Transport PPP decisions in Korea: value for money assessment and risk quantification

Abstract

Value for money (VFM) assessment has been adopted worldwide as a public private partnership (PPP) decision methodology. In terms of quantitative assessment, this method considers only the public sector cost, assuming completion delay does not occur between delivery alternatives, so it is difficult to use where systematic completion delays in the conventional delivery are expected to occur like in Korea. Therefore, in this research a Modified VFM methodology was developed to consider completion delay as well as public sector cost, using the VFM assessment and the Net Present Value (NPV) technique. In addition, various risks including transferable risks (completion delay, construction cost and traffic volume risk) were quantified in order to examine the impact of the transferable risks on PPP decisions, through historical observations and a literature review. In total six case studies (2 National Highways, 2 National Expressways and 2 National Railways) were conducted, reflecting Build-Transfer-Operate (BTO) and Build- Transfer Lease (BTL), the most popular PPP options in Korea. The biggest difference between the BTO and the BTL options is that the private sector makes a profit from end users’ tariffs in the BTO option, whereas it makes a profit using the annual lease fee from the government in the BTL option. The most important finding is that a completion delay in the conventional delivery can be a decisive factor on the quantitative PPP decisions because of the resulting benefit difference between conventional delivery and PPP options. As this completion delay for conventional delivery becomes longer, the probability that PPP schemes are favourable increases. In addition, the critical completion delay, making the Modified VFM zero, varies depending on not only whether to include the construction cost risk and the traffic volume risk, but also on the PPP options considered. Another important finding is that, when including construction cost risk, the viability of PPP options in roads increases, whereas that in railways decreases. This is because the average winning bid ratio (winner’s price divided by estimated price) of turnkey/ alternative bids in roads, used in the calculation of the asset cost of the public sector comparator (PSC) according to the BTL guidelines of Korea, is higher than historical observations that include construction cost risk, whereas in railways it is lower than historical observations that include construction cost risk. This difference between roads and railways seems to arise from the fact that railways are usually delivered separately using six major work element contracts, while roads are usually delivered by a single contract, suggesting that separate contracts lead to greater cost overruns than a single contract. In addition, when reflecting traffic volume risk, the most appropriate delivery option, from a Government perspective, for road/railway cases with tariffs changes from the BTL to the BTO option. This is because traffic volume risk directly results in a shortfall in revenue, which makes the BTO option more favourable to the public sector. However, in the case of railways, the BTL option seems to be practically adopted because the revenue stream is so small that the BTO option is not affordable for the private sector, even considering the maximum governmental subsidy condition. For the success of a BTO project in Korea, a new traffic volume risk sharing scheme is also suggested, sharing revenue shortfall or excess according to the investment of each participant.
Overall, this research suggests that, considering the transferable risks and the revenue stream size of each transport programme, the BTL option is the most appropriate for the National Railways, whereas the BTO is the most appropriate option for the National Expressways, provided that the BTO viability can be achieved in terms of the internal rate of return. With respect to the National Highway programme, the BTL option can be considered as an alternative to conventional delivery on a case by case basis. Finally, considering the land transport programme (roads and railways) of Korea, a meta-analysis indicates that the Modified VFM is positively influenced by project size, completion delay, benefit cost ratio, discount rate and consumer price index, whereas it is negatively influenced by the five year exchequer bond interest rate. In addition, the BTO option and Gyeonggi province (surrounding Seoul) respectively have a bigger positive influence on the Modified VFM than the BTL option and Gyungnam province (adjacent to Busan).

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

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