A study on the optimal PPP model for transport: the case of road and rail in South Korea

Abstract

In recent decades the Public Private Partnership (PPP) has been widely regarded as an innovative way to construct transport infrastructures and to improve the quality of service. As the number of PPP cases has increased, many countries have tried to standardise PPP models to minimise the costs of trial and error. South Korea, where 426 PPP projects have been undertaken since 1994, usually preferred the BTO (Build-Transfer-Operate) model for transport. In the BTO model, the private sector recoups its investment by charging end users directly and hence should bear the traffic demand risk. However, the Korean Government shared the demand risk through a minimum revenue guarantee to induce private sector involvement, and this led to many criticisms of the BTO model. Tariffs in the BTO case were much higher than those of public operators, but the Government still had to pay large amounts of guaranteed revenue. Thus, BTL (Build-Transfer-Lease), where the demand risk is on the public sector, has become an alternative model. The BTL is the “service sold to the public sector” model which is similar to the DBFO (Design-Build-Finance-Operate) in the UK. This thesis examines which of the BTO and the BTL PPP models is optimal to save governmental expenditure for transport infrastructures such as road and rail. Appropriate traffic demand risk sharing, which a particularly controversial issue in South Korea, is explored. These research objectives are examined through five case studies: the Incheon Airport Expressway and the Oksan-Ochang Expressway cases for road PPP; the Incheon Airport Railway, the Daegok-Sosa Railway and the Seoul Metro 9 cases for rail PPP. Through a detailed literature review and five case studies, the thesis shows that the optimal PPP model, which is measured by the VFM (Value for Money) assessment, needs to satisfy the interests of public sector, private sector, and end users. Based on these assessments and including these three viewpoints, it is concluded that the optimal PPP model for road can be the BTL where the public sector can save expenditure or reduce the level of tariff. Traffic demand risk for roads is relatively low, so the public sector does not have to transfer it to the private sector with high profit rate. In the case of rail, the limited revenue and high cost make a project difficult to be financially free standing by the BTO model. However, the BTO can be a better option in urban rail if traffic demand risk is shared appropriately.

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ORCID for J.M. Preston: orcid.org/0000-0002-6866-049X

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