South Korea

South Korea

PPP framework

Korea introduced public-private partnership programs with the adoption of the Promotion of Private Capital into Social Overhead Capital Investment Act in 1994. PPP projects focused on transport infrastructure, but after reviewing the PPP law in 2005, the amount of potential PPP projects now covers social infrastructure, which is closely related to people’s daily life.

Legal system and structure

The PPP law and the Decree on its implementation fully regulate PPP projects by directing state policy through the Basic Plan for PPP established by the Ministry of Strategy and Finance (MOSF).

Decisions are made as to whether or not to conduct a particular PPP project through a feasibility study and VFM test. Besides, the conditions of implementation are carefully examined, with transparency increasing through the process of competitive bidding for choosing private partners.

In accordance with the PPP law and the Decree on its implementation, 45 types of facilities in 15 categories were defined as appropriate for PPP projects. Build-Transfer-Operate (BTO) and Build-Transfer-Lease (BTL) are the most popular methods of implementation. In BTO projects a private partner makes a reasonable return on his investment by collecting user fees, whereas in BTL projects a private partner reimburses his investment through the payment made by the central and local government.

Budget rules

solicited projects: The Government finds a potential PPP project and then searches for concessionaires:

  • Competent authorities develop a potential project after reviewing relevant plans and requests for the object. They then evaluate the options of providing, in order to determine whether provision through PPP will be more effective than conventional provision;
  • An appropriate method of implementation is chosen (BTO, BTL, etc), taking into account the nature of the project, its profitability and other relevant factors.
  • unsolicited projects: The private sector can propose a PPP project that is in great demand but was postponed due to budget constraints of the state:

  • After considering factors such as demand, profitability, project structure, construction and operation plans and funding, the private partner creates a project plan and submits a proposal to the competent authority;
  • The private sector can propose cost-efficient and creative additional/minor projects related to the main PPP project;
  • The competent authority shall review and evaluate the content and value for money of a private proposal.
  • Financial support:

    Private partners must comply with the minimum required equity ratio:

  • During construction, the project companies must comply with the minimum required equity ratio, at least, 20% for a BTO project or 5% or more for a BTL project;
  • When the investment ratio of institutional investors is more than 50% of total capital, the minimum required equity ratio during the construction can be reduced from 20% to 15%. The concessionaire can refinance in accordance with changes in the macroeconomic environment, the risk of the project, etc.
  • Investors may see an increase in their anticipatory profit depending on changes in the capital structure and conditions of debt financing, etc.
  • The profit from refinancing is divided between the concessionaire and the Government in order to benefit both parties. The profit from refinancing can be used to reduce user fees so that the users of the object could also benefit from the refinancing. Financing through the Infrastructure Fund for the diversification of the investor profile is also encouraged;
  • The Infrastructure Fund is an indirect investment object, which raises funds from investors for lending and investing in PPP projects, as well as distributing the profit among various investors;
  • The provisions on asset management and financing have been relaxed to promote the use of the Infrastructure Fund.
  • Help in purchasing property by concessionaires:

  • Concessionaires acquire the right to purchase the land, as well as the right to use the national and state/public land free of charge;
  • Concessionaires can entrust to the competent authority the implementation of the purchase of land, loss compensation, transfer of local population and other relevant administrative tasks.
  • Financial support:

  • To maintain an appropriate level of user fees the Government may, if necessary, transfer the concessionaire the costs for the purchase of land and subsidies for the construction;
  • Korean Infrastructure Credit Guarantee Fund (KICGF):
  • > KICGF was established in accordance with the PPP law to provide loan guarantees for concessionaires that raise bank loans from financial institutions or issue revenue-yielding bonds for PPP projects.

  • Tax and financial benefits provided for PPP projects include the following:
  • > 0% tax rate is applied to the value-added tax for construction services for reversible infrastructure facilities;

    > Exemption from tax on the purchase and registration of BTO projects is given;

    > A separate tax rate of 14% is applied to the interest income derived from revenue-yielding bonds with a maturity of 15 years or more;

    > A separate tax rate is applied to dividends from the investment of the Infrastructure Fund: 5% for the investment of less than 300 million South Korean won, 14% for the investment over 300 million South Korean won.

    Implementation of the project and the contracting process

    Budgeting system based on the performance results:

    Medium Term Financial Plan sets a limit of five years for federal spending. On the basis of reasonable projections of economic growth the plan defines the levels of annual total spending over the medium term, distributed among 14 main sectors of federal spending.

    Sectoral strategic plans are adjusted every three years.

    The annual plan is adopted by the Ministry of Planning and Budget.

    Project selection criteria:

    Does the object meet the requirements of the PPP project specified in the PPP law and the Decree on its implementation?

    Is the project a priority for the medium and long term plans of infrastructure investments?

    Does it suggest a more timely profit in comparison to a conventional government project that has budget constraints?

    Do the operational efficiency and services improve because of the creative approach and know-how of the private sector?

    Will it be profitable, taking into account the level of user fees and subsidies? (for BTO projects)

    PPP project selection

    VFM test

    The purpose of the PPP project

    The process of PPP providing:

    I. Announcement about PPP

    II. Project proposal presentation

    III. Assessment and selection of the winner

    IV. Conduction of negotiations and award of the contract (the appointment of the concessionaire)

    V. Application for approval of a detailed implementation plan

    VI. Construction and operation