Public Private Partnerships
The Korean government will stimulate the economy with a Korean version of the New Deal by reviving private sector investment.
Visiting a road construction site in southern Seoul on March 9, Finance Minister Choi Kyung-hwan said, “By introducing a new system to share business risks rationally between the private sector and the government, we will induce investment from the private sector.”
Choi previously mentioned the need to increase the minimum wage as one of the measures to create effective demand on March 4. In contrast, this plan might be his plan to deal with the pressures of deflation.
At the moment, most public-private projects are either carried out under build-transfer-operate (BTO) or build-transfer-lease (BTL) arrangements. A BTO arrangement forces private companies to bear most of the risk in a project, while BTL compels the government to take most of it.
However, existing public-private projects have side effects, since private companies can fail to accurately forecast business feasibility and thoughtlessly push ahead with the project. Also, it could waste taxpayers’ precious money, and there could be excessive risk in the private sector.
Accordingly, the government is planning to adopt a new public-private projects system that can share risk evenly between the government and private companies, including the risks of financial investors. A new kind of approach, dubbed build-operate-adjust (BOA), is being reviewed, which financially supports minimum operational costs to construct and manage facilities and to split additional gains into the competent agencies and investors.
Also, he mentioned the needs to appropriate usage fees, which match with production costs, on facilities built by private companies.
He said, “When the fee system, which does not correspond to the production cost, is built, it is bound to have distortions somewhere. If possible, I will set the fees to accord with the production cost, so private companies won’t face any disadvantages.”
Choi also added, “By implementing a fast track policy, including competitive procedures of negotiation, we will simplify the procedure significantly and expand the facilities for private companies. Once the new system is introduced, the time that is consumed in the public-private projects will be reduced by a third.”
The government decided to come up with measures to rationally relieve an excessive minimum revenue guarantee (MRG) through negotiations in order to improve the negative perception of public-private projects.
Choi said, “The government’s financial abilities are continuously decreasing, while there are enough surplus funds in the market, including the growth in companies’ reserves. Public-private projects are attractive businesses that can make up a for lack of finance and induce the surplus funds into the productive investments.”
Meanwhile, the government is planning to announce a plan to promote private-public partnership projects on March 19.