AbstractEvaluating the Efficiency of Private Investment Project- Focusing on Comparison of Implementation Phases of Private Financed Expressway and Government Funded Expressway - Yeon Tae ChaeDepartment of Public Enterprise PolicyThe Graduate SchoolOf Public AdmistrationSeoul National UniversityUpon the enactment of 「The Promotion of Private Capital into Social Overhead Capital Investment Act」 in 1994, private investment in public sector got into its stride, and the rationales were to relieve financial burdens of the government, increase the managerial efficiency, balance out regional development, raise the quality of public service, and increase the benefit of the living standards of people.As for private financed expressways, there are 9 of them namely including Incheon Airport Expressway and Cheonan Nonsan Expressway, but they are faced with numerous problems including but not limited to the problems caused by excessive optimism in transportation forecasts, induction of additional financial burdens of the government to redeem Minimum Revenue Guarantee, over-allocation of business expenses resulted by accepting the highest tender of a single consortium without any competition, increasing users complaining expensive toll rates, and criticisms of unbalanced regional development of land resources as the service routes are heavily centralized in the National Capital region.In this study, therefore, the problems of private financed expressways are analyzed and thus evaluated by comparing the 9 private financed expressways currently in operation, including Incheon Airport Expressway and Cheonan Nonsan Expressway, with the government funded expressways. In doing so, each phase of a project, which includes promotion phase, operation phase, and allotment (of finance) phase, is examined.In the course of analysis, The following were the problems detected from each phase of private financed expressway in operation.Firstly, competition was extremely limited in the operator selection procedures. When reviewing the nature of existing consortiums of expressways that are subject to private finance, most of them were formed either as a single consortium or a consortium where construction companies take initiative. Therefore, the worthy aim of fostering the fundamental principles of the market economy in the public sector to promote creativity and efficiency through private through attracting private investment has not been fully attained in this respect.Secondly, there was a tendency of overstating the transportation forecast in the phase of estimating transportation demand forecast. According to a report released on October 2008 by Land, Transport and Maritime Affairs Committee of the National Assembly, the real transportation volume of private financed expressways in fact failed to reach a mere 60% of the transportation forecast. This might be due to the fact that the transportation forecast was valued as one of the top priorities in analyzing the feasibility and profitability of a provisional project and judging whether or not an expressway should be constructed. Addition to it, a report of the Board of Audit and Inspection, 「Investigation on Private Financed SOC Operation」, revealed that the forecasted transportation volume was directly proportional to the business feasibility.Thirdly, when the toll rate of the two types of expressways, private financed expressways and government funded expressways, was compared, the former’s toll rate was higher. On the assumption of an equal distance travelled in equal conditions of road, the toll rates of Incheon Airport Expressway and Incheon Bridge were at least twice higher than the average expressways funded by the government in construction. This might be due to the fact that the private business, which was obviously on a commercial basis, reflected the business profitability in their price-earnings ratio, and also to the realization of an agreement between the business and the government that the toll rate was subject to adjustment reflecting the annual price inflation.Fourthly, increased financial burdens of the government to subsidize construction and redeem Minimum Revenue Guarantee further intensified the problem. The level of subsidization for private financed expressway was originally set as 30% by the Ministry of Strategy and Finance, but the actual subsidization for construction of Gyeongsu Highway and Incheon Airport Expressway exceeded as they recorded 42.97% and 48.25%, respectively. Furthermore, national subsidy was overpaid as well to subsidize construction and redeem Minimum Revenue Guarantee.Lastly, constructing private financed highways was of no substantial assistance to overcome the problem of unbalanced regional economic development, as in fact, they contributed to further intensification of unbalanced development of national land resources. Seven out of the 9 private financed expressways currently in operation were constructed in the National Capital region, reaching 55.6% in its concentrativeness, resulting in ill-balance and inequality.As portrayed above, the original rationales for the implementation of private financed expressways have not been fulfilled in many aspects. The following are the detailed solutions to the aforementioned problems.First of all, there is a need to actively promote competition in a bid system of private financed expressway. In order to root out evil practices, a single consortium bid should be invalidated, and advantage points should be given to a consortium with financial investors (such as pension funds and insurance companies, and so forth) invited as its member investors. Also, amendments should be made to the related acts including the aforementioned investment act so not only financial investors but also individual investors would be able to take a part in SOC investments. In other words, to promote real competition, multiple consortiums should be invited to bidding.Secondly, there is a need for improving the reliability of the transportation forecast in analyzing the feasibility and profitability of a provisional project and judging whether or not an expressway should be constructed. In order to do so, there is a need to refine the system verifying the forecast outcomes as proposed by private stakeholders, and the national transportation database should be provided to them on a regular basis. In the long term, there is a need for consistent and continual research on structuring the database and devising techniques for evaluating the business feasibility and profitability of private financed projects, and the formation of a body consisting experts, public officials and scholars may be desirable to realize the cause.Thirdly, the toll rate of private financed expressway should be reduced as it is already much higher than that of government funded expressway. For such reduction, a fundamental revision of the earning rate (often denoted as (r)) as determined thus far by the private businesses and the competent authorities’ negotiation is necessary. The competent authorities should closely watch the fluctuation of market interest rates and if necessary refer to borrowing rate of interest and average earning rate of other companies in the same field in negotiating the annual earning rate as guaranteed in the contract or even institutionally revising the contract to rationalize the annual earning rate.Fourthly, financial burdens of the government imposed by subsidizing construction and redeeming Minimum Revenue Guarantee should be alleviated. In achieving this, the profitability should be prioritized and as long as the profitability is secured for the private business, there should be no financial support from the government in conducting their business. In some projects where the profitability is anticipated to be rather insufficient but nevertheless vital to the government, minimizing direct financial supports and reducing financial burden by expanding indirect supports seem ideal. Additionally, through analyses of the rate of national subsidy to overall expenses and managerial efficiency appraisals, measures to reduce the rate of Minimum Revenue Guarantee should be deliberated.Lastly, the problems associated with imbalance, or even ill-balance in regional development, which may have been further intensified by the construction of private financed expressways, should be overcome. Institutional frameworks to inhibit any further mal development as thus far induced by attracting private investments in the public sector or to coordinate regional distribution of resources by the central government may be necessary. Immediate measures in structuring such institutional frameworks, which may be namely incentivizing regional developments by amending 「Balanced Regional Development and Support for Local Small and Medium Enterprises Act」, developing projects linking the metropolitan area and underdeveloped regions, and reducing the earning rate of the private finance in the metropolitan area, would be also desirable.Key Words : Social Overhead Capital, Private Investment Project, Government Proejct, Incheon Airport Expressway, Private Financed Expressway, Government Funded Expressway
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