Sungmin Han
Associate Fellow
Public and Private Infrastructure Investment Management Center(PIMAC)
KDI
Nov 2015
Towards More Efficient Public Investment
Management
1
Most infrastructure
investment projects had
been evaluated by
foreign organizations or
experts.
Implementation of new
infrastructure investment
as suggested by the
Five-year Economic
Development Plans
History of Project Appraisal in South Korea
1960s
Investment Project
Deliberative Committee
(IPDC)
(Economic Planning
Board (EPB))
Review of the feasibility
of investment projects
costing over 10 billion
Korean Won (KRW)
1970s
As the nation began to
expand steadily at an
unprecedented rate
financially and
economically,
the number of projects
and their value
increased, rendering
effective analysis
increasingly difficult.
1991
The “Regulations on
the Major Investment
Project Review”
amended (EPB dir.)
Review of projects
with total investment
of KRW 50 billion or
more;
Internal review of
projects with KRW 10
billion to just under
KRW 50 billion by an
“operating division”
1994
The Budget Office in
MFE
Difficult to review the
results of feasibility
assessments of major
projects submitted by
each operating
division
Total Projects Cost
Management (TPCM)
『The Private Capital
Inducement
Promotion Act』
1999
Introduction of
preliminary
feasibility study
The Public Investment
Management Center
(PIMA) at the Korea
Development Institute
(KDI) to undertake pre-
feasibility studies was
established (2000)
『The Act on Private
Participation in
Infrastructure 』
(MPB); the
amendment of PPP
Act
0
2
4
6
8
10
12
14
16
18
0
20
40
60
80
100
120
140
Considerable increase in government expenditure for social
welfare and physical Infrastructure
Welfare
Physical Infrastructure
(unit: trillion won, % of expenditure)
Source: Ministry of Strategy and Finance, Korea. Consolidated Fiscal Balance, Respective Year.
Consolidated Fiscal Expenditures and Net lending by Central Government
A Need for Effective PIM System ( I )
2
A Need for Effective PIM System ( II )
Criticism against Feasibility Studies by Line Ministries
: Lack of Objectivity and Reliability in FS
The baseline cost of the Seoul-Busan High Speed Rail (KTX) project has
more than tripled from 5.5 trillion KRW ($5.5 billion USD) to 18.5 trillion
KRW ($18.5 billion USD).
A feasibility review committee investigated the FS.
Thirty-two out of thirty-three projects (1994-98) were evaluated as
feasible in FS.
Serious flaws in terms of transparency, credibility and objectivity
3
4
What went wrong and why?
Polluted by interested groups
No independent review process
Economic value isolated from social value
Lack of standardized guidelines and databases
Capital project budgeting inconsistent with the Medium Term Expenditure
Framework (MTEF) budget
Ex ante appraisal, and nobody cares thereafter
A Need for Effective PIM System ( III )
Evolution of PIM System
5
TPCM (Total Project Cost Management)
PFS (Pre-Feasibility Study)
RSF (Re-assessment Study of Feasibility)
IEBP (In-Depth Evaluation of Budgetary program)
RDF (Re-assessment of Demand Forecast)
PE (Performance Evaluation)
VE introduced in 2000 and reinforced in 2005
2006
RDF introduced
RSF strengthened
National Finance Act
legislated
2003
RSF guidelines
developed
1999
PFS introduced
RSF introduced
PE introduced
2005
IEBP introduced
1994
TPCM introduced
Introduction of PFS
New paradigm of PIM
As a government reform initiatives in response to the financial crisis of
1997-98, a new PIM started in 1999.
Introduction of Preliminary Feasibility Study (PFS)
Short and brief evaluation of a project to produce information for
budgetary decision
Owned by the Ministry of Strategy and Finance (MOSF) and evaluated
by independent evaluation unit, PIMAC
Clear and explicated binary judgment (feasible/non-feasible) on the
overall feasibility
6
Line Ministry KDI (PIMAC)
Select PFS Projectsin consultation with
PFS committee
Request PFS
Make InvestmentDecision
Submit PFS Report
Organize Teams/Conduct PFS
Consultation based on :• Eligibility for central
government grants•Urgency of the Projects•Concreteness of the project plan
Determination of the Priorities by considering • The long-term
National Compre-hensive Plan,
• National Policy Direction
Select and Submit PFS candidate
projects
(pre –PFS Committee)
Implementation Procedure of PFS
Ministry of
Strategy & Finance
Conduct Feasibility Study or Stop the Project
1st
Stage
2st
Stage
3st
Stage
Open to the PublicAnnouncement & Report to the National Assembly
7
1st Stage: Selection of Target Projects Subject to PFS
Line Ministry: Selection of PFS Candidate Projects and Submission of
Project Proposals to MOSF
All new large-scale projects with total costs amounting to 50 billion KRW (about
50 Million USD) or more are subject to PFS.
In principle, line ministries submit a project proposal to MOSF two years before
the project.
PIMAC: Setting Forth its Views based on Project Proposals
Consultation based on eligibility for central government grants, urgency of the
projects and concreteness of the project plan
MOSF: Selection of target projects subject to PFS in consultation with
PFS committee
Eligible projects are selected from the PFS request submissions through a PFS
committee.
8
1st Stage: Coverage of PFS
Initially focused on economic infrastructure, PFS has expanded
to social infrastructure, non-infrastructure (e.g. R&D, welfare)
programs, SOE projects and tax expenditure program.
PFS on Transport
Social
Infrastructure
Non-infrastructure
(R&D, Welfare program)
PFS on
SOE Projects
Tax Expenditure
Program
9
2nd Stage: Setting Out PFS
Receiving project proposals of line ministries from MOSF,
PIMAC sets out PFS and objectively evaluates project feasibility
for 6 months.
In the early stages: organizing PFS team(External + Internal Experts),
inquiring related data, addressing issues, studying PFS guidelines, etc
Well developed evaluation guidelines
Detailed description of methodology and procedures of PFS
implementation to avoid ambiguity
PFS guidelines by sector :
Roads, rail, seaports, airports, dams, and cultural facilities
Using the same dataset for different projects in the same sector
Continuous revision of guidelines through academic research
10
2nd Stage: Evaluation
Various values are incorporated and evaluated.
Various values (economic efficiency, policy consistency, relevant plans
and policy directions, environmental impact, regional equity, project-
specific factors) are incorporated in the frame of PFS.
Multi-criteria decision making technique(AHP) is finally adopted to
combine quantitative and qualitative elements of evaluation.
Giving a weight on each element through pair-wise comparison
A project is evaluated as feasible if AHP score is 0.5 point or more out of 1.0
point.
PFS results are rarely overruled by budget ministry and the National
Assembly.
Range of weight: Economic analysis–40~50%, Policy analysis–
25~35%, Balanced regional development analysis -20~30%
11
Project proposal
• Review of statement of purpose
• Collect socio-economic, geographic, and technical data
• Brainstorming (Other Alternatives)
• PFS issues raised
Background study
• Consistency with higher-level plan and policy directions
• Project risk (financing and environmental impacts)
• Project-specific evaluation item
Policy analysis
• Demand analysis
• Cost estimation
• Benefit estimation
• Cost-benefit analysis
• Sensitivity analysis
• Financial analysis
Economic analysis
• Overall feasibility
• Prioritization
• Financing and policy suggestion
Analytic Hierarchy Process
• Regional backwardness index analysis
• Regional economic impacts
Balanced regional development analysis
2nd Stage: Flowchart of PFS Analysis
12
Receiving the PFS result from PIMAC, MOSF makes an
investment decision based on it.
Submission of the PIMAC’s PFS full report to MOSF when PIMAC
completes PFS
MOSF announces the result to the National Assembly.
Go or Stop decision
In case of a project found feasible(go decision), line ministries conduct
feasibility study in more detail.
PIMAC announces the report to the public through the web.
The public can be readily accessible to the web and download PFS
reports from it.
3rd Stage: Investment Decision
13
3rd Stage: PIMAC, KDI Website
14
Number of PFS Executed and Total Project Cost (1999~2014)
Note: 1) PFS completed as of 31 Dec 2014.
2) About 60 PFS conducted by other organizations are not included.
20
30
41
3032
55
30
52
46
38
63
48
43
35
13
36
0
5
10
15
20
25
30
35
40
0
10
20
30
40
50
60
70
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Number) (Trillion)
# of PFS executed total project cost
15
Proportion of Feasible Projects and Total Project Cost Saving
(1999~2014)
Note: 1) PFS completed as of 31 Dec 2014.
2) About 60 PFS conducted by other organizations are not included.
65.0%
53.3%
34.1%
43.3%
59.4%
74.5%
63.3%
53.8%56.5%
68.4% 68.3%
75.0% 74.4%
69.4%
76.9%75.0%
63.2%
0
5
10
15
20
25
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
(Percent) (Trillion)
Proportion of feasible projects Saving Project Cost Total Saving Project Cost
16
Challenges and the Way forward
International comparison of general gov’t debt levels shows
Korea has a sound fiscal condition compared to other countries.
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17
Challenges and the Way forward
Public sector debt is a sustainable level, but the size and portion
of the debt held by public corporations are relatively greater than
other countries.
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General Government Public Nonfinancial Corporations
18
Challenges and the Way forward
The new paradigm of public investment management system in
early 2000 was a successful device to shift the trend of
infrastructure development, strengthening fiscal efficiency.
The PIM process in Korea need to be developed following good
tradition of infrastructure development.
Strong linkage of infrastructure development to national policy direction
such as economic growth
Guide of infrastructure development by a strategic vision of national
development
Capability to adjust investment priority by national economic
development stage
19
THANK
YOU!