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Kangsoo KIM ([email protected])
Executive Director
Public and Private Infrastructure Investment Management Center(PIMAC)
KDI
October 2014
Strong Project Appraisal Schemes ; Preliminary Feasibility Study (PFS) ?
1. PIMAC
2. Evolution of Feasibility Study in Korea
3. How to manage the Pre-Feasibility Study(PFS)
4. Features of Pre-Feasibility Study(PFS)
5. Performance of Pre-Feasibility Study(PFS)
PIMAC Part-01
Foundation of PIMAC
PIMA (Public Investment Management Center) was
established in Jan 2000 as an affiliated body of KDI.
The MOSF, then Ministry of Planning and Budget, decided to establish it to
conduct PFS.
PIMAC (Public and Private Infrastructure Management
Center) was established as a merger of PIMA and PICKO by
the second amendment of ‘The PPP Act’ in January 2005.
The PICKO (Private Infrastructure Investment Center of Korea) of KRIHS
(Korea Research Institute for Human Settlements) was founded in April
1999, to manage PPP projects as stipulated by the amendment of PPP Act.
PIMAC is a statutory organization based on the PPP Act,
while the KDI was established in1971 by the ‘Government
Funded Research Institute Act.’
3
Organization of PIMAC of KDI
4
RSF PPP
Policy
Policy and Research Division Public Investment Evaluation
Division Public-Private Partnerships
Division
- Conduct and manage PFS
- Policy research on PIM
- Program Evaluation and in-depth
evaluation of Public Investment
Projects
- Conduct and manage RSF
- Research on methodology of project
evaluation
- Appraisal for SOE Projects
- Int’l Cooperation
- Tax Expenditure Appraisal and
Evaluation
- Formulate PPP Annual Plan and develop
PPP guidelines
- Conduct evaluation of PPP Projects
- Research on PPP
- Financing and refinancing of PPP
- Capacity building and training
- Infrastructure DB management
PFS 2
Executive Director
PPP
Finance Policy
Research
SOE Project
Evaluation
Tax Expenditure Evaluation
PPP Project
PFS 1
96 staff members in 3 divisions Legal Affairs Team
The role of PIMAC stipulated by the National Finance Act
1) Evaluator and/or Government Agency in Public Investment Management (PIM) :
Carry out preliminary feasibility study (PFS)
Carry out re-assessment study of feasibility (RSF)
Carry out re-assessment of demand forecast (RDF)
2) Researcher
Support for new initiatives of better PIM
Policy studies on PIM
Missions of PIMAC (1)
5
The role of PIMAC stipulated by the Special Tax Treatment Control Act
1) Evaluator and/or Government Agency in Tax Expenditures (TE) :
Carry out TE preliminary feasibility study (PFS)
Carry out in-depth evaluation of Tax Expenditures and Reduction
2) Researcher
Studies on the Tax Expenditures Impact and evaluation methods
The role of PIMAC stipulated by the Act on the Management of Public Institutions
1) Evaluator in SOE’s new investment
Carry out preliminary feasibility study (PFS)
Carry out re-assessment study of feasibility (RSF)
2) Researcher
Studies on the evaluation methods
Missions of PIMAC (2)
6
The role of PIMAC stipulated by the PPP Act 1) Researcher
Support for formulation of the Basic Plan for PPP
Theoretical and policy studies on PPP programs
Development of implementation guidelines
2) Advisor and/or Government Agency in Project Management
Development of PPP projects
Execution and Review of VFM test
Support for formulation of RFPs
Review of RFP and concession agreement
Assistance in tendering and negotiation
3) PPP Market Promoter
Training programs and seminars on PPP for public officials
International cooperation
Database management
Missions of PIMAC (3)
7
As of May 2013
Areas of Expertise of PIMAC Staff
Areas of Expertise Head Count
Economics 26
Finance/Business/Accounting 16
Law 6
Transport 13
Engineering
(civil, architecture, environment, etc.) 8
International cooperation 4
Others
(urban planning, real estate, tourism, etc.) 23
Total 96
8
Evolution of Feasibility Study in Korea Part-02
1977 1970
Most infrastructure investment projects had been evaluated by foreign organizations or experts
Investment Project Deliberative Committee(IPDC) (Economic Planning Board (EPB))
IPDC was established to review the feasibility of a variety of investment projects.
The Regulations on Major Investment Project Review (EPB directive)
New treasury investment and loan projects, costing over 10 billion Korean Won (KRW) in total
Investment Appraisal Bureau (IAB) was established in EPB
As the nation began to expand steadily at an unprecedented rate financially and economically, the number of projects and their value increased in tandem, rendering effective analysis increasingly difficult.
Criteria for review and analysis: long-term plans and alignment with economic policies; cost, facility size, and international competitiveness; financing capability; debt service capacity; profitability;
The government identified and implemented new infrastructure investment projects, as suggested by the Five-year Economic Development Plans.
1979~1991
History of Project Appraisal in Korea
10
1991 1994
The “Regulations on the Major Investment Project Review” amended (EPB directive)
limiting new fiscal projects subject to review to those with total investment of KRW 50 billion or more
Calling for an internal review for projects with total investment of KRW 10 billion to just under KRW 50 billion by an “operating division “
Allowing a ministry concerned to carry out project reviews prior to the establishment of mid- and long-term plans
The Budget Office in MFE
Due to a lack of expertise and time, the Budget Office was not able to sufficiently review the results of feasibility assessments of major projects submitted by each operating division.
Feasibility assessments : merely a means to secure project budget funds.
1997
Currency and Financial Crisis
『The Private Capital Inducement Promotion Act』
1998
The Planning and Budget Committee (PBC)
Budget for 1998 was based on an estimated economic growth rate of 10.8 percent requiring substantial budget restructuring to overcome economic turmoil.
The PBC: feasibility studies performed under the supervision of each ministry lacked objectivity and reliability, and that there were no uniform and standard guidelines in place for feasibility studies.
In formulating the 1999 budget, the PBC’s assertion that feasibility studies for new large projects could not be left up to each ministry .
1999
The Planning and Budget Committee (1998) + The Budget Office Ministry of Planning and Budget (MPB)
『The Enforcement Decree of the Budget and Accounts Act』 was amended (MPB)
Any new large project be carried out with a pre-feasibility study, feasibility study, basic design, implementation design, compensation, and construction.
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 Private Infrastructure Investment Center of Korea (PICKO) at the Korea Research Institute for Human (KRIHS) the influence of the Ministry of Construction and Transportation to manage PPP projects as stipulated by the amendment of PPP Act.
History of Project Appraisal in Korea
Total Projects Cost Management (TPCM)
11
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
SOC
(unit: trillion won, % of expenditure)
Source: Ministry of Strategy and Finance, Korea. Consolidated Fiscal Balance, Respective Year.
Background of PFS : Needs for the control of
Increased Investment Expenditure
12
Consolidated Fiscal Expenditures and Net lending by Central Government
Background of PFS : Signs of Overinvestment
Distribution of Traffic Forecasting Errors and Marginal
Productivity of Economic Infrastructures
13
Background of PFS : Symbolic Failure in Public
Investment
Criticism against Feasibility Studies : Lack of Objectivity
and Reliability in FS
The baseline cost of on 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.
Conflict of interests
Line Ministry: Budget maximizing and irreversible decision making behavior
Engineers and professors: Keep up the market
FS as a formality: optimism bias (cost down, benefit/demand up)
No Check & Balance
14
Background of PFS : Financial Crisis 1997-98
Financial crisis in 1997-98 and PFS
In the wake of financial crisis, the issue of fiscal soundness became an
important policy agenda.
Budget for 1998 was based on an estimated economic growth rate of 10.8
percent requiring substantial budget restructuring to overcome economic
turmoil.
As a government reform initiative, the MPB (Ministry of Planning and
Budget) separated from the MOFE (Ministry of Finance and Economy),
whose core task is to enhance fiscal efficiency.
New paradigm of PIM has emerged
As a government reform initiatives in response to the financial crisis of
1997-98, a new PIM started in 1999.
15
Introduction of New PIM system : PFS
PFS was ‘invented’ as a resolution despite of resistance
from the line ministries.
The MPB tried to take over the FS from the line ministries
Line ministries, esp. MOCT, violently resisted to transferring the ownership
of FS. claiming that feasibility studies require each of their unique
expertise, and that no single country allows a budget authority to carry out
feasibility studies by itself.
The Enforcement Decree of the Budget and Accounts Act was amended in
April 1999 to require that any new large project be carried out with a pre-
feasibility study, feasibility study, basic design, implementation design,
compensation, and construction.
16
How to manage the Pre-Feasibility Study(PFS)
Part-03
What is PFS?
Short and brief evaluation of a project to produce
information for budgetary decision
Owned by the Ministry of Strategy and Finance (MOSF) and managed by
PIMAC
While (detailed) feasibility study analyzes technical aspects of a project in
detail, PFS emphasizes broader analysis of a project from a national socio-
economic viewpoint.
Meaning of “PRELIMINARY” is two-folded:
Provisional, or short and brief; and
PFS costs about 80~100 million Won, and takes about 6 months; Detailed FS
costs about 300 million to 2 billion Won.
Preceding a (detailed) feasibility study
The National Finance Act of 2006 provides the legal basis of PFS
18
Coverage of PFS
All new large-scale projects with total costs amounting to
50 Billion KRW (about 50 Million USD) or more are subject
to PFS.
Local government and PPP (Public-Private Partnership) projects are also
subject to PFS if central government subsidy exceeds 30 Billion KRW.
Initially focused on economic infrastructure, PFS has
expanded to social infrastructure and non-infrastructure
(e.g. R&D, welfare) programs.
Projects without effectiveness of PFS are exempted
Typical building projects: government offices and correctional institutions
Legally required facilities(specified in the law) : sewage and waste
treatment facility
Rehabilitating projects and restoration from natural disaster
Military facilities and projects related with national security 19
Flowchart of PFS Analyses
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
20
Analysis Structure in PFS
Economic Analysis Policy Analysis
Consistency with higher level plan
Project risks Project-specific
factors
Attitu
de to
ward
the p
roje
ct
Co
nsis
ten
cy w
ith h
igh
er le
vel p
lan
Pre
pare
dn
ess
Pro
ject-s
pe
cific
item
(op
tion
al)
Fin
an
cia
l feasib
ility
En
viro
nm
en
tal im
pa
ct a
ssessm
en
t
Pro
ject-s
pecific
item
(op
tion
al)
Pro
ject-s
pecific
item
2 (op
tion
al)
Pro
ject-s
pecific
item
1 (op
tion
al)
Pro
ject-s
pecific
item
(op
tion
al)
Reg
ion
al e
co
no
mic
imp
acts
Reg
ion
al b
ackw
ard
ness a
naly
sis
Project Implementation Status Quo Alternatives
Level 1
Level 2
Level 3
21
Overall Feasibility
Balanced Regional Development Analysis
PFS Implementation Procedure
Line Ministry Ministry of
Strategy & Finance KDI (PIMAC)
Conduct Feasibility Study or Stop the Project
Select PFS Projects In consultation with
PFS committee
Request PFS
Make Investment Decision
Announcement & Report to the National Assembly
Submit PFS Report
Organize Teams/ Conduct PFS
Open to the Public
Consultation based on : • Eligibility for central
government grants • Urgency of the Projects • Concreteness of the
project plan
22
Determination the Priorities by considering • The long-term
National • Comprehensive Plan, • National Policy
Direction
Select and Submit PFS candidate
projects
(pre –PFS Committee)
Management ; Selection of External PFS Research Team
Multi-disciplinary PFS team
Three or more organizations are involved
e.g. KDI (Project manager), University professors (Transportation demand
analysis), and private Engineering firms (Cost estimation
Open Recruitment for external experts or outsourcing PFS
research team throughout the homepage announcement of
KDI, Public Procurement Service Agency, related
associations and daily newspaper advertisement.
Consider the main research and project experiences and comprehensive
reviews on the PFS external research team(expertise, impartiality,
accountability)
Exclusion of stakeholder through the checking school ties, regionalism, pre-
feasibility participation etc.
School ties and regionalism with KDI internal research team for Internal
PFS conducted are also excluded. 23
Management ; Selection of External PFS Research Team
Selection of outsourcing PFS research team through a
public tender evaluation by the evaluator consisting of KDI
PIMAC, Ministry of Strategy and Finance and the competent
authorities officials, external experts.
Evaluation criteria: Understanding of Project, Approach method,
Institutional assessment, Outcomes, Input personnel evaluation
24
Management ; PFS progressives
① Kick-off Meeting
Attendance: MOSF, KDI PIMAC, PFS
Research Team
Meeting Issue: PFS overview, guidelines
and schedule
② Progress Check Meeting
Attendance: PIMAC, Internal reviewer,
External research team, external experts
Meeting Issue: Background, survey
result, issues and schedule
③ KDI 1st Check Meeting
Attendance: PIMAC, Internal reviewers,
External research team, external experts
Meeting Issue: Cost, Demand, Benefit
Estimation result and tentative result of
B/C
25
Management ; PFS progressives
④ MOSF 1st-Check Meeting
Attendance: KDI PIMAC, PFS research team, MOSF and Line ministry
Meeting Issue: Cost, Demand, Benefit Estimation result and Tentative
result of B/C
⑤ KDI 2nd Check Meeting
Attendance: KDI PIMAC, Internal reviewer, External research team,
external experts
Meeting Issue: Major changes after 1st Meeting, Result of Policy and
Balanced Regional Development Analysis
⑥ KDI 2nd Check Meeting
Attendance: KDI PIMAC, PFS research team, MOSF and Line ministry
Meeting Issue: Major changes after 1st Meeting, Result of Policy and
Balanced Regional Development Analysis
26
Management ; (implicit) Code of Conduct
① Reference the regionalism for the duty avoidance of stake
when KDI internal PFS team selected.
② Prohibit sensitive information leakage obtained in
connection with conducting PFS.
KDI internal team (KDI Code of Conduct), external researchers (service
declaration)
③ Not accepting any kind of bribes from relevant competent
authorities.
(example) Expenditure from PFS service charge for expenses when having
meetings with competent authorities and relevant local government.
27
Features of Pre-Feasibility Study(PFS)
Part-05
Owned by the Ministry of Strategy and Finance (MOSF),
evaluated by Independent Evaluation unit, PIMAC
PFS is a evaluation of a project to produce information for budgetary
decision
PFS evaluated by KDI PIAMC, an independent research institute,
provided some buffer from political and bureaucratic pressure.
PFS team evaluates feasibility of the comprehensive judgment
expenditures.
Features of PFS
29
Features of PFS
The Expanded Role of Policy Analysts (PFS team) in PFS,
beyond only Technical Information Providers:
PFS team members (e.g. Team leader (KDI), Demand (Professor), Cost
(Engineer)) ) and Advisory committee members (Staff of PIMAC and peer
reviewers) make their explicitly quantified judgments on project
desirability, and their judgments are respected in the government
decision-making.
PFS results are rarely overruled by budget ministry and the National Assembly
Clear and Explicated Binary judgment (feasible/non
feasible) on the overall feasibility
Minimizing uncertainty and arbitrary Interpretation of acquired information
from analysis
Gained increasing acceptance as a highly information means of budget
allocation
30
Features of PFS
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
31
Features of PFS
Multi-disciplinary PFS team
► Three or more organizations are involved
► e.g. KDI (Project manager), University professors (Transportation demand analysis), and private Engineering firms (Cost estimation)
Open review process
► Independent reviewer is designated
► Open discussion on a mid-term and final PFS reports
► Reviewed by the MOSF and line ministries, PIMAC, and field specialists from private and public sectors
32
External experts to join PFS
Open review process
Neutrality and Objectivity
Phase 1: Feasibility study (Decision to Invest)
► The cost- benefit analysis and AHP is conducted to determine
feasibility of the project from a national economy perspective.
Phase 2: Value for Money Assessment (Decision on PFI)
► The government payment of PSC (Public Sector Comparator) is
compared against that of PFI (Private Finance Initiative) to assess
whether the PFI achieves VfM.
33
Features of PFS
Unified tool to consider the possibility of PPP (Public Private
Partnerships)
Various values are incorporated and evaluated
Various values (job creation, environmental impact, regional equity,
project-specific factors) are incorporated in the frame of PFS
Multi-criteria decision making technique(AHP) is adopted to combine
quantitative and qualitative elements of evaluation
PFS results are rarely overruled by budget ministry and the National Assembly
Gives weight on each element through pair-wise comparison
A project I evaluated as feasible if AHP score is 0.5 points or more out of 1.0
point
Systematic Management
Procedures of PFS ; Selection of PFS projects, manage and external
experts, five report review meetings, code of conducts
Select ion of PFS Projects Organize Teams Conduct PFS
34
Features of PFS
Performances of Pre-Feasibility Study(PFS)
Part-04
Number and Total Project Cost (1999~2012)
36
Note: 1) PFS completed as of 31 Dec 2012.
2) About 60 PFS conducted by other organizations are not included.
20
30
41
30 32
55
30
52
46
38
63
48
43
35
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
(Trillion) (Number)
Number Total Project Cost
Proportion of Feasible Projects and Total Project Cost Saving (1999~2012)
37
Note: 1) PFS completed as of 31 Dec 2012.
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
71.4
62.5
117.7
0
5
10
15
20
25
30
40
50
60
70
80
90
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Average
(Trillion) Proportion(%)
Proportion Saving Project Cost Total Saving Project Cost
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