Management of Public Investment Projects in Korea 2005 5 24 Korea Development Institute Public and Private Infrastructure Investment by zrt20108

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									Management of Public Investment
Projects in Korea



                    2005. 5. 24.


          Korea Development Institute
          Public and Private Infrastructure
          Investment Management Center
           Hyeon Park (hpark@kdi.re.kr]
                  Contents
1. Introduction
2. PFS (Pre-Feasibility Study) Overview
3. PFS Implementation
4. PFS Methodology
5. Case Study 1:
  PFS on Dang-jin ~ Cheon-an Freeway Construction Project

6. Case Study 2:
  PFS on Light Rail Transit Project in Kang-Nam Gu, Seoul

7. Further Issues in PFS
                                                            2
1. Introduction

Establishment of Integrated Public Investment Management

   ₵ A Pre-feasibility study (PFS) was introduced in April 1999 as a public sector reform
      initiative in the wake of the financial crisis of 1997 and 1998.
        • Since the 1970s, line ministries have implemented Feasibility Studies to get
          government budget funding.
        • Criticism of feasibility studies for the Seoul-Busan Express Rail project and other
          large-scale construction projects.

   ₵ A Total Project Cost Management (TPCM) System was established in 1994.
        • During the design and construction phases of a project, the change in construction
          costs is monitored by the Ministry of Planning and Budget.
        • If the total costs of a project increase by more than 20%, the feasibility study is re-
          inspected. In April 2005, re-inspection guidelines were established

   ₵ Performance evaluations for several road construction projects have been recently
      conducted.

                                                                                                    3
1. Introduction (2)

                  Public Investment Management Process

      Ex Ante                       Intermediate                         Ex Post


                                                                         Operation/
       Planning                        Draft Design
                                                                        Maintenance



        PFS
                                    Blueprint Design
(Pre-Feasibility Study)



                                    Land Acquisition/
   Feasibility Study
                                      Construction



                          Total Project Cost Management          Performance Evaluation
                          Re-inspection of Project Feasibility


                                                                                          4
2. PFS Overview


Purpose of PFS

   ₵ PFS aims to enhance fiscal productivity by launching large-scale public investment
      projects based on transparent and objective ex ante project evaluations.

Coverage of PFS

    All new infrastructure projects with total costs amounting to 50 billion Korean Won ($50
      Million USD) or more are subject to PFS.
    Local government and private investment projects are subject to PFS if central
      government subsidies exceed 30 billion Won.

    Exemptions from PFS

         Legally necessary facilities

         Rehabilitating facilities

         Military facilities
                                                                                                5
2. PFS Overview(2)

PFS Procedure

       Line               Ministry of        KDI
      Ministry        Planning & Budget

    Submit PFS           Select PFS
 projects candidate       Projects

                                          Organize Teams/
                        Request PFSs
                                           Conduct PFS

                      Make Investment        Submit
                         Decision           PFS Report

 Feasibility Study     Announcement
      or Stop
                                                            6
2. PFS Overview(3)

                   Comparison of PFS and Feasibility Study
                                   PFS                                         Feasibility Study
Definition      An overview survey preceding a detailed       Detailed analyses of economic and technical
                feasibility study aimed at budget             feasibility before beginning construction of the
                planning and setting priorities               projects that have already met the criteria of the
                                                              preceding PFS
Economic        Broad analyses to decide whether the          Precise and detailed analyses to decide whether
Analysis        next phase of detailed feasibility study is   construction should be started. Analysis focuses on
                necessary. Finding alternative way to         a given alternative.
                achieve the project goal.
Policy          Examination of macro aspects of the           Not applicable except for detailed environmental
Analysis        project, such as necessity of the project     impact assessment and analyses of some related
                in a national-economy perspective,            issues that have significant expected impacts
                correspondence with higher level plans,
                and balanced regional development.
Technical       Detailed analysis is not required.            Various detailed analyses including soil analysis and
feasibility     Replaced by expert's consulting.              analysis of engineering techniques.
analysis
Evaluation      Ministry of Planning and Budget               Spending Agency (Line Ministries)
Ownership
Research        80 – 100 million won                          300 million - 2 billion won
fund/duration   Approximately 6 months                        Depending on the project



                                                                                                                      7
2. PFS Overview(4)


                       <Table 1> Number of PFS Conducted

               Roads          Rail      Seaports Airports        Dams       Other   Sum
    1999        11              2           1       0              1         4        19
    2000        11              7           5       1              1         5        30
    2001        20             14           1       1              0         5        41
    2002         9              9           0       0              5         7        30
    2003        19             11           4       0              5         12       51
    2004        14              6           0       0              3         10       33
    Sum         84             49          11       2             15         43      204
Proportion (%) 41.2           24.0        5.4      1.0            7.4       21.1    100.0

Evaluation Results
    ₵ About half of the projects were evaluated as being ‘Not-Feasible.’.


                                                                                            8
3. PFS Implementation


Pillars of PFS Implementation
   ₵ Objectivity, consistency, and transparency



Development of Evaluation Guidelines
   ₵ Detailed description of methodology and procedures of PFS implementation

   ₵ 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



                                                                                9
3. PFS Implementation (2)


Multi-disciplinary Research Team

   ₵ Three or more organizations are involved including KDI

        • e.g. KDI (Project manager), University professors (Transportation demand analysis),
           and Engineering firms (Cost estimation)

   ₵ Induce balanced decision-making



PFS Committee
   ₵ Members: Staff from the MPB and line ministries, PIMAC, the PFS team, and field
      specialists

   ₵ Open discussion on mid-term and PFS final reports



                                                                                                10
4. PFS Methodology
                             [Figure 1] PFS Flowchart

                                     Project Proposal

                                     Background Study
                              Review of statement of purpose
                          Collect Socio-economic, geographic, and
                                       technical data
                                       Brainstorming
                               Raising issues concerning PFS


          Economic Analysis                                      Policy Analysis
           Demand Analysis                               Balanced Regional Development
           Cost Estimation                                 Regional Economic Impact
          Benefit Estimation                            Consistency with Higher-level Plan
         Cost-Benefit Analysis                          Environmental Impact Assessment
          Financial Analysis                                   Regional Preference
                                                               Financial Feasibility


                          Multi-Criteria Decision Analysis (AHP)
                                    Overall Feasibility


                                                                                             11
4. PFS Methodology (2)


Economic Analysis
   ₵ Methodology: cost-benefit analysis
        • Criteria: B/C, NPV (Net Present Value), IRR (Internal Rate of Return)
        • Social Discount Rate: 6.5%
        • Duration: Roads, rail and seaports (30 yrs), Dams (50 yrs)
        • Tax is excluded but salvage value is included
   ₵ Benefit of road project
        • Valuation of changes in route, and travel speeds due to the project
        • Savings in travel time, vehicle operation costs, traffic accidents, and environmental
           costs (air and noise pollution)



                                                                                                  12
4. PFS Methodology (3)


AHP (Analytic Hierarchy Process)
   ₵ A multi-criteria decision-making approach

        • Combines quantitative and qualitative criteria for decisions under a hierarchical
          structure

        • A group decision support system


   ₵ Characteristics

        • Hierarchical structuring

        • Pair-wise comparison




                                                                                              13
4. PFS Methodology (4)

                 [Figure 2] AHP Structure of PFS (Prototype)


                           Pre-Feasibility


      Economic Analysis                               Policy Analysis




                               Common criteria                          Project-specific Criteria



                            Balanced Regional Development                PSC 1

                            Regional Economic Impact                     PSC 2

                            Environmental Impact Assessment
                                                                         PSC 3

                            Regional Preference                          PSC 4

                            Funding Source Availability

                            Consistency with H-L Plan


                                                                                                    14
5. Case Study 1

Dang-jin ~ Cheon-an Freeway Construction


    Objectives
        To relieve traffic congestion
        To improve accessibility to Cheong-ju International Airport

    Project Scope
        Length: 45.0 km (4 lane)
        Estimated Total Cost: 900 Billion Won
        Construction Period: 2008~2013



                                                                       15
5. Case Study 1 (2)

    Site Map




                      16
5. Case Study 1 (3)

    Route Map



                                                   평택-안성고속도로




                                   서해안고속도로

                                                                    경부고속도로




                                  인주도시계획구역



                                             대안1




                                             대안2




                      당진-대전고속도로                                논산-천안고속도로




                                                                             17
5. Case Study 1 (4)

    Demand Forecast

          10,000~40,000 vehicles/day (2014)




                                               18
5. Case Study 1 (5)

    Estimate of Benefits
       Estimating changes in choice of route and travel speeds
       Savings in travel time, vehicle operating costs, traffic accidents
          and environmental costs (air and noise pollution)
    Estimate of Costs
       Estimating Construction Costs, Land Acquisition              Costs,
          Accessory Costs, Contingency Costs, Operating Costs
    Economic Analysis
                    Benefits         Costs                NPV
                                                                    IRR
                 (Billion won,   (Billion won,    B/C    (Billion
                Not Discounted) Not Discounted)                     (%)
                                                          won)

      Route 1       37,233          11,791        1.36   213.1      10.9


      Route 2       32,966          11,271        1.26   152.9      10.2

                                                                              19
5. Case Study 1 (6)

    Policy Analysis

    AHP
       Weights on economic analysis & policy analysis results
                              Economic Analysis   Policy Analysis
              Average               0.614             0.386
              Person 1              0.600             0.400
              Person 2              0.700             0.300
              Person 3              0.550             0.450
              Person 4              0.600             0.400

          Final results
                                  Feasible         Non-Feasible
              Average               0.779             0.221
              Person 1              0.771             0.229
              Person 2              0.804             0.196
              Person 3              0.799             0.201
              Person 4              0.757             0.243
                                                                    20
6. Case Study 2


Light Rail Transit (LRT) Project in Kang-Nam Gu, Seoul

    ₵ Construction of a Light Rail Transit (LRT) System in the Kang-Nam Gu Area, a sub-
       center in southern Seoul.

         • Objectives

              - Relieve traffic congestion and mitigate air-pollution emission

              - Provide public transportation to manage travel demand

              - Enhance high-tech image of the international business district

         • Length: 4.9km; No. of Stations: 13

         • System: Seat-type monorail / AGT (Automated Guideway Transit)

         • Cost Estimate: 300 Billion Won / 240 Billion Won


                                                                                          21
6. Case Study 2 (2)


                      Route Map of LRT




                                         22
6. Case Study 2 (3)


                      Seated-Type Monorail




                                             23
6. Case Study 2 (4)

                  AGT (Automated Guideway Transit)




                                                     24
6. Case Study 2 (5)


Travel Demand

   ₵ 80-90 thousand daily passengers


Summary of Economic Analysis
                                                      (Billion Won)

   System          Benefits            Costs   B/C    NPV


  Monorail          180.4              256.9   0.70   -76.4


   AGT              180.4              192.6   0.94   -12.2




                                                                      25
6. Case Study 2 (6)


Conclusion
   ₵ This project is not economically feasible (B/C <1).
   ₵ The major beneficiaries of this project would be local residents in Kang-Nam Gu, which
       is the wealthiest local government in Korea and already has a well-developed subway
       system. Hence, central government subsidies for this project would widen regional
       disparities between Kang-Nam Gu and other areas in Seoul as well as the rest of Korea.

   ₵ The research team recommends ‘not to provide’ a central government subsidy for this
       project.




                                                                                                26
7. Further Issues in PFS


 Expansion of PFS Coverage


 Continuous Standard Guidelines Revision


 Database Building




                                            27

								
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