Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects
Abstract
1. Introduction
2. Literature Review
2.1. Risks Involved in PPP Projects
2.2. PPP Success Factors and Risk Allocation
3. Negotiations and CIRR
- n: Period (years) from the project’s launch to completion of construction prior to the launch of service
- N: Service period (years) after completion of construction
- CCi: Contracted annual expenses for completion of construction (excluding the amount of the government’s financial subsidy)
- ORi: Contracted annual operational revenue
- OCi: Contracted annual operational cost (excluding corporate tax)
- CIRR: Contracted (pre-tax real) rate of return of the project (CIRR)
4. Analysis of the Determinants of CIRR
4.1. Data
- Request for proposal notice or third-party proposal notice;
- Concession agreement;
- Construction;
- Operation.
4.1.1. Dependent Variable: CIRR
4.1.2. Independent Variables
Financing Cost (Rf_5 years)
Facility Type
Service Area of the Project (Authority)
Operation Period (O_Period)
Project Size: Total Private Investment (Ln_P_Investment)
Solicited or Unsolicited Projects (Solicit)
Construction Subsidy: Ratio of Construction Subsidy (Sub)
Minimum Revenue Guarantee (MRG)
Project Preparation Period (Prepperiod) and Negotiation Period (Negoperiod)
Value for Money Assessment (VfM)
Negotiation Experience (Exp)
Competition Rate (Bid_compet)
Average CIRR of Recently Similar Projects (IRR_S_three)
4.2. Model Establishment
4.2.1. Model
4.2.2. Correlation Analysis
4.3. Results and Discussion
4.3.1. Cost Borne by the Private Partner
4.3.2. Project Characteristics and Government Support
4.3.3. Pre-Contract Process, Market Maturity, and Negotiation Behavior
5. Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
References
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Process | Identified Risk | |
---|---|---|
Macro & political | ▪ Regulatory change ▪ Change in taxation ▪ Political will ▪ Unstable government ▪ Government intervention ▪ Expropriation of facility | ▪ Public sector budget deficit ▪ Strong political opposition ▪ Lack of PPP/toll experience ▪ Inflation risk ▪ Interest rate fluctuation ▪ Currency change |
Force majeure | ▪ Natural disaster ▪ War | ▪ Vandalism |
Approval | ▪ Delays in permits | ▪ Detailed design approval risk |
Planning | ▪ Poor decision process risk ▪ Planning permit | ▪ Poor utilities access |
Environmental assessment | ▪ NEPA (National Environment Policy Agent) approval | |
Design | ▪ Design errors/deficiency | ▪ Unproven engineering techniques |
Financing | ▪ Poor financial market ▪ Financial attraction to investors | ▪ Insufficient financing ability of partner ▪ Refinancing |
Site preparation | ▪ Site acquisition ▪ Delays in right of way acquisition ▪ Geo-technical condition ▪ Archeological findings | ▪ Hazmat ▪ Availability/access of site ▪ Delays in cable and pipe relocation |
Construction | ▪ Construction cost overrun ▪ Labor dispute ▪ Procurement (material availability) ▪ Subcontractor disputes ▪ Insurance coverage unavailable ▪ Construction security ▪ Insolvency of sub-contractors | ▪ Commissioning on time ▪ Change in scope/design ▪ Performance specification achievement ▪ Final acceptance ▪ Interface management ▪ Patent infringement ▪ Defects |
Operation | ▪ Traffic demand ▪ Toll price change ▪ Competing facilities ▪ Withdrawal of supporting networks ▪ Maintenance cost overrun | ▪ Insurance coverage unavailable ▪ Security ▪ Service quality ▪ Early termination risk ▪ Traffic information system |
Hand-over | ▪ Premature obsolete risk ▪ Needs for expansion | ▪ Residual transfer value risk |
Others | ▪ Change in private partner share | ▪ Conflict between private partners |
Min | Mean | Max | ||
---|---|---|---|---|
1. Road projects (60) | Real | 4.21 | 6.76 | 10.03 |
Current | 8.38 | 11.34 | 15.53 | |
Premium | 2.50 | 5.77 | 10.50 | |
2. Rail projects (9) | Real | 5.03 | 7.83 | 10.43 |
Current | 9.23 | 12.60 | 15.95 | |
Premium | 4.65 | 7.86 | 10.49 | |
3. Port projects (18) | Real | 5.25 | 7.99 | 9.62 |
Current | 8.41 | 12.73 | 15.10 | |
Premium | 3.40 | 7.40 | 9.52 | |
4. Environmental projects (75) | Real | 3.33 | 5.72 | 8.44 |
Current | 7.09 | 10.21 | 13.87 | |
Premium | 1.84 | 5.37 | 9.00 | |
Total (162) | Real | 3.33 | 6.47 | 10.43 |
Current | 7.09 | 11.04 | 15.95 | |
Premium | 1.84 | 5.40 | 10.50 |
Category | Explanatory Variable | Explanation | Statistics | |||
---|---|---|---|---|---|---|
Variable Name | Min | Mean | Max | Std. Dev | ||
Financing cost | Risk free interest rate (Rf_5 years) | Market return of five-year treasury bond as of the date of agreement signing (%) | 2.39 | 5.16 | 12.20 | 1.76 |
Project characteristics | Facility type | Road (Road), rail (Rail), port (Port), and environment (Environ) | - | - | - | - |
Service area of the project (Authority) | Central government project, local government project, central government-managed local government project | - | - | - | - | |
Operation period (O_Period) | Operation period as stated in the agreement (months) | 120.00 | 310.99 | 600.00 | 119.05 | |
Project size: Total private investment (Ln_P_Investment) | Natural logarithm of total private investment (USD) | 13.19 | 18.07 | 21.87 | 1.80 | |
Solicited/unsolicited (Solicit) | Solicited proposal and unsolicited proposal | - | - | - | - | |
Government support | Ratio of construction subsidy (Sub) | Ratio of construction subsidy out of total project costs (%) | 0.00 | 38.36 | 94.48 | 24.69 |
Minimum revenue guarantee (MRG) | Projects with or without MRG option | - | - | - | - | |
Pre-contract process | Project preparation period (prepperiod) | Length from the date of receipt of project proposal to the date of designation of the preferred bidder (months) | 1.00 | 18.89 | 98.00 | 16.42 |
Negotiation period (negoperiod) | Length from the date of designation of the preferred bidder to the date of agreement signing (months) | 1.00 | 19.15 | 84.00 | 16.10 | |
Value for money assessment (vfm) | Whether value for money assessment was carried out or not | - | - | - | - | |
Market maturity | Negotiation experience (Exp) | Negotiation experience of the authority | 1 | 25.23 | 75 | 19.42 |
Competition rate (Bid_compet) | Number of bidders in the selection process of the preferred bidder | 1.00 | 1.62 | 5.00 | 0.86 | |
Negotiation behavior | Average CIRR of similar recent projects (IRR_S_three) | Average CIRR of three recent PPP projects of the same type facility (%) | 4.40 | 6.60 | 10.43 | 1.51 |
Time | Time | Year of the agreement signing | - | - | - | - |
Category | Explanatory Variable (Variable Name) | Model 1 | Model 2 | ||
---|---|---|---|---|---|
coef. | std.errors | coef. | std.errors | ||
Financing cost | Risk free interest rate (Rf_5 years) | 0.005 | 0.077 | 0.001 | 0.093 |
Project characteristics | Rail | −0.012 | 0.362 | −0.648 | 0.437 |
Port | 0.797 * | 0.345 | 0.534 | 0.353 | |
Environment | −0.093 | 0.275 | 0.092 | 0.28 | |
Service area of the project (Authority) | 0.186 | 0.201 | 0.132 | 0.205 | |
Operation period (O_Period) | −0.001 | 0.001 | −0.001 | 0.001 | |
Project size: Total private investment (Ln_P_Investment) | 0.086 | 0.062 | 0.041 | 0.066 | |
Solicited/unsolicited (Solicit) | −0.157 | 0.177 | −0.101 | 0.184 | |
Government support | Ratio of construction subsidy (Sub) | −0.008 * | 0.003 | −0.011 ** | 0.003 |
Minimum revenue guarantee (MRG) | 0.605 ** | 0.212 | 0.543 * | 0.226 | |
Pre-contract process | Project preparation period (prepperiod) | −0.001 | 0.004 | 0.005 | 0.005 |
Negotiation period (negoperiod) | 0.005 | 0.005 | 0.009 | 0.005 | |
Value for money assessment (vfm) | 0.006 | 0.223 | 0.196 | 0.233 | |
Market maturity | Negotiation experience (Exp) | 0.013 | 0.007 | 0.010 | 0.007 |
Competition rate (Bid_compet) | −0.257 ** | 0.08 | −0.255 ** | 0.08 | |
Negotiation behavior | Average CIRR of similar recent projects (IRR_S) | 0.547 *** (IRR_S_three) | 0.082 | 0.616 *** (IRR_S_five) | 0.09 |
Time | −0.089 * | 0.041 | −0.095 * | 0.044 | |
Intercept | 181.378 * | 83.24 | 192.900 * | 89.15 | |
Observations | 150 | 142 | |||
Adjusted R-squared | 0.748 | 0.731 |
IRR_S_3 | Rf_5 years | Exp | O_Period | Ln_P_Investment | Sub | Prep_Priod | Nego_Period | |
---|---|---|---|---|---|---|---|---|
IRR_S_3 | 1.00 | |||||||
Rf_5 years | 0.37 | 1.00 | ||||||
Exp | −0.51 | −0.46 | 1.00 | |||||
O_period | 0.54 | 0.02 | −0.13 | 1.00 | ||||
Ln_P_Investment | 0.33 | −0.07 | 0.15 | 0.54 | 1.00 | |||
Sub | −0.21 | −0.08 | −0.27 | −0.36 | −0.54 | 1.00 | ||
Prep_Period | −0.08 | −0.15 | 0.16 | 0.22 | 0.29 | −0.05 | 1.00 | 0 |
Nego_period | 0.21 | 0.05 | 0.05 | 0.22 | 0.34 | −0.27 | 0.18 | 1.00 |
Type | Average CIRR (%) | |
---|---|---|
Solicited project | Road | 8.101 |
Rail | 8.469 | |
Port | 8.313 | |
Environment | 5.650 | |
Total | 6.897 | |
Unsolicited project | Road | 6.043 |
Rail | 5.575 | |
Port | 6.853 | |
Environment | 5.816 | |
Total | 5.983 |
Category | Explanatory Variable | Model 1 | |
coef. | std.errors | ||
Financing cost | Risk free interest rate (Rf_5 years) | −0.065 | 0.122 |
Project characteristics | Service area of the project (Authority) | 0.688 * | 0.296 |
Operation period (O_Period) | 0.002 | 0.003 | |
Project size: Total private investment (Ln_P_Investment) | 0.148 | 0.13 | |
Solicited/unsolicited (Solicit) | 0.008 | 0.313 | |
Government support | Ratio of construction subsidy (Sub) | −0.006 | 0.006 |
Minimum revenue guarantee (MRG) | 1.239 ** | 0.423 | |
Pre-contract process | Project preparation period (prepperiod) | 0.005 | 0.009 |
Negotiation period (negoperiod) | 0.006 | 0.006 | |
Value for money assessment (vfm) | 0.236 | 0.358 | |
Market maturity | Negotiation experience (Exp) | 0.042 * | 0.02 |
Competition rate (Bid_compet) | −0.045 | 0.112 | |
Negotiation behavior | Average CIRR of similar recent projects (IRR_S_three) | 0.386 * | 0.148 |
Time | Time | −0.282 * | 0.105 |
Intercept | 565.589 * | 211.763 | |
Observations | 57 | ||
Adjusted R-squared | 0.834 |
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Kim, K.; Kim, J.; Yook, D. Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects. Sustainability 2021, 13, 3311. https://doi.org/10.3390/su13063311
Kim K, Kim J, Yook D. Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects. Sustainability. 2021; 13(6):3311. https://doi.org/10.3390/su13063311
Chicago/Turabian StyleKim, Kangsoo, Jinoh Kim, and Donghyung Yook. 2021. "Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects" Sustainability 13, no. 6: 3311. https://doi.org/10.3390/su13063311
APA StyleKim, K., Kim, J., & Yook, D. (2021). Analysis of Features Affecting Contracted Rate of Return of Korean PPP Projects. Sustainability, 13(6), 3311. https://doi.org/10.3390/su13063311