PIMAC Jungwook KIM awaker2kdirekr Director PPP Division Public and Private Infrastructure Investment Management Center 1 Process of PPP Project Implementation 3 Project Initiation ID: 1012189
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1. Value for Money Test in KoreaPIMACJungwook KIMawaker2@kdi.re.krDirector, PPP DivisionPublic and Private Infrastructure Investment Management Center
2. 1. Process of PPP Project Implementation
3. 3Project InitiationBoth the government and a private company can initiate a PPP projectSolicited ProjectsA solicited project is that the competent authority identifies a project for private investment and announces a RFPCompetent authorities develop a potential project after considering related plans and demands for the facility. They then weight the procurement options in order to determine whether the PPP procurement is more efficient than the conventional procurement Unsolicited ProjectsFor an unsolicited project, a private company (project proponent) submits a project proposal, and then the competent authority examines and evaluates the contents and value for money of the private proposal, and designates it as a PPP project
4. 4Competent AuthorityReview by PIMACCompetent AuthorityCompetent AuthoritySelection of PPP ProjectDesignation as the PPP ProjectAnnouncement of RFPsSubmission of Project ProposalsEvaluation and Selection ofPreferred Bidder VFM TestNegotiation and Contract Award(Designation of Concessionaire)Application for Approval of Detailed Implementation PlanConstruction and OperationCompetent AuthorityPrivate Sector → Competent AuthorityCompetent AuthorityCompetent Authority →Preferred BidderConcessionaire →Competent AuthorityConcessionaireSolicited ProjectProcurement Steps of a Solicited Project
5. 5Submission of Project ProposalVFM TestNotification of ProjectImplementationPIMACPrivate Sector →Competent AuthorityCompetent Authority →ProponentAnnouncement of RFPsSubmission of Project ProposalsEvaluation and Selection ofPreferred Bidder Negotiation and Contract Award(Designation of Concessionaire)Application for Approval of Detailed Implementation PlanConstruction and OperationCompetent AuthorityPrivate Sector → Competent AuthorityCompetent AuthorityCompetent Authority →Preferred BidderConcessionaire →Competent AuthorityConcessionaireUnsolicited ProjectProcurement Steps of an Unsolicited Project
6. VFM : The Theory
7. What is Value for Money? The best available outcome after taking account of all benefits, costs and risk over the whole life of the project (HM TREASURY)Not lowest price Why it is Used? Seek the best use of available resourcesEfficient and effective public service delivery“ The competent authority uses VFM reports as basic material to make a judgment on whether to move forward with the PPP project proposed by the private proponent” according to the Article 7, Paragraph 3 of the Enforcement Decree of the PPP Act7The VFM Concept
8. VFM is often a comparative assessmentRequires a benchmark cost : PSC (Public Sector Comparator)PSC is a benchmarking and evaluation tool : a Key tool Benchmarks the cost of government service delivery Evaluates whether VFM is delivered from bidsA Procurement principle, not only for PPPAdopted by different countries to meet government’s procurement practicesNot a universal toolApplied on a project or program basisInnovation, asset utilization, risk sharing, competition, service integration ate main key drivers of VFMPresence of VFM drivers confirms suitability for PPP8Key Elements of VFM
9. Promote whole life costing early in the project’s development Assist in assessing the project affordabilityProvide a means for demonstrating VFMProvide a consistent benchmarking and evaluation tool Encourage bidding competition Based on : Reference Project Risk analysis Cash flow over the life of the project (inflation, cost, revenue, discount rate..)Government procurement costs to asses project affordability9The Role of PSC
10. 10 Compare to PSC or between bidders Presence of VFM confirms suitability for PPP.NPV of Transferable RiskPSCPFINPV of PPP Contract QUANTITATIVE VFMNPV of Retained RiskNPV of CompetitiveNeutralityNPV of Raw PSCNPV of Retained RiskVFM Assesment
11. 3. VFM : The Practice in Korea
12. 12PIMAC of KDI is in charge of VfM test as stipulated by the PPP ActVfM test is carried out in accordance with ‘Guidelines for implementation of VfM Test/Review of Proposal for unsolicited BTO projects’.Five interim review meetings are held during the VfM testThe duration of each project research should take up to six monthsSame methodology and procedure are applied both to VfM Test and Review of ProposalObjectivity, consistency, independence as well as professional expertise are important elements in conducting VfM tests.Implementation
13. 13A VfM test is carried out by a multi-disciplinary research teamKDI (Project Manager)Experts with relevant skills and expertise for the project are selected at the preliminary stageExternal experts (selected from human resource pool)Demand forecasting : university professorsCost estimation: engineering companies Accounting: accounting firmsOrganization of a Research Team
14. 14Phase 1: Feasibility study (Decision to Invest)The cost- benefit analysis 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. Phase 3: Formulation of PFI alternativesBased on the results of phase 2, an appropriate PFI alternatives are formulatedThe level of project cost, user fee, subsidy scale, etc. are suggested from the government.Phase 4: Award bonus points to the initial proponentBonus points (10% max.) awarded to the initial proponent are estimated based on the results of VfM tests and the quality of the proposal.Scope of a VFM Test
15. UnsolicitedUnsolicited With Public PlanSolicitedPrivate Finance InitiatePFIp(based on proposal)PFIp (proposal)PFIG(research team)PFIG (research team)Public Sector ComparatorPSCp(estimated by research team)PSCp (research team)PSCG(research team)PSCG (research team)15VfM Analysis Implementation MethodSetting Comparators for VFM Test
16. 16Implementation of PPP ProjectRejectionCalculation of bonus pointsProject Proposal(PFI0)Construction of PSC(PSC0)Construction of PSC1, PFI1 Construction of PFI2-i, PFI Alternative (PFI2*) VFM test of private proposal(VFM1=PSC1-PFI1≥0)VFM test of PFI alternative(VFM2=PSC1-PFI2 * ≥0)Feasibility analysisNNNYYPhase 1Phases3 & 4Phase 2Flowchart of a VFM Test (Unsolicited)
17. Flowchart of a VFM Test (Unsolicited with Public Plan)Construction of PSC (PSCp )VFM test (VFMP1)VFM test (VFMG1)Construction of PFIp2 Calculation of Bonus Points(VFMp )PFI Alternative (PFI2* )With bigger NPV RejectionRejectionImplementation of PPPVFM test(VFMP2=PSCp2-PFIp2≥0)VFM test(VFMg2=PSCg2-PFIg2≥0)PSCp1, PFIP1 PSCG1, PFIG1 NYYYNNYYYYNNPSC by Public Plan (PSCG)Phase 1Phase 2Phases3 & 4Construction of PFIP2 Feasibility Test (PSCp PSCG) Project Proposal (PFIp)
18. Construction of PSC (PSCG)Feasibility Test (PSCG)VFM test (VFMG1)Construction of PFI AlternativeRejectionImplementation of PPPNYNYConstruction of PSCG1, PFIG1 Phase 1Phase 2Phases3 & 4Flowchart of a VFM Test (Solicited Project)
19. 19Assess project feasibility and necessity in the context of national economy and policy directionsCost-benefit analysis method is used to assess the economic feasibility of a projectCBA is conducted in accordance with sectoral guidelines (e.g. roads, railroads, ports, seaports, dams, and environment facilities) for PFS (Preliminary Feasibility Study)B/C ratios calculated based on Estimation of demand, costs, and benefitsSensitivity analysisPolicy analyses, if necessary, are carried outPhase 1: Feasibility Study (1)
20. 20Setting a PSC (Public Sector Comparator)Setting an appropriate PSC option is very important both to feasibility and VfM of a projectA basic assumption of VfM test (including FS) is that the same level of service will be provided by both PSC and PFI optionsIn reality, a PSC option that is compatible with PFI proposal is formulatedTotal, (risk adjusted) whole-of-life cost of the project is estimated if government is to undertake the project.User fee and project cost of PSC are not necessarily same as those of PFIThe user fee of PFI is usually larger than that of PSCPhase 1: Feasibility Study (2)
21. 21Policy analyses are carried out if necessaryEvaluation in qualitative/quantitative terms whether the project is justified in relation to relevant policy issuesRelevant policy issues: balanced regional development; consistency with higher level plan and policy directions; and environment impact analysis, etc.The overall feasibility of a project is assessed based on economic and policy analysesIf the FS results demonstrate that the project is feasible, then VfM assessment ensues. If not, the VfM test process as a whole is suspended, and PIMAC recommends the Competent Authority to reject the project proposal.Phase 1: Feasibility Study (3)
22. 22Government spending of the PSC is compared against government payment requested by PFI proposal to assess if PPP procurement improves the value of tax payer’s moneyFeatures of VfM assessmentIt assists government making decision on appropriate procurement options: conventional public procurement vs. PPP procurement.It provides a quantitative VfM level and a justification for the decision on procurement option.It provides a reliable benchmark and specifies project scope.It encourages project appraiser to consider risks early in the project lifecycle, and address risk transfer options in the bidding process.It reduces negotiation time and increases the efficiency of bidding costs as the scope of private sector bids are more aligned with the public sector needs, and risk transfer profiles.Phase 2: VFM Assessment (1)
23. 23Cost items adjusted for competitive neutrality between PSC and PFI optionsRevenue from user fee is deducted from government payment of PSCRevenue from supplementary project is taken into account in consideration of both optionsVAT and other tax payments are adjustedSame amount and payment schedule of land acquisition is applied to both optionsAdministrative costs incurred by governments for project management are excluded from both optionsInsurance fee are estimated in different ways, reflecting the difference in market valuation of project risk by project ownersAdditional government support if requested by private company is included in both options based on estimated spendingPhase 2: VFM Assessment (2)
24. 24ItemPSCPFICapital costsProject costsConstruction cost(1) Cost of survey(2) Design cost(3) Construction cost Construction cost(1) Cost of survey(2) Design cost(3) Construction cost Land acquisition cost(4) Compensation for land and other possessionsLand acquisition cost(4) Compensation for land and other possessionsSupplementary cost(5) Cost for feasibility study(6) Cost for transportation impact assessment(7) Cost for environmental impact assessment(8) Cost for supervision(9) Insurance costsSupplementary cost(5) Cost for feasibility study(6) Cost for transportation impact assessment(7) Cost for environmental impact assessment(8) Cost for supervision(9) Insurance costs(10) Cost for operation equipment(10) Cost for operation equipment(11) Taxes and fees(11) Taxes and fees(12) Business setup costs(12) Business setup costsFinancing costs(13) Financing costs(13) Financing costsoperating costs(14) Operation costs(15) Maintenance costs(16) Management and supervision costs(14) Operation costs(15) Maintenance costs(16) Management and supervision costs ① Base cost born by the government(Capital costs + operating costs)- operating revenue Construction subsidy + land acquisition cost +additional government support② Risk adjustment costsCost and time overrunTotal government payment① + ② Phase 2: VFM Assessment (3)
25. 25Present value of government payments for PSC and PFI options are estimated (discount rate = 5.5%) and VfM(%) is calculatedGP(PSC) = Capital costs + operating costs – RevenueGP(PFI) = Construction subsidy + Compensation costs + Additional government supportGP(PFI) is the government subsidy requested by the private party in the project proposalPhase 2: VFM Assessment (4)
26. 26Qualitative VfM assessmentAllocation of risks (construction, operation risks, etc.)Improvement of service qualitiesAnd other ripple effects (positive externalities): Promote the financial market through the adoption of an advanced financial technique, etc.Quantification of project risk transfer is not satisfactory and those qualitative effects are not incorporated into overall VfM assessment so farPhase 2: VFM Assessment (5)
27. 27Financial analysis and sensitivity analysis are carried out to assess the profitability (bankability) of a projectBased on the VfM assessment and financial analyses, PFI alternatives including the following components, are formulated:Total project costsUser feeIRR (Internal Rate of Return)Total government paymentsOther components related to the implementation of the projectThe Competent Authority chooses the most appropriate PFI option and invites third parties to tenderingIf it is impossible to formulate a PFI alternative that delivers VfM at a reasonable level of IRR, then the PFI option is rejectedPhase 3: Formulation of PFI Alternatives
28. 28The VfM test team makes decision on bonus points (10% max) to be awarded to the initial proponents based on the VfM(%) and quality of the proposalThe quality of a proposal is evaluated based on the following criteria:① Priority of the project in the mid- to long-term government investment plan (10 points)② Composition of equity investors (10 points)③ Excellency of construction and operation plan (30 points)④ Accuracy of demand forecast (30 points)⑤ Prior consultation with relevant government agencies and plan of addressing of civil complaints (10 points)⑥ Adequacy of required documentation (10 points)Phase 4: Bonus Points for Initial Proponent (4)
29. 29Bonus PointSwiss Challenge: the original proponent has right to counter-match any superior offer.Best and Final Offer: the winning bidder must compensate the original proponent for project development costs.Phase 4: Bonus Points for Initial Proponent (4)
30. 30Phase 4: Bonus Points for Initial Proponent (4)
31. 31The VfM test sets the bottom line to meet the condition of ‘VfM≥0’ in selecting preferred bidder and following phases of a project.VfM reports are used as an important reference when tender evaluation committee conducts their work.VfM reports provide useful information to prompt negotiation process.VfM reports are used as reference when ex-post VfM tests are conducted.Use of VFM Test Results