Title: Value for Money Test in Korea
1Value for Money Test in Korea
Hojun Lee hojunlee_at_kdi.re.kr Public and Private
Infrastructure Investment Management Center
PIMAC
2- Value for Money Test
- Process of PPP Project Implementation
- VFM The Theory
- VFM The Practice in Korea
3Value for Money Test
Part-01
4- 1. Process of PPP Project Implementation
5Project Initiation
- Both the government and a private company can
initiate a PPP project - Solicited Projects
- A solicited project is that the competent
authority identifies a project for private
investment and announces a RFP - Competent 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 Projects
- For 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
5
6Procurement Steps of a Solicited Project
Solicited Project
6
7Procurement Steps of an Unsolicited Project
7
8 9The VFM Concept
- 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 resources
- Efficient 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
Act
9
10Key Elements of VFM
- VFM is often a comparative assessment
- Requires 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 bids
- A Procurement principle, not only for PPP
- Adopted by different countries to meet
governments procurement practices - Not a universal tool
- Applied on a project or program basis
- Innovation, asset utilization, risk sharing,
competition, service integration ate main key
drivers of VFM - Presence of VFM drivers confirms suitability for
PPP
10
11The Role of PSC
- Promote whole life costing early in the projects
development - Assist in assessing the project affordability
- Provide a means for demonstrating VFM
- Provide 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
affordability
11
12VFM Assesment
12
133. VFM The Practice in Korea
14Implementation
- PIMAC of KDI is in charge of VfM test as
stipulated by the PPP Act - VfM 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 test - The duration of each project research should take
up to six months - Same methodology and procedure are applied both
to VfM Test and Review of Proposal - Objectivity, consistency, independence as well as
professional expertise are important elements in
conducting VfM tests.
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15Organization of a Research Team
- A VfM test is carried out by a multi-disciplinary
research team - KDI (Project Manager)
- Experts with relevant skills and expertise for
the project are selected at the preliminary stage - External experts (selected from human resource
pool) - Demand forecasting university professors
- Cost estimation engineering companies
- Accounting accounting firms
15
16Scope of a VFM Test
- Phase 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 alternatives
- Based on the results of phase 2, an appropriate
PFI alternatives are formulated - The level of project cost, user fee, subsidy
scale, etc. are suggested from the government. - Phase 4 Award bonus points to the initial
proponent - Bonus points (10 max.) awarded to the initial
proponent are estimated based on the results of
VfM tests and the quality of the proposal.
16
17Setting Comparators for VFM Test
VfM Analysis Implementation Method
Unsolicited Unsolicited With Public Plan Solicited
Private Finance Initiate PFIp (based on proposal) PFIp (proposal) PFIG (research team)
Private Finance Initiate PFIp (based on proposal) PFIG (research team) PFIG (research team)
Public Sector Comparator PSCp (estimated by research team) PSCp (research team) PSCG (research team)
Public Sector Comparator PSCp (estimated by research team) PSCG (research team) PSCG (research team)
17
18Flowchart of a VFM Test (Unsolicited)
Project Proposal(PFI0)
Construction of PSC(PSC0)
Phase 1
N
Feasibility analysis
Construction of PSC1, PFI1
VFM test of private proposal (VFM1PSC1-PFI10)
Phase 2
N
Y
Construction of PFI2-i,
Phases 3 4
VFM test of PFI alternative (VFM2PSC1-PFI2 0)
N
Y
PFI Alternative (PFI2)
Calculation of bonus points
18
Rejection
Implementation of PPP Project
19Flowchart of a VFM Test (Unsolicited with Public
Plan)
20Flowchart of a VFM Test (Solicited Project)
Phase 1
Phase 2
Phases 3 4
21Phase 1 Feasibility Study (1)
- Assess project feasibility and necessity in the
context of national economy and policy directions - Cost-benefit analysis method is used to assess
the economic feasibility of a project - CBA 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 benefits - Sensitivity analysis
- Policy analyses, if necessary, are carried out
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22Phase 1 Feasibility Study (2)
- Setting a PSC (Public Sector Comparator)
- Setting an appropriate PSC option is very
important both to feasibility and VfM of a
project - A basic assumption of VfM test (including FS) is
that the same level of service will be provided
by both PSC and PFI options - In reality, a PSC option that is compatible with
PFI proposal is formulated - Total, (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 PFI - The user fee of PFI is usually larger than that
of PSC
22
23Phase 1 Feasibility Study (3)
- Policy analyses are carried out if necessary
- Evaluation in qualitative/quantitative terms
whether the project is justified in relation to
relevant policy issues - Relevant 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 analyses - If 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.
23
24Phase 2 VFM Assessment (1)
- Government spending of the PSC is compared
against government payment requested by PFI
proposal to assess if PPP procurement improves
the value of tax payers money - Features of VfM assessment
- It 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.
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25Phase 2 VFM Assessment (2)
- Cost items adjusted for competitive neutrality
between PSC and PFI options - Revenue from user fee is deducted from government
payment of PSC - Revenue from supplementary project is taken into
account in consideration of both options - VAT and other tax payments are adjusted
- Same amount and payment schedule of land
acquisition is applied to both options - Administrative costs incurred by governments for
project management are excluded from both options - Insurance fee are estimated in different ways,
reflecting the difference in market valuation of
project risk by project owners - Additional government support if requested by
private company is included in both options based
on estimated spending
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26Phase 2 VFM Assessment (3)
Item Item PSC PSC PFI PFI
Capital costs Project costs Construction cost (1) Cost of survey (2) Design cost (3) Construction cost Construction cost (1) Cost of survey (2) Design cost (3) Construction cost
Capital costs Project costs Land acquisition cost (4) Compensation for land and other possessions Land acquisition cost (4) Compensation for land and other possessions
Capital costs Project costs Supplementary 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 Supplementary 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
Capital costs Project costs (10) Cost for operation equipment (10) Cost for operation equipment (10) Cost for operation equipment (10) Cost for operation equipment
Capital costs Project costs (11) Taxes and fees (11) Taxes and fees (11) Taxes and fees (11) Taxes and fees
Capital costs Project costs (12) Business setup costs (12) Business setup costs (12) Business setup costs (12) Business setup costs
Capital costs Financing costs (13) Financing costs (13) Financing costs (13) Financing costs (13) Financing costs
operating costs operating costs (14) Operation costs (15) Maintenance costs (16) Management and supervision costs (14) Operation costs (15) Maintenance costs (16) Management and supervision costs (14) Operation costs (15) Maintenance costs (16) Management and supervision costs (14) Operation costs (15) Maintenance costs (16) Management and supervision costs
? Base cost born by the government ? Base cost born by the government (Capital costs operating costs) - operating revenue (Capital costs operating costs) - operating revenue Construction subsidy land acquisition cost additional government support Construction subsidy land acquisition cost additional government support
? Risk adjustment costs ? Risk adjustment costs Cost and time overrun Cost and time overrun
Total government payment Total government payment ? ? ? ? ? ? ? ?
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27Phase 2 VFM Assessment (4)
- Present value of government payments for PSC and
PFI options are estimated (discount rate 5.5)
and VfM() is calculated - GP(PSC) Capital costs operating costs
Revenue - GP(PFI) Construction subsidy Compensation
costs Additional government support - GP(PFI) is the government subsidy requested by
the private party in the project proposal
27
28Phase 2 VFM Assessment (5)
- Qualitative VfM assessment
- Allocation of risks (construction, operation
risks, etc.) - Improvement of service qualities
- And 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
far
28
29Phase 3 Formulation of PFI Alternatives
- Financial analysis and sensitivity analysis are
carried out to assess the profitability
(bankability) of a project - Based on the VfM assessment and financial
analyses, PFI alternatives including the
following components, are formulated - Total project costs
- User fee
- IRR (Internal Rate of Return)
- Total government payments
- Other components related to the implementation of
the project - The Competent Authority chooses the most
appropriate PFI option and invites third parties
to tendering - If it is impossible to formulate a PFI
alternative that delivers VfM at a reasonable
level of IRR, then the PFI option is rejected
29
30Phase 4 Bonus Points for Initial Proponent (4)
- The 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 proposal - The quality of a proposal is evaluated based on
the following criteria - ? Priority of the project in the mid- to
long-term government investment plan (10 points) - ? Composition of equity investors (10 points)
- ? Excellency of construction and operation plan
(30 points) - ? Accuracy of demand forecast (30 points)
- ? Prior consultation with relevant government
agencies and plan of addressing of civil
complaints (10 points) - ? Adequacy of required documentation (10 points)
30
31Phase 4 Bonus Points for Initial Proponent (4)
- Bonus Point
- Swiss 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.
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32Phase 4 Bonus Points for Initial Proponent (4)
32
33Phase 4 Bonus Points for Initial Proponent (4)
33
34Use of VFM Test Results
- The VfM test sets the bottom line to meet the
condition of VfM0 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.
34