabilities of the Infrastructure Credit Guarantee Fund pursuant to the PPPAct is

categorized as an expense (Article 63 of the Enforcement Decree of the Corporate Tax Act).

When the Infrastructure Credit Guarantee Fund accepts the bad debt allowance for redeemable liabilities as expense,

the amount is included as expense in the process of calculating earnings of the year within the range of 1/100 of the

remaining amount of the Credit Guarantee as of the end of the business year (Article 63 Paragraph 1 Subparagraph 3

and Paragraph 2 of the Enforcement Decree of the Corporate Tax Act).

Way ofCalculatingEarning

when uses

grantedsubsidy

When a domestic corporation uses granted subsidy for the purpose of acquisition or reform of business

assets with an aim to carry out PPP projects, the amount pursuant to such use is included as expensein the process of calculating earnings of the year (Article 64 Paragraph 1 and Paragraph 6

Subparagraph 3 of the Enforcement Decree of the Corporate Tax Act).

for

concessionaire

When the concessionaire distributes as dividend 90% or more of the distributable income by meeting

the terms of a nominal investment company as stipulated under Article 51-2 of the Corporate Tax Act

(the equity capital of the concessionaire corporation for the projects other than BTL projects shall be 5

billion KRW or more and the equity capital of the concessionaire corporation for the BTL projects shallbe 1 billion KRW or more), that amount is deducted when calculating earnings (Article 51-2 of the

Corporate Tax Act; Article 86-2 Paragraph 4 Subparagraph 1 of the Enforcement Decree of the

Corporate Tax Act).

Taxes aboutthe Land

Land developed for the implementation of PPP projects is exempted from additional taxation of capital gain tax and

corporate tax (Article 55-2 Paragraph 1 Subparagraph 3 and Paragraph 2 Subparagraph 4(c) of the Corporate Tax Act; Article 92 Paragraph 1 Subparagraph 3 of the Enforcement Decree of the Corporate Tax Act).



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Government Support (2) : MRG

A certain fraction of projected annual revenues may beguaranteed when the actual operating revenue falls considerablyshort of the projected revenue prescribed in the contract Applicable only to solicited projects

Not applicable to projects that earn less than 50% of projected revenue

Jan 1999May 2003

January 2006

Solicited UnsolicitedSolicited Unsolicited

Period Whole operating period 15 Years 10 Years

Abolished

GuaranteeLevel (Max)

90% 80%First 5 Years 90%Next 5 Years 80%Last 5 Years 70%

First 5 Years 75%Next 5 Years 65%

Condition NoneNo MRG applied

if Actual Revenue < 50%of Forecasted Revenue

Same as Left

Profile of Minimum Revenue Guarantee



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SOC credit guarantee fund provides credit guarantee for PPPproject finance to enhance the timely payment of debt service. Its

guarantee products include:

Guarantee for facility loans (during construction)

Guarantee for working capital loans (during operation)

Guarantee for bridge loans

Guarantee for refinancing

Guarantee for infrastructure bond

Buyout options

Force majeure (natural disaster or political turmoil)

Other specific events prescribed in the concession agreements



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Approval of Credit Guarantee

Year 2001 2002 2003 2004 2005 2006 2007 2008

Number 11 9 6 10 11 15 16 23

Amount 331 303 469 1005 1006 1215 1207 1216

(unit: bill. KRW)

SOC Credit Guarantee Fund is administrated by KODIT (Korea Credit Guarantee

Fund).

The maximum credit guarantee coverage has increased from 200 bill. KRW to

300 bill. KRW per project (Annual PPP Plan, revised Feb. 2009)



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RailwayParking

Lot

Environ

-mentRoads Schools Port

Number 1 2 5 4 8 3

Amount 200 24 148 400 39 135

In 2008, 23 PPP projects were provided with credit guarantee by SOC creditguarantee fund.

The total amount of guarantee in 2008 is around 1.2 trill. KRW.

(unit: bill. KRW)

Approval of Credit Guarantee (cont.)

Credit Guarantee in 2008 by Sector



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Recognition of Buyout Right

The concessionaire of facilities revertible to the government may

request the central or local government to buyout the concerned project

(including supplementary projects) in the event that construction or

management and operation of the infrastructure facilities is impossible

due to inevitable circumstances such as natural disaster.

[Grounds for recognition of buyout right]

When construction is suspended for six months or longer or total project cost increases byfifty percent (50%) or more due to natural disasters, war and other cases of force majeure;

When operation of the facility is suspended for six months or longer, or where the repaircost or reconstruction cost exceeds fifty percent (50%) of the initial total project cost dueto natural disasters, war, and other cases of force majeure;

When the government does not perform its duties in the absence of justifiable cause asdetermined in the concession agreement for a year or longer from the date of receipt ofnotification of the grounds thereof, or when the construction or operation of the facility isdelayed or suspended for six months or longer as a result; and

When a cause as determined by the concession agreement occurs and the competentauthority determines that it is reasonable to recognize the buyout right of theconcessionaire

* source: Basic Plan for PPP, May. 2008



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Buyout Right and Early Termination in PPP Projects

1. PPP

SOC

2. Gov. Project

1. Government

2. Concessionaire

3. Political Force Majeure

Event (default)

occurs by

4. Non -Political Force Majeure

Early Termination / Termination Payment

The concessionaire may request the

government to buyout the project in the event

that facilities is impossible to maintain due to

inevitable circumstances

Buy -out

RightBasic Plan for PPI

&

Concession

Agreement



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Change of Early Termination Clauses

Environment& SystemChanges

EarlyTerminationPaymentChange

1994 1997

’97 financial crisis leaves banksconscious of BIS ratios Risk weight of PPP senior loan is 400%

vs. government guaranteed seniorloan weight of 0%,

Early terminationpayments were notclearly stipulatedby law or regulation

Government’s Senior Debt

Guarantee clause

appeared inconcessionagreement

2000

“Basic Plan for PPP”

adopted buyout right& early termination

payment criteria

PPP projectsFirst launched

2003

Board of Audit &

NGO’s criticize system

Excessive MRGpayments and other PPPissues surface. Changeto payment per stage:Guarantee period andratio reduced

Guarantee stipulationburdened government Criticized for inequity

since senior debt sizediffers for each project

2004

New calculation methodconsidered privateinvestment andperformance-based futureexpected revenue To enable repayment of

remaining loans

2006

MRG payment methodchanged: 75-65%for10 years only for solicited projects



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Calculation Guidelines for Early Termination Payment for BTO Projects

CategoryBTO

Construction Period Operating Period

Default byConcessionaire Incorporated private investment amount1) Depreciated value of the amount on the left4)

Non-politicalforce majeure

Incorporated private investment amount x [1 +

Standard debt interest rate (A)2)]

Weighted average6) of the sum of the

depreciated value of the amount on the plus

the future expected profit5) while considering

the remaining operating period.

Politicalforce majeure

Incorporated private investment

amount x [1 + (A + B)/2]Same as above

Default byGovernment

Incorporated private investment

amount x [1 + current IRR3](B)]Same as above

Note: 1) Construction interest rate is deducted from the total private investment cost.

2) Add 2% to the annual average amount of distribution rate of a 5-year government bond for every yearduring the construction period and take its weight average by the ratio of accumulated total privateinvestment fund amount at the end of each year.

3) The current IRR is calculated by reflecting the real rate of consumer price increase to the real IRR duringthe construction period.

4) The already invested private investment fund is depreciated by the rate fixed in the concession agreement.

5) The expected profit is the amount discounting by fixed IRR the flow of expected profit that is based on thereal price at the time of termination.6) [Remaining depreciation x (1-ratio of remaining operating period)] + [future expected profit x (ratio of

remaining operating period)]



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Calculation Guidelines for Early Termination Payment for BTL Projects

categoryBTL

Construction Period Operating Period

Default byConcessionaire

(Private investment cost put in up to the timeof termination)-(Equity Capital put in to the

time of termination)

(The PV of lease fee of the remainingperiod that is discounted by rate of return

applied at the time of termination)-(Equity

capital put in)=E

Non-political

force majeure

[Net private investment put in at the time of

termination] × [1 + C]

E+(F-E)X1/3

Politicalforce majeure

[Net private investment put in at the time of

termination] × [1 + (C+ D)/2]

E+(F-E)X2/3

Default byGovernment

Net Private investment put in at the time of

terminationⅹ [1 + D]

The PV of the lease fee of the remaining

period that is discounted by the rate of return applied at the time of termination=F

* C: [Government bond interest rate] determined in the concession agreement* D: [Government bond interest rate + additional rate] determined in the concession agreement

* E & F: [Government bond interest rate + additional rate] applied when calculation lease fee at the time of termination



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Temporary support measures were introduced in the AnnualPPP Plan (Feb. 2009) as a response to recent global financial

market instability.

Risk sharing for adverse movements in interest rates

Incentive for Early Completion In the event of early completion, the SPC is granted the right to operate the

facility to the extent of ½ the reduced completion period.

BTO

in the event of more than ±0.5% point change in reference rate,

60~70% government support/redemption for reduced/excess interest rateamount

BTL

adjustment period for rate of return reduced from every 5 years to every 2

years

60~80% government support if interest rate difference between

government bonds and bank bonds amounts to 50bp



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Annual PPP Plan (Feb. 2009)

Reduction in Minimum Level of Required Equity Ratio

B T O

during period of construction 25% 20%

projects with investment ratio of financial

investors exceeding 50%20% 15%

B T L

projects of less than 100 billion KRW

(e.g. schools, military housing, sewerage

facilities)

5~15% 5%



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