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ccording to the government budget plan for 2004 released in September, public infrastructure spending will drop 6 percent, from 18.2 trillion won this year to 17.1 trillion. Central government spending will thus decline, but will not necessarily affect investment opportuniti es for the private sector. On the contrary, to maintain an adequate level of investment in infrastructure, private investment must rise. Additional investment will be necessary in order to build the logistical infrastructure to develop South Korea as the economic hub of Northeast Asia, one of the 12 policy goals of the administration of President Roh, Moo-Hyun.

  The concepts of Public Private Partnerships (PPPs) and Private Finance Initiatives (PFIs) have developed significantly worldwide since the 1990s. Korea embraced these new trends in the context of infrastructure in 1994, and initiated Korea¡¯s Private Participation in Infra-structure (PPI) program. Of course, private investment in public infrastructure was sought before this, but it was limited in terms of size and types of facilities. The private sector was authorized to operate and manage public infrastructure only after the new PPI program was installed. This created major new opportunities for the private sector.

  From 1994 to 2003, 134 projects have been implemented under this program at a total project cost of $33.25 billion. Most of these projects have been promoted as national policy projects. Of these, the Incheon International Airport Expressway, Cheonan-Nonsan Expressway, Gwangju Second Ring Road and another 32 projects are now in operation.

  CREATING A MARKET, BUILDING CONCENSUS
  Korea¡¯s PPI Program in Action
  Korean PPI has been especially successful since 1998 when the program underwent major revisions. These measures were taken in response to the limited success of the initial PPI program. Insufficient support measures, lack of transparency, complicated procedures, programs not in conformance with global standards, and unsatisfactory risk-sharing mechanisms were often cited as causes. In addition, the 1997/8 financial crisis critically altered the economic and financial environment.

  The changes in the program include clearer and more simplified procedures, systematic government support, transparent bidding requirements, and more incentives for the private sector. Submission of unsolicited proposals is encouraged through the provision of bonus points in the evaluation of the initial proposal. A minimum revenue guarantee of up to 80 percent of estimated operational revenue in the case of an unsolicited project, and 90 percent in the case of a solicited project, is also available. A long-term loan or direct financial subsidy may be offered when it is deemed necessary for the implementation of desirable projects. There are other incentives such as a foreign exchange risk guarantee, various tax reductions and exemptions, authorization of supplementary projects, and the establishment of a national PPI unit, the Private Infrastructure Investment Center of Korea (PICKO).

  PICKO¡¯s efforts are directed at creating synergies between concerned government institutions and potential investors through both facilitation and technical expertise. Government officials previously labored under a lack of expertise and a common standard to apply in the evaluation and negotiation of PPI projects, which, in turn, created confusion for investors, particularly foreign investors. The establishment of PICKO was designed to meet the needs of both the government and investors for consistent, expert PPI service.

  The renewed efforts of the Korean government to promote PPI in the Korean market have been successful. The number of projects is steadily increasing, the types of infrastructure proposed and implemented are diversifying, the geographic range of project sites has expanded, and competition in the market is becoming intense. Initially, the majority of the projects were roads, tunnels, bridges or harbors, and located within the Seoul Metropolitan Area. The range of participants was also limited; sponsors were mostly construction companies, and deals were arranged by the Korea Development Bank. Today, mutual funds, pension funds, and insurance companies are participating in infrastructure projects as equity partners, and numerous investment banks are providing loans. Light rail transit (LRT) projects in urban areas such as Busan, Yongin, and Uijongbu, plus sewage treatment plants (STPs) and waste disposal facilities in other regional cities are on the increase.

  As more PPI projects are actively implemented, they are gaining public awareness yet provoking resistance. However, public antipathy toward user fees and labor and environmental issues related to PPI projects is not specific to Korea, as many European countries have also experienced, and continue to experience, the same problems. The government is attempting to ease public sentiment against these initiatives by reducing the price gap between traditionally procured and PPI services, introducing public hearing procedures to reach consensuses, and fine-tuning PPI policy.

  A SEARCH FOR CONSISTENCY
  Korean PPI Market from a Foreign Investor¡¯s Perspective
  Foreign investment in infrastructure is one example of the progress of Korea¡¯s PPI market. Since 1998, nine projects have succeeded in attracting foreign capital amounting to $704.4 million in both equity and debt. The Daejeon Riverside Expressway was the first PPI deal signed with foreign investors, namely Egis Projects SA of France and Singapore Piling. The Busan New Port and the Incheon International Airport 2nd Bridge are recent projects in which foreign investment has been made. Negotiations are underway on the Yongin Light Rail Transit and Geomdan Sewage Treatment Plant, with Bombardier of Canada and Veolia Water (formerly Vivendi Water) of France, respectively. Also, the UFJ Bank of Japan stands ready to raise financing for the Seoul Beltway once the debate on drilling a tunnel through Mt. Sapae in the Mt. Bukhan National Park to facilitate the project is resolved. These three projects are slated to attract a further $175.3 million in foreign capital.

  Although the foreign portion within the total amount of private investment in infrastructure is not large, in those projects where it is present, it is a significant component. In particular, for projects with foreign equity participation, the foreign equity stake is 23.3 percent for national, and 93.0 percent for regional projects. Attracting foreign investment for smaller projects has proved relatively easier.

  Despite its successful participation in a number of projects, there remain significant obstacles for foreign investment. It was to address these difficulties that a PPI consultative meeting organized by PICKO and sponsored by the Ministry of Planning and Budget was held in June. Specifically, the meeting allowed foreign investors to air their opinions on the problems of Korean PPI and to discuss possible solutions. Rather than radical system reform, foreign investors suggested a faithful implementation of the system already in place. Mr. Serge Sassus, representative director of Veolia Water in Korea, emphasized implementation of a consistent and transparent framework, and asked for the willingness of all parties, including the central government, municipalities, and the private sector, to embrace all of the benefits offered by PPI. Other participants emphasized the negative consequences of the multi-level negotiation structure, the government¡¯s hesitance to share risk, ambiguous language in concession agreements, and the inflexibility of the public procurement process. Other typical problems for foreign investors, including language and cultural barriers, the absence of information in English, and the rigid stance of public officials, were also cited.

  Mr. Jun Huh, senior vice president of Hyundai Engineering and Construction, shared his experience with foreign companies and agreed with many of the points their representatives raised. However, he also pointed out the shortcomings of certain foreign investors, such as their demands for foreigner-specific revisions of the Korean PPI system, and their insistence on foreign models and new technology over domestic skills and proven systems even if higher costs would result.

PROPOSALS SOLICITED & UNSOLICITED
  Investment Opportunities in Korean PPI
  Thirty-six types of infrastructure in the 10 categories of road, rail, port, water resources, communications, energy, environmental facilities, logistics, and culture/tourism are eligible to be implemented under the program. The PPI program, though, does not cover all types of public infrastructure. The program, for example, still excludes projects in such areas as urban development and free trade zones. The government is continuing its efforts to include more types of facility under the program. The private sector can participate in PPI projects either by participating in public bidding or submitting a proposal for a new project. The former are referred to as solicited projects, and the latter, unsolicited projects. The procedures for solicited projects have been modified to encourage competitive bidding for projects that are financially attractive. They also allow for negotiation of the terms of the concession agreement. The concerned authority undertakes the initial development of the project (e.g. the Ministry of Construction and Transportation for transport infrastructure). The concerned authority is also responsible for approval of the detailed engineering and design planning as well as confirmation of project completion.

  The process for unsolicited projects is similar to that for solicited projects, but also allows for third-party proposals. In this case, the private sector prepares a proposal, which is then evaluated by PICKO. If approved, a minimum 90-day period is provided for third parties to submit counterproposals. These are also evaluated, and a winning bidder is selected. The initial proposer is given a bonus in the evaluation of the bids up to a maximum of 10 percent of the total evaluation score. The structure of the project is determined through negotiation.

  In 2001, the government of the Republic of Korea established its Ten-Year Plan for Private Participation in Infrastructure with the objectives of attracting private sector participation while maximizing the leverage effect of government subsidies. The comprehensive and systematic management implicit in the plan prevents interested parties from duplicating investment by demanding preliminary investment information on candidate projects.

  The plan includes a list of 179 candidate projects selected for private investment implementation during the plan period from 2002 to 2011 through consideration of investment priority within each of the five sectors - road, rail, port, environment, and other facilities. As of September 2003, 55 of the 179 are being implemented, while 124 projects await investment.

  A review of the plan for possible revision and improvement is scheduled for every three years, with the first slated for 2004. This monitoring is to enable prompt responses to changes the PPI market environment. In order to accomplish the long-term goals of the plan, a greater organizational effort is required to achieve a smooth conversion between government-financed and private investment projects.

COMPETING WITH CHINA
  An Invitation to Participate in Building ¡°Hub Korea¡±
  The specter of a nuclear-armed North Korea has destabilized the political environment in and around Korea. Aggressive labor unions are also scaring away foreign investors. The worst typhoon in history hit the Korean peninsula in September causing major damage to the country¡¯s infrastructure. Almost every factor influencing foreign investment seems to have turned negative. Korea must face the fact that it must work hard to win the confidence of foreign investors. This is easier said than done but one sure strategy is the showcasing of successful foreign-invested projects, several of which are already in operation.

  A selective and layered approach is required to better introduce foreign investment. Given ample domestic liquidity, more emphasis should be placed on attracting strategic investment that secures specialized productive plant, technical skills, or operational expertise rather than financial investment. While finding new and prospective foreign investors, the potential of those already operating within Korea, who may be willing to make a second or third investment, should be recognized.

  Korea is actively promoting the PPI program as a major element in its drive to compete with a rising China and become the economic and logistics hub of Northeast Asia. The program is well organized, and many financially viable candidate projects are awaiting investment. A ¡°road show¡± will visit Singapore and Hong Kong in November and feature the two projects that rank as the government¡¯s top priorities: the Busan New Port Phase II and Gwangyang Port. The road show is intended to broadcast to the world that Korea is ready to partner with the international business community in developing the infrastructure that will establish the country as the focus of the world¡¯s most dynamic region.

by Hahm Jung-lim (jlhahm@krihs.re.kr)
Senior Analyst,
Private Infrastructure Investment Center of Korea (PICKO)
Korea Research Institute for Human Settlements (KRIHS)