By enacting the Promotion of Private Capital into Social Overhead Capital Investment Act in August 1994, Korea introduced the public-private partnership (PPP) scheme in earnest.2 Under the PPP scheme, the government seeks to supplement its insufficient finances by inviting private funds to construct social infrastructure, such as roads, railroads, and harbours. Subsequently, Korea has continued to make efforts in creating an environment suitable for private partnership for approximately 20 years by statutory amendments and system improvements. The current PPP is being operated transparently and fairly, pursuant to the Act on Public-Private Partnership in Infrastructure (the PPP Act), its enforcement decree, the Public-Private Partnership Project Basic Plan (PPP Basic Plan), the detailed methods and guidelines prescribed by the Korea Development Institute's Public and Private Infrastructure Investment Management Center (PIMAC),3 and ordinances legislated by each local autonomous government.
By amending and publicly announcing the PPP Basic Plan annually, pursuant to the PPP Act, Korea is responding to the changes in conditions of the private investment market. Moreover, by developing guidelines on various types of evaluation and enforcement processes and standardising the qualification examinations, infrastructure project basic plans, and implementation agreements, Korea is striving to enhance transparency and fairness in implementing PPP projects.
Triggered by the deterioration in government finances caused by the foreign exchange crisis in the late 1990s, the demand for PPP projects in Korea had increased exponentially. At that time, PPP projects were boosted by the large influx of foreign infra funds, which had an abundance of experience in implementing PPP projects and the requisite capital. The number of projects and the total invested amount eventually peaked in 2007, subsequently declining as the financial crisis subsided. However, PPP projects for social infrastructures, such as roads, railroads, harbours, and terminal sewage disposal plants, have continued to build and rebuild Korean infrastructure.
II THE YEAR IN REVIEW
PIMAC publishes an annual report on PPP projects each year; however, the 2018 Annual Report on PPP projects has not yet been published.4
According to the 2017 Annual Report on PPP projects, there were 712 PPP projects in total that were in progress or implemented as of the end of December of 2017 and the total investments in such PPP projects amount to approximately 108 trillion won as of the above-mentioned date. PIMAC had performed the review of the PPP Basic Plan and the PPP Project Plan, evaluation of project plan proposals, negotiation for execution of the concession agreement, review of the proposed concession agreement, review of and negotiation on refinancing (including reorganisation of the capital structure of project companies), and change of project implementation terms, for approximately 80 PPP projects.
III GENERAL FRAMEWORK
PPP projects in Korea are regulated by the PPP Act and its subordinate statutes. The statutory system governing PPP projects is described in the table below.
|System||Norms||Legislator or author|
|PPP Act||Social infrastructure specification, implementation method, PPP project implementation procedure, concessionaire's rights, industrial infrastructure credit guarantee fund, social infrastructure investment and loan collective investment scheme, PPP project dispute resolution committee, management and supervision, systematic support, and penalties||National Assembly|
|Enforcement Decree of the PPP Act||Elaboration of statutorily delegated matters||President|
|The PPP Basic Plan||Annual policy implementation direction and investment plan, general guidelines on implementation of PPP projects, and PPP project implementation procedure||Minister of Strategy and Finance|
|Detailed methods and guidelines||Detailed methods for qualification examination, detailed methods for funding, and detailed methods for evaluation and negotiation, etc.||PIMAC|
Korean PPP projects are statutorily limited to six categories of projects under the PPP Act; however, by stipulating broad details regarding the fifth and sixth categories, the PPP Act, in effect, permits PPP projects to be implemented in diverse manners, such as build-transfer-operate, build-transfer-lease, build-operate-transfer and build-own-operate.
PPP project implementation projects can be broadly divided into two types: government initiated projects, wherein private partners are recruited by the government to implement a publicly financed project, where the government sees the private partner as having superior capacity and expertise to deal with the project than the government; and privately initiated projects, wherein a private partner independently discovers a project that is deemed profitable among the PPP projects and proposes its implementation to the government.
The types of social infrastructures that can be subject to PPP projects are enumerated in the PPP Act, and they are relatively diverse: roads, railroads, harbours, airports, water resources, information telecommunication infrastructure, energy facilities, logistics complex, environmental facilities, educational facilities, national defence facilities and cultural facilities.
ii PPP project implementation procedure
With respect to government-initiated projects, the Minister of Strategy and Finance commences the project implementation by establishing a basic plan regarding social infrastructure that conforms to priority order according to the principles of the beneficiary's financial capability, profitability, business benefits and efficiency, in accordance with the PPP Act, and subsequently selects and publicly announces the social infrastructure to be constructed as a PPP project.
To elaborate, a potential infrastructure project is designated by the government –whether national or local – and a preliminary feasibility study for such a designated project is requested by the competent government authority5 to the Minister of Strategy and Finance. Upon receiving such a request, the Minister of Strategy and Finance commissions PIMAC to perform a preliminary feasibility study and report the result thereof. Based on such result, the competent government authority files an application with the Ministry of Strategy and Finance to designate and publicly announce the designated project as a PPP Project, if the total project cost is billion won or more (the competent government authority has the authority to designate and publicly announce any project with total project cost less than 200 billion won (build-transfer-lease type is 100 billion won)). Upon obtaining the designation and public announcement, the competent government authority prepares and publicly announces a detailed infrastructure project basic plan based on the PPP Basic Plan.
The Basic Plan acts as a reference for private partners to prepare a project plan to be submitted to the competent government authority – multiple private partners can competitively submit project plans for a single infrastructure project. The competent government authority would then review the project plans submitted by various private partners and designate one private partner as a preferred negotiating partner, which would subsequently negotiate on the proposed concession agreement and decide on the final proposed concession agreement for execution. Once the negotiation is over, the competent government authority and the private partner (or project implementing corporation established by the private partner) will enter into the concession agreement.
Based on the concession agreement, the private partner or project implementing corporation (the concessionaire) will apply for the competent government authority's approval of implementation plan including an implementation design drafted pursuant to the proposed concession agreement. The concessionaire will commence the construction of social infrastructure as a PPP Project according to the implementation plan and the concession agreement upon the competent government authority's approval based on the latter's review, in accordance with the relevant statutes and basic plan. After months or even years, the competent government authority will confirm the completion of construction and the relevant PPP Project will commence commercial operation.
Privately initiated project
A privately initiated project commences with the submission of a project proposal to a competent government authority by any private partner seeking to implement a PPP Project. Upon receipt of such project proposal, the competent government authority commissions PIMAC to review the relevant proposal in order to evaluate whether the project details proposed by the private partner are feasible. Subsequent to the review, PIMAC will submit its opinion to the competent government authority and the Minister of Strategy and Finance.
If PIMAC's opinion is that the proposed project is economically feasible, the competent government authority will publicly announce the relevant project proposal, so as to invite other non-proposing private partners to also submit a project plan, or to provide other private partners with an opportunity to submit other project proposals (for the same project). If no other project proposals are received from other private partners, the project plans submitted by the private partners will be considered by the competent government authority. Conversely, if other project proposals are received, the competent government authority will request PIMAC to provide its review opinions on each of such other proposals.
By reviewing the submitted project plans or other project proposals, the competent government authority will select the preferred negotiating partner. If no other project proposals are submitted, the initial proposing party will be designated as the preferred negotiating partner; however, if other project proposals are submitted, the competent government authority will compare, review, and evaluate the proposals and project plans to designate the preferred negotiation partner.
After a preferred negotiation partner is designated, such a private partner (or a project implementation company established by the private partner) would negotiate the proposed concession agreement with the competent government authority, and nail down the final proposed concession agreement for execution. Upon the execution of such agreement, the private partner (or a project implementation company established thereby) would become the concessionaire and apply for the competent government authority's approval of the implementation plan (including implementation design) drafted based on the proposed concession agreement.
Upon obtaining such approval from the competent government authority, the Concessionaire will commence the construction of the social infrastructure as a PPP Project pursuant to the implementation plan and the concession agreement. Once the construction is completed, the competent government authority will confirm such completion and begin commercial operation of the relevant PPP Project.
iii Government agencies related to PPP projects
Major government agencies and support institutions related to the Korean PPP projects include the Ministry of Strategy and Finance, the various competent government authorities, the PPP Project Review Committee, the PPP Project Dispute Mediation Committee, PIMAC at the Korea Development Institute, and the Korea Infrastructure Credit Guarantee Fund.
The Ministry of Strategy and Finance legislates and announces the PPP Basic Plan, and subsequently amends, changes and announces such PPP Basic Plan by reflecting the market conditions.
The various competent government authorities include the Ministry of Land, Infrastructure and Transport, the Ministry of Environment, the Korea Maritime and Port Administration, and the Ministry of Education, depending on the relevant project. Local autonomous governments may also be categorised as a competent government authority. Such competent government authorities are the public-sector parties that prepare the infrastructure project basic plan, review the project proposal or project plan, select the preferred negotiating partner and execute the concession agreement.
The PPP Project Review Committee is an organisation that reviews whether to approve projects with total estimated project costs of 200 billion won or more. The PPP Project Dispute Mediation Committee is an organisation that handles mediation in the event of dispute between the concessionaire and the competent government authority regarding the relevant PPP project (since the PPP project dispute mediation procedure is not a compulsory project, disputes more frequently proceed directly into arbitration procedure or other dispute resolution procedures pursuant to the concession agreement).
PIMAC prescribes detailed methods, guidelines and policies regarding the entire PPP projects pursuant to the PPP Act and PPP Basic Plan, publicly announces by establishing standardised concession agreement proposal, and submits opinions by conducting preliminary feasibility studies by each project (if public funds are invested or an agency invested with public funds participates in the project). If a given project is deemed unreasonable as a result of preliminary feasibility study, the relevant project is likely to be rejected; hence, PIMAC performs a very important role in the Korean PPP projects.
The Korea Infrastructure Credit Guarantee Fund provides credit guarantees for concessionaire if such concessionaire obtains loans for PPP project costs from lending banks. Such guarantees cover the obligations to return loan principals borne by the concessionaire, and the fund is established from contributions made by the central government and local autonomous governments pursuant to the PPP Act, income from guarantee fees, management profits from the fund, or loans from other financial institutions.
iv Financial support for PPP projects
Under the PPP Act, direct financial support can take the following three forms: construction subsidies, minimum revenue guarantees and termination payments.
Construction subsidies are financial supports provided at the construction phase, and timing of such support is decided in the concession agreement in connection with the concessionaire's capital investment plan.
Under minimum revenue guarantees, the government or local autonomous governments guarantee a certain ratio of the revenue prescribed by the implementation agreement, which is intended to reduce the financial risk of private partners to pursue stimulation of PPP projects. However, multiple instances of side-effects wherein the contributions from the government or local autonomous governments increased due to excess estimation of demand occurred; hence, in concession agreements that were newly executed after 2006 (privately initiated project) and 2009 (government initiated project), minimum revenue guarantees are not prescribed. Moreover, even the already executed minimum revenue guarantee provisions are being subjected to attempts in changing them to investment risk-sharing schemes, such as investment risk-sharing types and profit-and-loss sharing types.
Termination payments are made to the private partners by the competent government authority when the concession agreement is terminated. Since ownership to the relevant infrastructure belongs to the government or local autonomous governments upon termination of the concession agreement, the termination payments were introduced so that the benefits that the government enjoys from such infrastructure projects do not constitute unjust enrichment for the government. Termination payments are paid in different ranges by each type of PPP Project.
Though not direct financial supports, other forms of supports are available for private partners. Provision of credit guarantee through the Industrial Infrastructure Credit Guarantee Fund performs the role of supporting private partners to more easily obtain loans.
The PPP Act explicitly stipulates the basis for establishing a collective investment scheme6 for PPP projects and provides exceptions on establishment and operation of such collective investment scheme, so as to pursue stimulation of PPP project financing. Moreover, the PPP Act permits the issuance of social infrastructure bonds so that private partners can issue long-term bonds to implement PPP projects.
Moreover, if meeting certain requirements, private partners may also be provided with tax-exemption benefits that exempt such private partners from paying development charges, overpopulation charges, or local taxes that they have to pay in the process of implementing the PPP project.
Key details of standardised concession agreement
PIMAC prepares and announces publicly a standardised concession agreement proposal for each PPP project infrastructure and for each type of project. A standardised concession agreement proposal is ultimately executed through negotiations between the parties for each matter, and the key matters included in this standardised concession agreement proposal are as follows:
- designation of concessionaire and its rights and obligations: if a concession agreement is executed with a sponsor, the sponsor must establish a project company before the approval of the implementation plan;
- periods for assumption of ownership and establishment of management and operation rights: the timing for assumption of ownership by the competent government authority is different for each project type. The period for management and operation rights is also differently established pursuant to negotiation by each infrastructure type;
- total project costs and total private project costs, and procedure for changing total project costs: total project costs and total private project costs are clearly set based on constant prices, and the grounds for changes in total project costs are enumerated in a limited scope;
- financing (owned capital and borrowed capital): the standardised concession agreement proposal includes provisions on the market price, method and procedure for the project financing. These provisions also include the approval procedure by the competent government authority when providing collateral for the procurement of borrowed capital;
- matters related to design and construction: these concern agreed matters regarding the design standards, construction, and subcontracting (include basic matters to be included in the engineering, procurement and construction contract);
- matters related to maintenance and operation: including basic matters to be included in the operation and maintenance agreement;
- project rate of return and usage fee: after setting the pre-tax real rate of return, the usage fee is set to achieve the target rate of return. Subsequently, if the target rate of return is affected by the occurrence of grounds explicitly provided in the concession agreement, the procedure for adjustment of usage fee is included in the standardised concession agreement proposal. When minimum revenue guarantee was provided before 2009, the provisions on the size and procedure of contribution payments by the competent government authority were also included in this chapter;
- support and obligations of competent government authority: if the competent government authority decides to provide financial support such as construction subsidies, this chapter will explicitly stipulate the matters related to the support by the competent government authority. This chapter also explicitly stipulates other matters related to the provision of project land, administrative procedure support, permit and licence support, and land compensation standards;
- matters regarding risk: this chapter provides the subscription to risk insurance and the plan for handling the risk caused by reasons attributed to the concessionaire or competent government authority or risk caused by force majeure event;
- conclusion of agreement: this chapter includes provisions on expiration of contract term, conclusion of agreement by termination, and follow-up measures pursuant thereon, and right to claim for purchase and termination payments;
- disposal of rights and refinancing: these include provisions on disposal of concession rights, change of concessionaire, establishment of additional security, and grounds and procedure for refinancing; and
- dispute resolution: though dispute resolution based on arbitration is preferred, a court decision-based resolution is also possible. Mediation by the PPP Project Dispute Mediation Committee composed pursuant to the PPP Act is not a requirement.
IV RECENT DECISIONS
According to the 2017 PPP Project Annual Report published by PIMAC, PIMAC had conducted 31 reviews of preliminary feasibility study in 2017, and the total investment amounts for such 31 PPP project candidates amounted 21.149 trillion won. In 2016, the number of PIMAC's review of preliminary feasibility study was 23, and the total investment amounts for such 23 PPP project candidates amounted 6.9 trillion won.
After PIMAC's review of preliminary feasibility study in 2017, approximately 47.7 per cent of the PPP project candidates were economically feasible. In 2016, the rate was 56.5 per cent. These figures can be viewed as an increase in the number of preliminary feasibility studies and the investment amounts compared to the previous year's statistics. However, PIMAC seems to apply harder standards for preliminary feasibility study of the PPP projects than those of previous year.
PIMAC is in search for an arrangement wherein private partners and competent government authorities can share the risk equally by changing the minimum revenue guarantee agreement included in the concession agreements executed before 2009. Moreover, upon request by the competent government authority, PIMAC assists in negotiation on the change of risk-sharing arrangement on behalf of the competent government authority.
In January 2019, the government took action to waive a preliminary feasibility study for 23 government-financed social overhead capital projects amounting to approximately 24 trillion won, which is likely to spur projects establishing infrastructures in Korea. Some of these major infrastructure projects are anticipated to be PPP projects. However, upon considering the size of input of the government budget and the economic feasibility of pending projects for regional development, government-financed projects are likely to be implemented first.
In the meantime, with more than 20 years of active implementation of the PPP projects in Korea, private investors' management and operation rights are expected to expire in some of the PPP projects that had been implemented in the past. This pending expiration has invited earnest discussions on the plan to manage the facilities subject to private investment. Some of the plans being discussed include the government's acquisition, and subsequent management and operation, of facilities for which the private investors' management and operation rights are expiring; application of a new PPP project format; accompanying improvement or expansion of the relevant facilities; delegation of operational capabilities to private companies; or sale of the facilities to private companies. These discussions are anticipated to form one axis of the PPP projects in the years to come.
Further, with reduced political tension between North and South Korea, the significant construction demand for the establishment of infrastructure to stimulate the economy and improve the environment in North Korea is anticipated. To meet this demand, PPP projects are expected to increase in the future. Hence, many construction companies and financial institutions appear to be preparing for a construction boom in North Korea. However, at this moment, it is not certain whether the South Korean legal scheme for PPP projects would apply to such PPP projects to be implemented in North Korea.
1 Soong Ki Yi and Joon Man Shim are partners, and James Jin Jung is a foreign attorney at Yoon & Yang LLC.
2 Several social infrastructures were constructed under the PPP scheme even before the enactment of this act. However, the aforementioned projects were tailor-made by enacting and applying special legislations for each project. The PPP scheme was not stimulated before 1994 because each piece of special legislation had raised controversy that each project was a government attempt to provide special benefits to the private enterprises that participated in the relevant social infrastructure projects.
3 This is a government agency established under the PPP Act and serves as an information investment agency in charge of assisting the PPP projects executed between private partners and competent government authorities by providing preliminary feasibility studies and qualification examinations for projects that exceed a certain size.
4 We expect the report to be published on 30 April 2019.
5 The competent government authority is difference for each PPP Project depending on the social infrastructure being constructed. For example, the competent government authority for roads is the Ministry of Land, Infrastructure and Transport, and for sewage treatment plant it is the Ministry of Environment. Social infrastructures that must be installed by local autonomous governments are governed by the relevant local autonomous governments.
6 Though only a corporate-type collective investment scheme was permitted before 2011, a statutory amendment now also permits investment trust-type collective investment scheme. Accordingly, public-type infra funds have also been established.