South Korea’s infrastructure prioritisation plan

In the 1990s, South Korea suffered from limited investment in infrastructure, particularly from the private sector. To address the challenge, it partnered with private companies in major infrastructure projects, such as constructing the Korean sections of the Great Asian Highway.

The challenge

During the 1970s and 1980s, the Republic of Korea achieved exceptional economic growth. The government’s long-term development plans focused clearly and exclusively on infrastructure, with priority being placed on the construction of facilities that promoted industrialisation.

However, during this period the government changed its infrastructure development policies and began to place greater emphasis on regional development. The allocation of funds for transport infrastructure facilities focused more on major congestion problems in the transport system rather than on the need to mobilise new resources to extend capacity.

In the 1990s, in order to save distribution costs, the government substantially increased its investment in transportation. However, due to political pressure, infrastructure investment was somewhat skewed towards some roads and airports. This led to delays in the construction of other urgent infrastructure projects and brought about inefficiencies, since those less urgent projects only handled small amounts of traffic.

The initiative

In order to meet this challenge, the Korean government aimed to engage the private sector in developing infrastructure facilities in order to increase efficiency and reduce the public budget. [1]

In 1994, the government introduced the Private Capital Inducement Act in order to promote public private partnership (PPP). This first policy was largely unsuccessful because the risks were not always well evaluated and the government was unused to working with the private sector.

In 1998, a revised act was introduced: The Act on Private Participation in Infrastructure. It clearly stated that PPP projects were to be undertaken on the basis of an execution agreement between the relevant ministry and the concessionaire. [2] In order to remove barriers to private sector participation, the 1998 Act improved the procurement process and provided new incentives to private investors.

The public impact

The result was to encourage investment in PPP projects:

  • Private investment increased from KRW 300 billion in 1995-1997 to KRW 3.2 trillion in 2006.
  • The proportion of private investment as a proportion of the total investment in infrastructure increased from 3.9 percent in 1998 to 15.4 percent in 2009.
  • By the end of 2009, 461 PPP contracts had been awarded, of which 251 projects were completed to provide services to the public.
  • Two major Korean sections of the Great Asian Highway have been constructed as PPPs, the AH1 and the AH6.

What did and didn't work

All cases in our Public Impact Observatory have been evaluated for performance against the elements of our Public Impact Fundamentals.

Legitimacy

Public Confidence Weak

There was little public confidence in the Korean government. [4] In a 1994 opinion poll, Kim Young-San’s rating was low, as the public was not content with his government's inconsistent performance and its backtracking on many of his reform measures.

Stakeholder Engagement Good

The initiative was planned by its internal stakeholders, i.e., the government and its ministries:

  • The project was planned and carried out by the government in collaboration with the Ministry of Strategy and Finance (MOSF).
  • The Ministry of Planning and Budget proposed developmental strategies for the project.
  • The government carried out a Total Project Cost Management System to control the ever-increasing cost of infrastructure investment by escalation clauses or changes in design. [3]

The government provided funds for the initiative through the creation of the Korean Infrastructure Guarantee Fund (KICGF). This fund received the capital from government, Minimum Revenue Guarantee (MRG) fees, other guarantee fees, and bank loans.

Political Commitment Strong

The initiative was a clear political priority because the Korean government:

  • Focused its long-term development plans clearly and exclusively on infrastructure, with priority being placed on the construction of facilities to promote industrialisation.
  • Enacted legislation in 1998 (The Act on Private Participation in Infrastructure) for the proper enforcement of the project, which indicates its commitment to the initiative.
  • Funded the initiative through the creation of the Korean Infrastructure Guarantee Fund.

Policy

Clear Objectives Good

The policy objectives were clear: increased infrastructure investment and a greater involvement of the private sector in infrastructure. [5]

Feasibility Strong

The feasibility of deploying PPPs to deliver infrastructure projects more efficiently and economically was evident:

  • Efficiency gains could be realised because private players were more focused and could bring economies of scale. Private sector firms were more specialised, larger, and had more experience in the construction and operation of the relevant businesses.
  • The financial burden on the government was less, as the overall cost could be spread over a much longer duration.
  • The 1998 legislation removed the main constraints on private investment in infrastructure.

Action

Management Good

The government’s management of the initiative included the following strands:

  • It created a special unit, the Private Infrastructure Investment Centre of Korea (PICKO), which provided technical assistance to the government and local authorities to promote private participation in infrastructure (PPI). PICKO prepared feasibility studies, PPI tenders, review studies and bid evaluations and negotiated concession agreements.
  • In 2003, it created PIMAC (the Private Infrastructure Investment Management Centre) – the successor – to PICKO to provide support services in various fields of PPI projects (such as feasibility studies of unsolicited projects and assisting the Korean government in formulating policies relating to PPI).

Researchers from the Korea Development Institute (KDI) reviewed the feasibility of PPI projects in partnership with university professors, and private company experts for those projects whose cost exceeded USD50 million.

Measurement Fair

There was no existing organisation to gauge the impact of the programme. However, there were indicators (like private investments in infrastructure) which capture the outcome objectives of the policy:

  • Private investment increased from KRW 300 billion in 1995-1997 to KRW 3.2 trillion (USD 3.2 billion equivalent) in 2006.

The relative proportion of private to public investment in infrastructure increased from 3.9 percent in 1998 to 15.4 percent in 2009.

Alignment Strong

The Korean government and its relevant ministries collaborated efficiently to carry out the initiative:

  • In 2001, the Korean government formulated a ten-year plan for PPI with the main objective of providing a clear overview of the priority areas of investment (such as roads). The plan included a list of 179 possible projects to be financed by the private sector from 2002 to 2011.
  • In 2006, the Ministry of Planning and Budget formulated fiscal guidelines and strategies for the sustainable development of PPI up to 2015.
  • The KICGF provided guarantees for debt or revenues in PPP projects of up to about USD 200m per project. From 1995 to 2005, the KICGF provided guarantees for 65 projects of an accumulated amount of over USD 3bn.