2016/17 KSP Policy Consultation III : 2016/17 KSP Policy Consultation III : Public-Private Partnership for Urban Transportation Infrastructure in

Public-Private Partnership for Urban Transportation Infrastructure in Colombia

Ministry of Strategy and Finance, Republic of KoreaⅠGovernment Complex, Sejong, 30109, Republic of Korea www.mosf.go.kr The Export-Import Bank of KoreaⅠ38 Eunhaeng-ro, Yeongdeungpo-gu, , 07242, Republic of Korea www.koreaexim.go.kr

2016/17 KSP Policy Consultation Ⅲ

Project Title Public-Private Partnership for Urban Transportation Infrastructure in Colombia

Prepared by EY Hanyoung, ITS,

Financed by Ministry of Strategy and Finance, Republic of Korea

Supported by The Export-Import Bank of Korea (Korea Eximbank) - Seung Ho Sohn, Director General - Jae Jeong Moon, Director of KSP Team - So Ra Eom, Senior KSP Specialist of KSP Team - Seong Ji Kang, Researcher of KSP Team - Seo Jeong Kim, Researcher of KSP Team

Prepared for National Development Financial Institution, Colombia

Project Manager Dae Seop Roh, EY Hanyoung

Researchers Joon Yang Jeong, EY Hanyoung Hyung Seok Oh, EY Hanyoung Do Hoon Lee, EY Hanyoung So Young Lee, EY Hanyoung Young Kyun Lee, ITS Jeong Ho SEO, ITS Soon Kee Jo, ITS Jong Bum Kim, Seoul Metro Sung Hee Lee, Seoul Metro

i Contents 2016/17 KSP Policy Consultation Ⅲ

Summary

Ⅰ. Project Overview ·········································································································· 1 1 . P r o j e c t B a c k g r o u n d a n d O b j e c t i v e s ···························································································· 1 2 . P r o j e c t S c o p e ····································································································································· 2 3 . E x p e c t e d O u t c o m e ···························································································································· 3

Ⅱ. Project Target ··············································································································· 4 1 . U n d e r s t a n d i n g t h e C u r r e n t S t a t u s ······························································································· 4

Ⅲ. A Case Study on 's PPP ································································· 29 1 . C u r r e n t S t a t u s o f K o r e a ' s P P P ··································································································· 2 9 2. Subsidiary Business ­ Construction of Private Capital Station ······································· 4 3 3 . I n f r a s t r u c t u r e F u n d ························································································································· 5 7 4. Case Study of the PPP Projects in Korea ·············································································· 6 8

Ⅳ. Capital Supply ············································································································ 96 1 . O v e r v i e w ············································································································································ 9 6 2 . A l t e r n a t i v e s f o r C a p i t a l S u p p l y ··································································································· 9 8

Ⅴ. Policy Recommendation ························································································ 125 1 . S e c u r i n g B u s i n e s s F e a s i b i l i t y o n P P P ····················································································· 1 2 5 2 . E n h a n c e m e n t o f G o v e r n m e n t S u p p o r t P o l i c i e s ·································································· 1 2 6 3 . E n h a n c e m e n t o f R i s k - S h a r i n g P o l i c y ····················································································· 1 2 7 4. Adaption of New PPP Model ···································································································· 1 2 8

Ⅵ. Conclusion ················································································································· 131

Reference ·························································································································· 137

ii List of Tables

T a b l e Ⅰ - 1 . S c o p e o f t h e P r o j e c t ································································································· 3 T a b l e Ⅱ - 1 . G e n e r a l I n f o r m a t i o n o f C o l o m b i a ·········································································· 4 T a b l e Ⅱ - 2 . M a j o r E c o n o m i c I n d i c a t o r s o f C o l o m b i a ······························································ 5 Table Ⅱ-3. Overview of Politics and Economy in Colombia ··············································· 6 Table Ⅱ-4. Ranking of Competitiveness of Colombian Infrastructu r e ······························ 7 Table Ⅱ-5. Public Private Infrastructure Database of Colombia ········································ 8 Table Ⅱ-6. Urban Transportation Infrastructure of Colombia ············································ 8 Table Ⅱ-7. Budget of the ‘4th Generation Highway Project’ ·········································· 1 1 T a b l e Ⅱ - 8 . C u r r e n t S t a t u s o f T r a n s m i l e n i o L i n e s ································································ 1 4 Table Ⅱ-9. Major roads in Medellín ························································································· 1 9 Table Ⅱ-10. Masivo in Medellín ·································································································· 2 2 Table Ⅲ-1. Progress of PPP law and system ········································································ 3 0 Table Ⅲ-2. Comparison of PPP Schemes ··············································································· 3 5 T a b l e Ⅲ - 3 . V F M T e s t P h a s e s ······································································································ 3 9 Table Ⅲ-4. Role of the stakeholders by the Progress of the Proj e c t ·························· 4 3 Table Ⅲ-5. PPP investment by Schemes ················································································ 4 7 Table Ⅲ-6. PPP Investment by Facilities ················································································· 4 7 Table Ⅲ-7. Status of PPP in Rail Sector of Korea ······························································ 4 8 Table Ⅲ-8 Roles of Participants in Private Capital Station ··············································· 5 3 Table Ⅲ-9 Financing Schemes Utilized by Project Operator ············································ 5 4 Table Ⅲ-10. Private Capital Stations in the Metropolitan Area ········································ 5 5 Table Ⅲ-11. The Comparison of Regulations by the Legal Structure ····························· 5 8 Table Ⅲ-12. Differences According to Legal Term Under the PPP Ac t ························· 5 9 T a b l e Ⅲ - 1 3 . C o m p a r i s o n o f I n f r a s t r u c t u r e F u n d ···································································· 6 0 Table Ⅲ-14. Number of Established Infrastructure Fund and Purchase A m o u n t b y Y e a r ······································································································· 6 4 Table Ⅲ-15. Annual Equity Investment Ratio in Infrastructure Fun d ······························ 6 5 Table Ⅲ-16. Financing Structure of Yongin­Seoul Expressway ······································· 6 7 Table Ⅲ-17. Financing Structure of Daegu­Busan Expressway ······································· 6 7 T a b l e Ⅲ - 1 8 . S u m m a r y o f t h e S e o u l M e t r o L i n e 9 P r o j e c t ················································· 6 9 Table Ⅲ-19. Progress of the Seoul Metro Line 9 Project ··················································· 7 1 Table Ⅲ-20. Details of Total Project Cost and Total Investment C o s t ·························· 7 3 T a b l e Ⅲ - 2 1 . E s t i m a t e d O p e r a t i n g E x p e n s e s ············································································ 7 4 T a b l e Ⅲ - 2 2 . E s t i m a t e d C a s h I n f l o w s a n d O u t f l o w s ······························································· 7 5 T a b l e Ⅲ - 2 3 . M R G a n d R e f u n d o f E x c e s s R e v e n u e C o n d i t i o n ············································ 7 5

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T a b l e Ⅲ - 2 4 . F a r e T a b l e p e r C o n c e s s i o n A g r e e m e n t ····························································· 7 7 Table Ⅲ-25. Initial Capital Structure of the Seoul Metro Line 9 P r o j e c t ······················· 7 8 Table Ⅲ-26. Capital Structure of Seoul Metro Line 9 Project Afte r R e s t r u c t u r i n g ····· 7 9 Table Ⅲ-27. Composition of Equity and Debt of Seoul Metro Line 9 P r o j e c t ············ 8 0 Table Ⅲ-28. Actual Number of Customers Compared to Agreed Projected Demand 81 T a b l e Ⅲ - 2 9 . S u m m a r y o f t h e I n c h e o n B r i d g e P r o j e c t ·························································· 8 3 T a b l e Ⅲ - 3 0 . P r o g r e s s o f t h e I n c h e o n B r i d g e P r o j e c t ··························································· 8 5 Table Ⅲ-31. Capital Structure of the Bridge Project··········································· 8 6 Table Ⅲ-32. The Composition of Equity and Debt of the Incheon Br i d g e P r o j e c t ···· 8 7 T a b l e Ⅲ - 3 3 . O v e r v i e w o f t h e E v e r - L i n e P r o j e c t ···································································· 8 9 T a b l e Ⅲ - 3 4 . P r o g r e s s o f t h e E v e r - L i n e P r o j e c t ······································································ 9 1 T a b l e Ⅲ - 3 5 . C a p i t a l S t r u c t u r e o f t h e E v e r L i n e P r o j e c t ······················································ 9 2 Table Ⅲ-36. Comparison of Ever Line’s Capital Structure ·················································· 9 3 Table Ⅲ-37. The Comparison of Forecasted Demand and Actual Deman d ·················· 9 4 Table Ⅳ-1. Capital Supply of Infrastructure Project by Project O r i g i n a t o r ·················· 9 8 Table Ⅳ-2. Summary of the Infrastructure Project Using ABS under C o n s t r u c t i o n P h a s e ································································································· 1 0 9 T a b l e Ⅳ - 3 . T o p 1 0 I n f r a s t r u c t u r e F u n d s i n 2 0 1 6 ······························································ 1 1 0 Table Ⅳ-4. Share of Equity to Capital Investors in Private Fund i n g P r o j e c t s ········· 1 1 2 T a b l e Ⅳ - 5 . C h a r a c t e r i s t i c s o f M a j o r M B D s ·········································································· 1 1 4 T a b l e Ⅳ - 6 . W B G L e n d i n g b y R e g i o n ······················································································ 1 1 5 Table Ⅳ-7. The Top 10 Recipient Countries invested by WBG ···································· 1 1 6 Table Ⅳ-8. Major Recipient Countries invested by MBD except for W B G ················ 1 1 6 Table Ⅳ-9. Services provided by each organization of WBG ········································ 1 1 7 Table Ⅳ-10. WBG’s Standards of Financial Support by Target Count r i e s ·················· 1 1 8 T a b l e Ⅳ - 1 1 . O v e r v i e w o f I B D b y F i n a n c i a l S u p p o r t T y p e ················································ 1 1 9 T a b l e Ⅳ - 1 2 . O v e r v i e w s o f C A F b y F i n a n c i a l S u p p o r t T y p e ············································· 1 2 1 T a b l e Ⅳ - 1 3 . B T P r o j e c t S c e n a r i o ( M i l l i o n d o l l a r s ) ······························································ 1 2 4 Table Ⅴ-1. Comparison between Conventional and New PPP Model ······················· 1 2 9

iv List of Figures

Figure Ⅱ-1. Planned Area of the ‘4th Generation Highway Project ’ ···························· 1 0 Figure Ⅱ-2. 20 Administrative District of Cundinamarca and Bogo t a ··························· 1 3 F i g u r e Ⅱ - 3 . M a p o f B o g o t a T r a n s m i l e n i o ··············································································· 1 5 F i g u r e Ⅱ - 4 . T y p e s o f P u b l i c T r a n s p o r t a t i o n i n B o g o t a ······················································ 1 6 Figure Ⅱ-5. Geography of Antioquia, Aburrá Valley, and Medellín ······························· 1 7 Figure Ⅱ-6. Major road network in Medellín ········································································ 1 8 Figure Ⅱ-7. Metro Map of Medellín ’ s M a s i v o ( i n c l u d i n g p l a n n e d l i n e s ) ····················· 2 1 Figure Ⅱ-8. Different Types of Public Transportation in Medellín ································· 2 2 Figure Ⅱ-9. Types of Colevtivo and semi-public transportation in Medellín ············· 2 3 Figure Ⅱ-10. Mode Share in Medellín ······················································································· 2 4 Figure Ⅱ-11. Medellín Public Transportation Expansion Plan (2006-2030) ·················· 2 7 Figure Ⅲ-1. Annual Performance of PPP Project ·································································31 Figure Ⅲ-2. New PPP Model (BTO-rs and BTO-a) ···························································· 3 3 F i g u r e Ⅲ - 3 . L e v e l o f D e m a n d R i s k f o r P r i v a t e I n v e s t o r s ·················································· 3 6 F i g u r e Ⅲ - 4 . P F A a n d V F M T e s t f o r S o l i c i t e d B T O P r o j e c t ··············································· 3 7 F i g u r e Ⅲ - 5 . P r o c e d u r e f o r S o l i c i t e d B T O P r o j e c t ································································· 3 8 F i g u r e Ⅲ - 6 . V F M T e s t P r o c e s s ··································································································· 4 0 F i g u r e Ⅲ - 7 . P r o c e d u r e f o r U n s o l i c i t e d B T O P r o j e c t ···························································· 4 1 F i g u r e Ⅲ - 8 . P r o c e d u r e f o r S o l i c i t e d B T L P r o j e c t ·································································· 4 2 F i g u r e Ⅲ - 9 . P r o j e c t I m p l e m e n t a t i o n P r o c e d u r e ····································································· 5 2 F i g u r e Ⅲ - 1 0 . A u t h o r i z a t i o n P r o c e d u r e ························································································ 5 2 F i g u r e Ⅲ - 1 1 . C o m p o s i t i o n o f I n v e s t m e n t T r u s t ······································································ 6 1 F i g u r e Ⅲ - 1 2 . C o m p o s i t i o n o f I n v e s t m e n t C o m p a n y ······························································ 6 2 F i g u r e Ⅲ - 1 3 . O p e r a t i o n S t r u c t u r e o f I n f r a s t r u c t u r e F u n d ··················································· 6 3 F i g u r e Ⅲ - 1 4 . M a p o f t h e S e o u l M e t r o L i n e 9 ········································································ 7 0 Figure Ⅲ-15. Capital Structure of the Seoul Metro Line 9 Project ································· 7 2 F i g u r e Ⅲ - 1 6 . P r o p o r t i o n o f t h e T o t a l P r o j e c t C o s t ······························································· 7 3 Figure Ⅲ-17. Structure of Seoul Me t r o L i n e 9 O p e r a t i o n ··················································· 7 6 Figure Ⅲ-18. Structure of the Seoul Metro Line 9 Project after R e s t r u c t u r i n g ·········· 8 2 Figure Ⅲ-19. The Map of the Constructed by the Private Sector ····84 F i g u r e Ⅲ - 2 0 . T h e M a p o f t h e E v e r - L i n e ·················································································· 9 0 Figure Ⅳ-1. Structure of Infrastructure Project by Financing Sc h e m e ························· 9 6 Figure Ⅳ-2. Investment Path of Infrastructure for Private Secto r ·································· 9 9 F i g u r e Ⅳ - 3 . R e v i e w i n g C o - F i n a n c e ························································································· 1 0 0 F i g u r e Ⅳ - 4 . S t r u c t u r e o f C o - F i n a n c e ····················································································· 1 0 1

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Figure Ⅳ-5. Structure of the Metro Line 2 project ··············································· 1 0 2 Figure Ⅳ-6. Structure of Typical Future Flow Securitization········································· 1 0 3 Figure Ⅳ-7. Structure of BdB’s Remittance Securitization ·············································· 1 0 5 Figure Ⅳ-8. Structure of Banco de Credito del ’s Credit C a r d S e c u r i t i z a t i o n ································································································ 1 0 6 F i g u r e Ⅳ - 9 . S t r u c t u r e o f A B S I s s u a n c e ················································································· 1 0 7 F i g u r e Ⅳ - 1 0 . B T B u s i n e s s S t r u c t u r e ························································································· 1 2 2 Figure Ⅳ-11. BT project business structure, Ho Chi Minh City ······································ 1 2 3

vi List of Abbreviations

ABS Asset Backed Security ADB Asian Development Bank AfDB African Development Bank BdB Banco do Brasil BOO Build-Own-Operate BOT Build-Operate-Transfer BRT Bus BTL Build-Transfer-Lease BTO Build-Transfer-Operate BTO-a Build-Transfer-Operate adjusted BTO-rs Build-Transfer-Operate risk sharing CAF The Latin American Development Bank EBRD European Bank for Reconstruction and Development FCC Fomento de Construcciones y Contratas SA FDI Foreign Direct Investment FDN Financiera de Desarrollo Nacional GDP Gross Domestic Product GoC Government of Colombia GP General Partner ICC International Chamber of Commerce IDB Inter-American Development Bank IIC Inter-American Investment Corporation KDI Korea Development Institution KSP Knowledge Sharing Program LP Limited Partner MDB Multilateral Development Bank MEP Metro Expansion Plan MKIF Macquarie Korea Infrastructure Fund MOLIT Ministry of Land, Infrastructure and Transport (of Korea) MOSF Ministry of Strategy and Finance (of Korea) MOU Memorandum of Understanding MRG Minimum Revenue Guarantee NPS National Pension Service PF Project Financing PFI Private Finance Initiative

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PIMAC Public and Private Infrastructure Investment Management Centre PPP Public-Private Partnership PSC Public Sector Construction RFP Request for Proposal SCS Standard Cost Support SEIF Small Enterprise Investment Facility SOC Social Overhead Capital SPC Special Purpose Company SPV Special Purpose Vehicle UTI Urban Transportation Infrastructure VFM Value for Money WBG World Bank Group

viii Summary

Summary

In 2004, the Ministry of Strategy and Finance of Korea (hereinafter referred to as the “MoSF”) launched the Knowledge Sharing Program (hereinafter referred to as the “KSP”), a knowledge-based development and economic cooperation program designed to share Korea’s development experience with partner countries. KSP introduced a policy consultation on the construction and infrastructure sector, with the purpose of supporting the development of construction and infrastructure industry in partner countries.

As Colombia ranks at 3rd place in population and 4th place in GDP among South American countries, the economy of Colombia is increasing gradually. However, Colombia faces several problems resulting from rapid urbanization and meeting the deficiency in urban transportation infrastructure imperative is one of the key priorities, because it relates to the quality of civil life. According to the Global Competitiveness Report published by the World Economic Forum, transportation infrastructure condition in Colombia is ranked below 100th place among 140 countries and insufficient transportation infrastructure condition is considered to be an obstacle to economic growth in Colombia.1)

To improve transport infrastructure in Colombia, the state affair of Juan Manual Santos established the National Development Plan from 2014 to 2018 at the national level. At the local government level, Bogota city government has implemented the construction of metro lines, and Medellín city government has also established the Development Master Plan 2016-2019 for comprehensive development in both the short and mid-term. However, considering that its own budget is not sufficient to cover costs for the demand on urban transportation infrastructure, it is necessary for the Colombian and local governments to consider various financing alternatives to procure required amount to improve the condition of urban transport infrastructure.

For the efficient execution of transport infrastructure projects in Colombia, the KSP consulting team has made an in-depth analysis of the current Colombian transportation infrastructure

1) World Economic Forum, 2017, The Global Competitive Report 2016-2017, World Economic Forum

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and the case study of PPP in Korea and held workshops in Colombia to enhance capacity of Colombian government officials. After we conducted a policy advisory service to apply the PPP method to the Colombian transportation infrastructure projects, we offered a dissemination seminar to share the research findings and recommendations.

Through the analysis of the current urban transportation infrastructure in Colombia, we have confirmed the necessity for a review of the financing alternatives. Our findings is described as below.

First, Colombia’s urban development plan actively pursues the introduction of public transportation infrastructure with an emphasis on inter-regional connectivity and accessibility.

Secondly, the Colombian government is seeking cooperation with the private sector in the initiation of public infrastructure projects. Through the enactment of the PPP law, the Colombian government aims for stability in public infrastructure projects, particularly in the transportation infrastructure projects such as railway. For example, according to the PPP report of DNP Colombia for the first quarter of 2015, a total of 322 projects have been registered in PPP Registration System and have been in progress as of March 2015. Fifty nine percent of 322 projects are transportation infrastructure projects including railroad projects.

Thirdly, the Colombian government has recently been taking a passive stance towards urban infrastructure projects due to various environmental constraints. In general, central government of Colombia provides 70% of financing to construct an urban infrastructure project, while the local government provides the remaining 30% of financing. However, with the depreciation of the peso in relation to the US dollar, coupled with a drop in oil prices, financing for urban transportation infrastructure projects has become more with reduction in size or delay in execution.

Therefore, there is a growing possibility for the Medellín city government to receive no financial support from the central government. Also, the financial crunch poses a challenge for the city government to pursue and operate the MEP.

By examining our analysis described above, we came to a conclusion that the Colombian government has a strong willingness to develop its urban transportation infrastructure yet faces difficulties in financing its projects. Hence, there is a need to develop new ways to attract investment in undergoing projects and to efficiently utilize the government’s limited budget.

In order to discover financing alternatives applicable to Colombia, the KSP consulting team has analysed the current urban transportation infrastructure in Korea. We have analysed and presented the current PPP status in Korea, regulations concerning ancillary businesses, and

x Summary

infrastructure fund status. Regarding PPP case studies, we have selected the Seoul Metro Line 9, Incheon Bridge PPP, and the Ever-Line case to come up with the following implications.

The implications of the Seoul Metro Line 9 are as follows:

First, the Seoul Metro Line 9 was divided into upper and lower structure, securing the profitability of private investors. Compared to other types of PPP projects such as roads and ports, PPP projects in railway sector require relatively high initial investment cost. However, it is difficult for private investors to return its investment only through operating revenue from usage fees due to the high publicness of railway business.

Considering these traits of PPP projects in railway sectors, the Seoul Metro Line 9 divided the construction into the superstructure and substructure, the more costly portion of the construction which is the substructure including civil work was taken by the Seoul Metropolitan Government. The superstructure construction and operation including system, car, construction, orbits, etc. was carried out by the private sectors.

Secondly, the business of the Seoul Metro Line 9 was secured because of accurate demand forecasting. From the opening year of Seoul Metro Line 9, actual demand compared to estimated demand maintained above 80%. Since the actual demand of the Seoul Metro Line 9 was verified, business value was secured. When the project was restructured, the guaranteed business value attracted more financial investors which enabled the project operator to procure capital on more favourable condition than before restructuring.

Thirdly, the Seoul Metro Line 9 is one of representative examples of exercising both the private and public equity funds. In Korea, PPP projects were mainly financed through loans from financial institutions. Even when using funds or bonds utilizing securities, financing was carried out in the private equity scheme, preventing small investors to participate2). On the other hand, in the case of Seoul Metro Line 9, not only private funds but also public offering funds were utilized, which resulted in the expansion of access to the infrastructure capital market.

The implications of the Ever-Line PPP project are as follows:

First, the Incheon Bridge PPP project was carried out by financial investors but not construction investors. In the case of previous PPP projects, construction investors mainly initiated and led PPP projects. However, in case of the Incheon Bridge PPP project it was initiated by financial investors. As financial investors took an initiative of the project, the project operator reasonably estimated the design and construction cost, which resulted in a decrease

2) Jun-Kyung, Kim, 2014, Long-term Investment Activation Plan for PPP projects, KDI

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of total investment cost and led to a successful financing structure.

Secondly, the Incheon Bridge PPP project was able to resolve possible conflicts among stakeholders by signing a detailed concession agreement. After the initial concession agreement was signed, a construction company was determined through public tender. The public tender made it possible to secure transparency of the total settlement process, resolve conflicts between the project operator and the construction company, and save about KRW 270 billion in construction cost.

Thirdly, through an exemplary financing structure based on a strictly validated demand estimation, the project operator of the Incheon Bridge PPP project was able to borrow debts with a favourable financing condition. Both senior and subordinated debts used variable interest rates linked to the market interest rate, allowing the financial structure to follow the market condition, reducing financing cost.

The implications of the Ever-Line PPP project are as follows:

Firstly, the Ever-Line PPP project has experienced a substantial amount of operational deficit due to inaccurate demand forecasting. According to the projected demand in 2011 under the initial concession agreement (2004), an average of 161,000 riders per day was expected, but the number decreased to 65,000 riders per day when re-estimated as of 2010. The potential financial burden due to MRG caused conflicts between the authority and the project operator, which resulted in construction delay until the MRG was replaced by SCS through the restructuring.

Secondly, the lack of prior consultation on technical standards led to disputes between the authority and the concessionaire. As a result, the authority had to compensate the concessionaire for the opportunity cost due to the delays. In case of the Ever-Line PPP project, the authority and the concessionaire did not negotiate thoroughly prior to the initial concession agreement, which brought to the case to the International Court of Arbitration.

Thirdly, an effective dispute settlement clause had been incorporated in the agreement clause, for disputes to be resolved through the Court of International Arbitration.

Based on our analysis of the current Colombian and Korean urban transportation infrastructure, we came to a conclusion that alternative financing methods must be introduced to expand urban transportation infrastructure in Colombia. We suggest the following financing alternatives: 1) utilization of co-financing, 2) securitization of future tax receivable, 3) utilization of ABS, 4) utilization of infrastructure fund, 5) expansion of financial investors’ participation 6) utilization

xii Summary

of MDB, and 7) utilization of BT scheme to decrease construction costs.

First, co-financing is a financing alternative where a PPP project is financed in various channels. One trait of co-financing is the sharing of risk road from the large initial investment and uncertainty of investment through diverse channels of financing. Borrowing costs are reduced as project risks are shared among various institutions which makes it easier for private investors to participate in the infrastructure projects. The Metro project guaranteed by MIGA in WBG and the Line 2 project financed from IBRD and IDB are examples of utilization of co-financing.

Secondly, securitization of future tax receivables is a financing alternative where an originator holding future receivables directly or indirectly sells its future receivables to an international special purpose vehicle, and the SPV then issues bond and raises capital. As the transfer, convertibility, and bankruptcy risks are alleviated through the securitization structure, the operators can receive a higher credit rating than that of individual country. The fact that the access to various investors and international capital markets can be facilitated easily is also another advantage of future tax receivables’ securitization. However, securitizations of future tax receivables also have constraints such as a complicated structure, large scale of preparation costs, and a long preparation period. Banco do ’s securitization of future remittance receivables and Banco do Credito del Peru’s securitization of credit card receivables are examples of securitization of future tax receivables.

Thirdly, ABS refers to the security backed by a specified pool of low-liquidity assets. Since the principal and interest of the ABS is redeemed based on the repayment ability of the securitized assets with the credit enhancement, the credit of the ABS is evaluated separately thus giving a higher rating than the project operator. If utilizing the ABS in financing, the project operator can avoid risks the credit risk, interest rate risk, and inconsistency risk between operation and procurement, making it possible to diversify funding sources and to expand investment base. In the case of Korean road, KRW 60 billion was procured through issuance of ABS.

Fourthly, infrastructure funds are special asset funds established to invest in infrastructure facilities which give opportunities to individuals and institutional investors who were not able to directly invest in infrastructure projects. The infrastructure funds are able to enhance the liquidity of invested capital of infrastructure projects, to hedge inflation risks, and to diversify portfolio risks due to low correlation with traditional financial assets such as stocks and bonds. This positive characteristic of infrastructure funds has made financial investors including pension funds in advanced countries such as Australia, to actively invest in public offered infrastructure funds.

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Infrastructure funds can be classified into two categories: listed infrastructure funds and unlisted infrastructure funds. Listed infrastructure funds raise capital through an Initial Public Offering method which lists shares on the stock market, or an open-ended fund method which collects from lots of investors. Unlisted infrastructure funds counter for institutional investors who want to invest in infrastructure projects. Institutional investors, limited partners, invest in unlisted infrastructure funds operated by investment banks, investment management companies, and general partners.

Fifthly, construction investors have generally led investment in infrastructure projects, but it now requires financial investors such as national pension, governmental agency, and equity fund to participate in order to vitalize infrastructure project. The marketability and transparency of the infrastructure projects are to be secured in order to attract financial investors to participate in infrastructure projects because the financial investors behaves as a passive investor seeking stable profits. In addition, the government of Colombia may consider utilizing quasi-equity including subordinated debts or providing risk sharing policy such as MRG to attract financial investors. If financial investors decide to contribute in equity, it implies that the required amount of investment is likely to be procured and the stability of profit on the project is secure.

Sixthly, if cooperating with the MDBs, various services related to projects could be provided for economic development. Various services composes of loan, grant, guarantee, equity investment, including loans, grants, guarantees, equity investments, advisory services, and other relevant services, thus of the government of Colombia could consider various services from IBRD, IFC, MIGA, CAF, and other MDBs.

Seventhly, we suggested the BT business structure as a measure to decrease construction costs. The BT business structure is when a project originator establishes SPC to construct infrastructure facility and contributes the facility to the government at the completion of construction. As the government does not pay construction costs in cash but grants the right as the consideration through BT structure, the government could minimize cash-out flow attract private investors to participate in infrastructure project.

Due to low GDP per capita in developing countries, it is difficult for private investors to return investment only through revenues from usage fees. Through BT structure, the private investors are able to return investment without taking operational risks from variance on demand. The government of Colombia can attract private investors and vitalize PPP projects by adapting BT as scheme of PPP. Ho Chi Minh City BT project by GS E&C is one of an exemplary PPP project utilizing BT structure.

xiv Summary

Based on our analysis from urban transportation infrastructure condition in Colombia to financing alternatives for expanding urban transportation infrastructure in Colombia, we suggested the following policy recommendation:

First, policy support is required to vitalize funding activities on PPP. Business feasibility on PPP can be secured by prioritizing projects based on their profitability and stability. In case of a project urgently required for social development but lacks profitability and stability, additional support for securing sufficient profitability and stability is required to attract private capital to the infrastructure projects. Urban transportation PPP projects have relatively higher publicity than other infrastructure projects. Considering this trait of urban transportation PPP projects, additional supports including MRG, early termination payment, and revising business structure are required to secure a certain level of return on investment. In case of Seoul Metro Line 9, low profitability was taken by the government, which secured the profitability of private investors.

Secondly, policies supported by the government are in need because private investors tend to invest based on project profitability than public interest, adequate government support is required to attract private investors to participate in urban transportation PPP projects. The government of Colombia may consider construction subsidy, tax incentives, and deregulation as government support polices. In case of Colombia, the PPP law in 4th generation has stipulated not to grant construction subsidy; however, it would be helpful to provide construction subsidy with limitation to the projects with high publicity but low in financial feasibility, because construction subsidy reduces the total private investment cost and usages fees, and helps infrastructure project to be financed by private capital with external effects of governmental support. According to PPP laws in Korea, government support policies include tax incentives and exemption. If regulations regarding financing and ancillary businesses are deregulated reasonably, an environment favourable to private investors to participate in PPP projects would be created in Colombia.

Thirdly, risk sharing policy is required. Private investors would not participate in infrastructure projects if they must take various project risks. Especially in case of urban transportation infrastructure, a certain level of risks is needed to be shared because it has higher project risks resulting from variance on demand. Under the PPP laws in Korea, the government provides various risk-sharing policies including infrastructure credit guarantee fund, buy-back rights, and early termination payment.

The infrastructure credit guarantee fund could enhance the project originator’s creditability in a way the fund repays debt on behalf in case the project operator becomes defaults. The limit of infrastructure credit guarantee fund increased from KRW 300 million to KRW 400 million in 2015, which led to an increase in stability of infrastructure projects.

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The buy-back rights refer to a right where the project originator may ask the government to buy the concession right in case the project originator is unable to operate or mange the facility due to inevitable circumstances prescribed in the concession agreement.

Early Termination Payment is a right where the project operator may request the government to terminate the concession agreement and pay the predetermined early termination payment when a project operator is no longer able to maintain the facility due to reasons prescribed in a concession agreement or related regulations. If early termination payment clause is included in a concession agreement, the project operator will be able to borrow debt with a favourable interest rate.

Fourthly, to attract the private investors to participate to infrastructure projects the new PPP model is required. New PPP model was devised in an attempt to prepare the change of external conditions in Korea. Through the new PPP model, a certain level of project risks could be shared.

Shin- Double Track Line (hereinafter “Shin-”) is expected to be the first PPP project utilizing the BTO-rs model. The government of Korea planned to construct Shin-Ansan Line with its own budget; however, considering its financial burden, the government of Korea changed the plan to construct Shin-Ansan Line through PPP scheme. Through BTO-rs model, the government of Korea would be able to share project risk, gains, and losses with private investors on a 50 to 50 ratio which would limit an increase in usage fees and maintain its fiscal soundness.

Gyeung-In Express Underground Project (hereinafter “Gyeung-In Project”) is expected to be the first PPP project implemented through BTO-a model. The upper and underground section will operate separately, where the upper section will become a free road and the underground section will become a toll road but would be similar to the toll operated by the government, which could reduce the burden of users.

With abundant natural resource and 3rd largest population among South America countries, Colombia has a great potential for growth. However, insufficient transportation infrastructure is an obstacle to the economic growth and connectivity among cities in Colombia. Therefore, if transportation infrastructure condition in Colombia is to be improved, the quality of civil life, infrastructure logistics and its economy would improve. The government of Colombia is looking for various financing alternatives to expand urban transportation infrastructure. If the government of Colombia reviews and utilizes financing alternative and structures described in this report, many urban transportation infrastructure projects could be implemented which would ultimately develop Colombia’s economy.

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Ⅰ. Project Overview

1. Project Background and Objectives

1.1. Background and Necessity of the Project

In 2004, the Ministry of Strategy and Finance of Korea (hereinafter referred to as the “MoSF”) launched the Knowledge Sharing Program (hereinafter referred to as the “KSP”), a knowledge-based development and economic cooperation program designed to share Korea’s development experience with partner countries. As part of the KSP, the Export-Import Bank of Korea (hereinafter referred to as the “Korea EXIMbank”) introduced a policy consultation on the construction and infrastructure, for the purpose of supporting the development of construction and infrastructure industry in partner countries and increasing the likelihood of Korean companies winning overseas orders.

Colombia is facing a number of problems due to rapid urbanization. Especially, the country has not been very successful in providing sufficient infrastructure, although the rapid growth of urban population has brought the increased demand for the Urban Transportation Infrastructure (hereinafter referred to as the “UTI”). To address such problem, the government of Colombia (hereinafter referred to as the “GoC”) has improved the climate for private investments, for example, entrusting Financiera de Desarrollo Nacional (hereinafter referred to as the “FDN”) with the role of attracting private investors to implement core infrastructures through a public-private partnership (hereinafter referred to as the “PPP”) project in 2011, and enacting the 1508 Act, which is also called the PPP Act, in 2012.

Medellín, as the second largest city of Colombia and one of the well-developed cities of transportation infrastructure, is currently pursuing many UTI projects under the Metro Expansion Plan 2006-2020 (hereinafter referred to as the “MEP”), but is facing difficulties in finding appropriate financial mechanism.

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Therefore, the MoSF has agreed with the GoC to share its experience in PPP-based UTI development projects and explore financing strategies for UTI development in Colombia, including the 80AT in Medellín, through the KSP policy consultation on the construction and infrastructure3).

However, as the City of Medellín decided to advance the project using a contracting model of public work rather than doing it as a PPP, the KSP team and FDN agreed to change the scope of work as supporting FDN to explore innovative financing alternatives for the UTI projects in Colombia.

1.2. Objectives of the Project

The objectives of this project are to contribute to the development of the UTI in Colombia, thereby to alleviate traffic congestion, and ultimately to strengthen the competitiveness of Colombia, by passing through three steps as follows; 1) conducting case studies of Korean experiences in selected UTI developments, 2) suggesting PPP-based financing alternatives for UTI projects in Colombia, and 3) holding a capacity-building workshop and final dissemination seminar in Colombia.

2. Project Scope

This project was conducted for the period from November 2016 to early August 2017. The project consists of the following four activities.

Activity 1, conducting a case study of Korean experience in PPP-based UTI development: the examples and suggestions were drawn, based on the analysis of PPP-based UTI projects such as Seoul Metro Line 9, Incheon Bridge, and Yongin Light Rail Transport.

Activity 2, suggesting the strategies to procure the financial resources for UTI projects in Colombia: for the Colombian government to address the financing problem on UTI projects, alternatives were suggested including project financing (hereinafter referred to as the “PF”) structure, and utilization plan of Multilateral Development Bank (hereinafter referred to as the “MDB”)

Activity 3, holding a capacity building workshop for the government personnel in Colombia: the challenges faced by Colombia will be drawn as an agenda, based on the results of Activity

3) Writing based on the kick off meeting

2 Ⅰ. Project Overview

1 and Activity 2. To discuss the agenda, the capacity building workshop was held in Bogota, Colombia.

Activity 4, holding a final dissemination seminar: The final dissemination seminar was held in Colombia to share the results of the project. The national and local government, experts of concerned sector, and other interest parties of the project were disseminated with the project outputs and discussed the future plan for UTI projects in Colombia.

Table Ⅰ-1 Scope of the Project

Conducting a Case Study of Korean Experience in PPP-based UTI Development Activity 1 - Conducting Case study of UTI projects in Korea such as Seoul Metro Line 9 - Drawing examples and suggestions applicable to Medellín Suggesting PPP-based Financing Alternatives for the UTI projects in Colombia Activity 2 - Suggesting the project structure for the UTI projects in Colombia - Exploring the methods of procuring the financial resources Holding a Capacity Building Workshop Activity 3 - Coming up with the agenda based on the results of Activity 1 and 2 - Hosting a capacity building workshop to share Korea’s knowledge and experience Holding a Final Dissemination Seminar Activity 4 - Sharing the results of the project to the interested parties - Holding the final dissemination seminar

Source: project kick off meeting material

3. Expected Outcome

The expected outcomes of this project are as follows.

First of all, the Korean experience in PPP-based UTI will be systematically transferred to the city of Medellín, through the analysis of Medellín case and the capacity building workshop.

Secondly, by suggesting the methods of procuring the financing resources, the feasibility of UTI projects in Colombia will increase.

Thirdly, by sharing Korea’s PPP related experience and knowledge, this project can facilitate the economic development of Colombia and cooperation between Korea and Colombia on the UTI sector.

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Ⅱ. Project Target

1. Understanding the Current Status

1.1. Analysis of the Current Status of Colombia

1.1.1. General Status

The Republic of Colombia lies along the Andes Mountains, in the north-west region of South America. Colombia is bordered with and Brazil. The geographic area of Colombia is 1,139,000 km², which is five times larger than the Korean peninsula. Major cities include Bogota, the official capital city, and Medellín, the economic capital of Colombia.

As of March 2015, its population was around 48 million, consisting of Mestizo and Caucasian (84%) and Mulatto (10%). The nation’s official language is Spanish. More than 90% of the population is Catholic.

Table Ⅱ-1 General Information of Colombia

Northwest of South America, Official Name Republicá de Colombia Location Borders Venezuela and Brazil

Major Cities Bogota, Medellín, Cali Territory 1,139,000 km²

Mestizo and Caucasian (84%), Population 48.8 Mil. ('16) Peoples Mulatto (10%)

Language Spanish (Official Language) Religion Catholic (90%)

Tropical (Coast) and Climate Currency Peso (Ps) Temperate (Plain)

Source: The Export-Import Bank of Korea, 2017, World fact book,TheExport-ImportBankofKorea(Re-writing)

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1.1.2. Political and Economic Status

Based on the principle of trias politica, the government consists of legislature, judiciary and executive body. There are 32 states and 1 capital in the nation and federalism has not been introduced. Direct elections are held to elect governors, mayors, and congressmen for state and city councils. In comparison with other nations, local autonomous government system is highly developed.4)

Since its independence from Spain in 1813, Colombian Conservative Party and Colombian Liberal Party had been leading the political scene. With the establishment of the new constitution in 1991, a multi-party system was formed. Currently, around 12 political parties or political groups exist. Major political parties include Social Party of National Unity (Partido Social de Unidad Nacional, U party), Colombian Conservative Party (Partido Consevador, PC party) and Colombian Liberal Party (Partido Liberal, PL Party). The president is elected by a direct election for a four-year term and can only serve two terms. Starting from 2010, President Juan Manual Santos Calderón is the incumbent president.5)

Since the establishment of diplomatic ties with Korea in 1962, the two nations have extended into major agreements including the Science Technology Agreement (1992), the Economic Development Cooperation Fund Agreement (2010), and others. As of July 15, 2016, the Free Trade Agreement was established between the two nations, which served as an opportunity to bolster ties between Colombia and South Korea.

Table Ⅱ-2 Major Economic Indicators of Colombia

Category Units 2013 2014 2015 2016 2017 Bil. GDP 3,802 3,785 2,921 2,741 3,010 Dollars GDP per capita Dollars 8,068 7,942 6,060 5,623 6,105 Economic Growth Rate % 4.9 4.4 3.1 2.2 2.7 Financial Revenue/GDP % -0.9 -1.8 -3.5 -2.9 -2.1 Inflation Rate % 2.0 2.9 5.0 7.6 4.1 Exchange Rate Pesos 1,868.9 2,001.1 2,741.8 3,050.4 3,023.8 (per dollar, annually) Mil. Current Account -12,355 -19,489 -18,775 -14,311 -12,644 Dollars Mil. Foreign Exchange Reserve 42,758 46,408 46,104 46,386 45,773 Dollars Government Debt/GDP % 37.8 44.2 50.6 47.5 47.0

4) Latin American and Caribbean Affairs Bureau, 2015, Introduction of Colombia, The Foreign Office 5) Homepage of ‘Embajada de la Republica de Corea en la Republca de Colombia’

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The nation pays keen attention to the transportation sector. Its economic growth rate has continuously been rising and its industry for competitiveness is in the upper ranks among nations in Central and South America. Its GDP per capita is 6,105 US dollar (for 2017), while its estimated economic growth rate of 2.7% (for 2017). Its major industries are service, manufacturing, and agriculture. Its international credit ratings are OECD Class 4, S&P Class BBB, Moody’s Class Baa2, and Fitch Class BBB.

Due to internal conflicts and external factors such as falling oil prices and devaluation of peso, Colombia’s GDP has recently been on a decline. However, as the internal conflict came to an end, the government is actively pursuing national developments and expectes that the situation is recovered.

Table Ⅱ-3 Overview of Politics and Economy in Colombia

Category Description President Juan Manuel Santos ∙ Independence day:1810.7.20 (Spain) Calderón ∙ Political structure: Republican form of government (Presidential system) ∙ President: Juan Manuel Santos Calderón (2010.8.7) Politics ∙ Council: Bicameral system (Upper house : 102 seats, Lower house : 166 seats) ∙ Major political parties : Social Party of National Unity (U Party), Conservative Party (PC Party), Liberal Party (PL Party)

Trend of GDP, 2006-2015 ∙ GDP:301 Billion USD ('17, estimated figure) ∙ GDP per capita: 6,105 USD ('17, estimated figure) Economy ∙ Growth rate of GDP: 2.7% ('17, estimated figure) ∙ Industrial Structure: Service 59%, Manufacture 34%, Agriculture 7% ('15)

∙ Established diplomatic relations 1962. 3. 10. (Established Leaders of both countries diplomatic relations with North Korea: 1988. 10. 24.) Diplomatic ∙ Main Agreements: Cultural agreement ('76), Visa exemption relation agreement ('81), Science and technology agreement ('92), with Trade agreement ('86), Foreign economic cooperation fund Republic of agreement ('10), Double tax avoidance agreement ('14), Free Korea trade agreement ('16) ∙ EDCF Support: total 2 cases, 4Mil. USD

Source: The Export-Import Bank of Korea, 2017, World fact book, The Export-Import Bank of Korea(Re-writing)

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1.1.3. Transportation Infrastructure Status

1) Current Status of Transportation Infrastructure

Since the Santos administration, the Colombian government has been pushing for a large-scale development across all sectors of the country. According to the Economic Development Plan (PND 2014~2018) announced in 2014, the government is actively pursuing developments in areas of economy, education, infrastructure, and transportation. In order to resolve the insufficient budget for the highly demanded infrastructure development, the government is increasing its public investment and pursuing PPP opportunities.

Despite its effort, Colombia’s infrastructure system in still considered inadequate. According to the rankings in the Global Competitive Index (2016-2017) published by the World Economic Forum, Colombia ranked 120th among 138 countries in the road category and 104th in the railroad category, resulting in the overall ranking of the 113th place overall. Despite the continuous initiation of infrastructure construction projects led by the central and local governments, there is still a pressing need for continuous improvement on both qualitative and quantitative aspects of infrastructure.

Table Ⅱ-4 Ranking of Competitiveness of Colombian Infrastructure

(Unit: KRW Billion) Category Ranking Score

Overall infrastructure 113 3.0

Road 120 28

Railway 104 1.4

Harbor 83 3,7

Air transportation 76 4,2

Sources: World Economic Forum, 2017, The Global Competitiveness Report 2016-2017, World Economic Forum(re-writing)

Colombia is actively seeking private sector investment to improve its underdeveloped infrastructure. Investment has been made through various methods, and in particular, investments in the road sector have increased significantly in the 2010. This increase is expected to continue in the future.

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Table Ⅱ-5 Public Private Infrastructure Database of Colombia

Total Investment Subsector Project Count (USD million) Airport 9 1,513 Electricity 29 12,883 ICT 9 18,788 Natural gas 11 1,059 Ports 13 2,541 Railways 2 500 Roads 55 24,230 Water and sewerage 52 1,069 Source: Private Participation in Infrastructure Projects, World Bank, 1990-2016

1) Current Status of Public Transportation

Colombia’s public transport system largely consists of Bus rapid transit (hereinafter referred to as the “BRT”), subway, and city buses. The average usage rate of public transportation is more than 53.3%, with an emphasis on BRT and city buses rather than subways. Therefore, the biggest cause of traffic congestion is attributable to the lack of road facilities. Paul Bromberg, the former mayor of Bogota, also emphasized the importance of addressing traffic congestion caused by lack of infrastructure.

Table Ⅱ-6 Urban Transportation Infrastructure of Colombia

Category Bogota Medellín Cali ∙ Called METROCALI, MIO ∙ Introduction of transit card system ∙ Called METROPLUS ∙ Operates 6 stations, with ∙ Operates 24 stations in the main line and ∙ Operates 2 lines, with 29 56 stations 21 stations in the sub-line in 13 districts stations BRT ∙ Main line extension of ∙ 131 stations in total ∙ Extension of 18km 39km ∙ Main line extension of 151km ∙ 18,000,000 passengers ∙ 159,000,000 passengers ∙ 565,100,000 passengers annually (2013) annually annually (2013) ∙ 2 lines with 27 stations Subway ∙ Planned Introduction in 2019 ∙ Extension of 28.8km ∙ Introduction of transit card system ∙ In 13 districts, 199 stations in the main line, 20 stations in the sub-line, 14 ∙ Operates in 3 different City bus stations in the special line ∙ Operates NON-MTO bus types of buses ∙ 809 stations in total ∙ 9 operators ∙ 50,000,000 passengers annually (2013) ∙ 3 metro cable lines, with ∙ Operates MTO cable Others ∙ 48,000 Taxi 8 stations, 93km (completed in 2015)

Source: IDB, 2015, Regional Observatory of Intelligent Transport Systems for and the Caribbean, IDB (re-writing)

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1.1.4. Authorities Related to UTI

In Colombia, several central government ministries and agencies are related to the transportation infrastructure. One is the Ministry of Transportation (Ministerio de Transporte), which is responsible for establishing policies and regulations for the transportation infrastructure. The Ministry of Transportation is also responsible for construction of highways and national roads, and management of existing road infrastructure are carried out by.

In addition, various ministries are in charge of transportation infrastructure projects depending on the project leading organization. The National Road Authority (Instituto Nacional de Vias, INVIAS) or the Civil Aviation Authority of Colombia (Aeronáautica Civil de Colombia, Aerocivil) are responsible for the projects founded by the government while the National Infrastructure Agency (Agencia Nacional de Infraestructura) in responsible for projects financed by the private sector.6)

Based on the law 1832/2012, the National Planning Department (Departamento Nacional de Planeacion) reviews the impact of transportation infrastructure to economic development in Colombia and sets up plans to develop related infrastructure based on the review result. Also, the DNP advises on technical aspect of projects and establishes not only policies for plans but also financial strategies and budget.

The National Council for Economic and Social Policy (Consejo Nacional de Política Económica y Social, CONPES) approves major infrastructure projects. Private investment projects approved by the DNP are required to get an approval from CONPES to call for a bidding. As for projects not funded by the government, the bidding process may be carried out without the approval of CONPES.7)

1.1.5. Transportation Related Plans

1) National Development Plan 2014-2018

The Department of National Planning (The Departamento Nacional de Planeacion) has established the “Plan Nacional de Desarrollo, PND” (hereinafter referred to as the "National Development Plan") every four years to set the direction of national development. At the national level, the government has set up a macro plan to promote peace, eradicate poverty, and improve the educational environment and public infrastructure in Colombia, making it an indicator of national policy enforcement. The plan shows the direction of state affairs of Juan

6) Gi-Soo, Kwon, 2011, MajorIndustriesin Colombia, KIEP 7) Homepage of ‘Embajada de la Republica de Corea en la Republca de Colombia’

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Manuel Santos from 2014 to 2018, and enthusiastic commitment to innovation with a slogan, ‘Todos por un Nuevo pais (All for a New Country)’.

In particular, the transportation sector is planning for establishment of 'Basic Plan for Transport Logistics', introduction of transportation infrastructure, and maintenance of logistics system through collaboration with the Ministry of Transport. The goal is to improve transportation infrastructure, integrate public transportation and new technologies to reduce regional development gaps, and secure fairness.

2) 4th Generation Highway Project

Colombia’s transportation infrastructure is influenced by three major mountain ranges which connect the northern and southern regions. The fact that the cities are situated in a mountainous area has contributed to the relatively poor development of infrastructure. There is also a limitation to the establishment and implementation of a systematic national development plan due to its internal conflicts. Yet, the government and the rebel group (FARC) has recently signed on a peace agreement. Therefore, the national security has been stabilized, highlighting the necessity for investment for infrastructure development.

The Colombian National Infrastructure Agency (ANI) has been promoting ‘the 4th generation highway project’ since 2012. Approximately 45 trillion pesos is expected to be invested into this mega-project, improving and extending 8,170km of the current road restructure. This project includes about 40 different road projects, consisting of construction of new roads and reparation of old roads.

Figure Ⅱ-1 Planned Area of the ‘4thGenerationHighwayProject’

Source: ANI

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Table Ⅱ-7 Budget of the ‘4th Generation Highway Project’(priortoANIapproval) Investment Debt Equity Category Name of the Project (Capex) (Deuda) (Equity) 1Girardot­Pto Salgar 1.1 1.2 0.4 1 Pacifico 3 1.8 2.1 0.5 1Cartagena Barranquilla 1.4 1.2 0.3 1Mulalo­Loboguerrero 1.2 1.3 0.3 1 Pacifico 2 1.3 1.9 0.5 1 Perim e tral de oriente 1.3 1.3 0.3 1Rio Magdalena 2* 1.7 1.5 0.4 1 Conexion Norte 1.1 0.9 0.3 Total 13.1 13.7 3.6 2 Puerta de Hierro­Carreto­Palmar de Varela; Carreto­Cruz del Viso 0.4 0.5 0.1 2 Transversal del Sisga 0.5 0.5 0.1 2 Villaviencio­Yopal 1.9 2.0 0.5 2 Santana­Mocoa­Neiva 1.5 1.6 0.4 2 Santander de Quilichao­Popayan 1.2 1.3 0.3 2 Autopista Mar 1 1.5 1.5 0.4 2 Yondo­Barranca­Bucaramanga 1.8 1.9 0.5 2 Rumichaca­Pasto 1.6 1.7 0.4 2 Autopista Mar 2 1.5 1.5 0.4 Total 11.8 12.4 3.1 Private Malla Vial del Meta 1.3 1.3 0.3 Private Cesar­Guajira (San Roque-Paraguachon) 0.4 0.4 0.1 Private Bogota (Chirajara)­Villavicencio (Sector 3) 1.9 2.0 0.5 Private Ibague­Cajamarca 1.0 1.1 0.3 Private Cambao­Manizales 1.3 0.5 0.1 Private Antiquia­Bolivar 1.1 1.2 0.3 Private Neiva­Girardot 1.3 1.4 0.4 Private Via del Nus 1.2 1.3 0.3 Private Ruta del Privilegio (Cajamarca­La Paila) 1.2 1.3 0.3 Private Sabana Norte (Salida Norte de Bogota) 0.6 0.6 0.2 Private Tunja-Puerto Araujo (Transversal del Carare) 0.9 0.9 0.2 Private Guaduas-Puerto Bogotá 0.4 0.4 0.1 Private Magdalena 1 1.0 1.0 0.3 Private Tercer carril Bogota Girardot 1.5 1.6 0.4 Private Pereira La Victoria Cerritos La Virginia 0.2 0.2 0.0 Private Autopistas del Caribe 1.1 1.2 0.3 Private Viaducto Soacha 0.9 1.0 0.2 Private Variante Occidental Area metropolitana B/manga 0.3 0.3 0.1 Private Cordoba Sucre 0.8 0.8 0.2 Private Cienaga Barranquilla 0.4 0.4 0.1 Private Zipaquira Barbosa 0.8 0.8 0.2 Private Facatativa Villeta 1.4 1.5 0.4 Private Ip 23 1.3 1.4 0.4 Private Ip 24 1.3 1.4 0.4 Private Ip 25 1.3 1.4 0.4 Total 25.0 25.4 6.4 3 Bucaramanga-Pamplona 0.8 0.8 0.2 3Pamplona-Cúcuta 1.2 1.3 0.3 Total 2.0 2.1 0.5 Source: FDN Internal Data. 4G Project Information

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1.1.6. Current Status of Colombian PPP

Colombia has enacted a PPP legislation in order to efficiently use PPP as a way to raise capital for infrastructure development. With the economic reform in 1990s, a PPP system was introduced along with the related legal system. After three revisions, the 4th generation of legislation has been in effect since January 2012.

The 1st generation of the legislation guaranteed a fixed operating period, minimum income, and additional construction costs. By partaking on the PPP related risks, the government had to suffer from excessive financial burden.

The 2nd generation of the legislation incorporated the concept of risk-sharing and income forecasting. The new revision was made to reduce the government’s financial burden.

The 3rd generation has seen an important change where the PPP has been made possible only with the presence of government subsidies. Moreover, the revision prioritized the road construction business in the metropolitan area. In order to increase the efficiency of PPP projects, a specialized agency for private investments has been established.

The 4th generation, which is currently in operation, was enacted to include not only the economic infrastructure, but also social infrastructure. Also, the risk arising from excess construction costs and demand forecasting has been transferred to the private sector. In order to reduce the financial burden and resolve other related issues, the new revision placed a limit of 30 years to the project period and a 20% extension from the initial period.

In addition to legislative revisions, the Colombian government established relevant institutions in order to increase the efficiency of PPP projects and assign specific lines of responsibilities. The roles and responsibilities of relevant organizations are as follows.

a) National Planning Department: The National Planning Department acts as an organization that coordinates all activities related to national policy and public investment. It also establishes criteria that are used to select PPP projects along with other infrastructure projects.

b) Ministry of Finance: Based on the investment budget established by the National Planning Department, the Ministry of Finance calculates the annual budget for the central government. It also approves the amount of government subsidies, which is a critical factor in the PPP project.

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c) Ministry of Transportation: The Ministry of Transportation is responsible for the establishment and execution of policies, plans, programs, and projects that cover roads, railways, ports, airports, and public transportation. Also controlling the Road Administration Office and the Private Company Management Office, the ministry is responsible for the promotion and management of PPP projects.

d) Local government: Colombia has more than 100 local governments. The local governments carry out PPP projects by linking local development plans and the national development plans.

1.2. Analysis of Current Status of Bogota

1.2.1. General Status

Bogota, its official name being Bogota D.C., Districto Capital, is the national capital of Colombia and the state capital of the Cundinamarca department (Departamento de Cundinamarca). It is located at 2,600m above sea level in the plateau of the Andes, making it the third city with the highest altitude just behind La Paz, Bolivia and Quito, . The average annual temperature is 14 degrees Celcius, with warm climate and unclear distinction of the four seasons. The map of the 20 administrative districts of Cundinamarca and Bogota is as follows.

Figure Ⅱ-2 20 Administrative District of Cundinamarca and Bogota

Location of Cundinarmarca 20 Administrative District of Bogota

Bogota encompasses an area of 1,775km², which is 2.5 times larger than Seoul City (605km²). Its population, being 808.1 million people is similar to that of Seoul. Along with Sao Paulo in Brazil and Buenos Aires in , it constitutes one of the three largest metropolitan cities in South America. Its major industries include automobile assembly, cotton,

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wool, glass, and cement field. In the nearby fertile highlands, agricultural products such as grains, vegetables, and fruits are harvested and underground resources such as salt, coal, and iron ore are mined.

1.2.2. Road and Transportation Infrastructure Status

Because Bogota is located in the high altitude area, transportation system with other cities is limited. In addition, traffic congestion in the city represents a major issue since there is a lack of railway system. In face of an exponentially growing number of vehicles, Bogota introduced the BRT, called the Transmilenio, and a vehicle passage system. As a result, with an increase in the usage rate of public transportation, it has become one of the best examples of public transportation around the world.

Public transportation in Bogota is divided into three categories: Transmilenio (BRT), Bus (Large), Buseta (Medium), Colectivo (Small) and Taxi. Transmilenio is an express bus system that carries passengers at stops located at the center of the road, and operates only on the central road. It is completely separated from the general lane and runs only on that lane, it requires the payment of boarding fee before the ride, and it is the highest level of BRT of which the height of the bus matches with the platform. There are in total of 150 bus stops and 12 lines, consisting of main lines (87km) and subsidiary lines (663km).

Table Ⅱ-8 Current Status of Transmilenio Lines

Line Number of Route First Stop Last Stop Number Stops A Carcas Calle 76 Tercer Milenio 14 B Autonorte Terminal Héroes 17 C Suba Portal de Suba San Martín14 D Calle 80 Portal de la 80 Polo 14 E NQS Central La Castellana Tygua-San José 13 FAméricas Portal de Las Américas Avenida Jiménez 18 G NQS Sur Comuneros San Mateo 17 Portal de Usme 및 H Caracas Sur Hospital 16 Portal del Tunal JEje AmbientalMuseo del Oro Universidades 3 K Calle 26 Portal Eldorado Centro Memoria 13 L Carrera Décima Portal 20 de Julio San Diego 10 M Carrera Séptima Museo Nacional - 1

Source: Wikipedia

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Figure Ⅱ-3 Map of Bogota Transmilenio

Because the Transmilenio only operates in some sections of Bogota, passengers resort to taxis and small buses (Buseta) in order to travel to other areas.

In recognition to the limitations of transportation of the Transmilenio, the city of Bogota is currently pursuing the Bogota Metro project.

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Figure Ⅱ-4 Types of Public Transportation in Bogota

Transmilenio Buseta, Bus Taxi (Metro, BRT)

1.2.3. Related Plans and Other Major Projects

Bogota has emphasized the importance of health infrastructure, education infrastructure, and transportation and communication infrastructure through a regional development plan, “Bogotá Best for All”.

Also, in order to improve the mobility of the city of Bogota, it introduced the Bogota Metro Line 1 project along with the Light Western train project, consisting of 37% of the municipal development plan budget.8) Especially, it is currently pursuing the metro project through PPP, with plans on connecting the metro with nearby buildings and creating a commercial center.

In addition, Transmilenio along with the city’s Bureau of Transportation and the Environment Agency, has developed plans to introduce electric and natural gas buses on Transmilenio and SITP lines, to minimize air pollution.

1.3. Analysis of Current Status of Medellín

1.3.1. General Status

Medellín, the target city of this project, is the 2nd largest city of Colombia and its economic capital. It is the state capital of Antioquia State in the northwest of Colombia. The city is located in the Aburrá Valley in the highlands of the Andes Mountains which is 1,500m above sea level.

The city is divided to the east and the west by Medellín River flowing from the north to the south. Bello, Copacabana, Girardota, and Barbosa are located in the north of Medellín,

8) Accessed via ‘En.investinbogota.org/’

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and Itagüí, Sabaneta, Envigado, La Estrella, and Caldas are located in the north and the south of Medellín.

It has an area of 380.6 km² with six zones. Among them, the central part (Zona Urbana de Medellín) consists of 16 administrative districts. Medellín is a mega city to host around 2.49 million population as of April 2016.

Figure Ⅱ-5 Geography of Antioquia, Aburrá Valley, and Medellín

Source: Medellín, 2014, Plan de Movilidad Segura de Medellín 2014-2020, Medellín Wikipedia() (Re-writing)

Offices and branches of various international organizations and multinational companies are located in the city. Nineteen companies out of top 100 businesses in Colombia are headquartered in the city. It is the biggest industrial city in Colombia with advanced industries such as steel manufacture and fashion/textile. Recently, healthcare service industry is rapidly growing. As the metropolitan area around Medellín accounts for more than 60% of Antioquia state and 11% of the entire economy of Colombia, the city exerts a great economic influence. As such, Medellín, which lies in the center of Aburrá Valley which is a part of the metropolitan area around the city, is the focal point of economic activities in Antioquia state. Therefore, it is necessary to take a look at the entire state, not the city itself, including the metropolitan area around the city.

1.3.2. Road and Transportation Infrastructure Status

Medellín is the first city in Colombia to introduce a plan for a smart transportation system as well as natural gas buses. Medellín plays a pioneering role in improving the transportation system in Colombia, and the detailed city transportation infrastructure is as follows.

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1) Road Infrastructure Status

Medellín has 18 major roads including Carrera 65 and Autopista Norte. In particular, Carrera 65 located at the center of the city is the arterial road that connects the northern and the southern regions. Due to the topographic characteristics, the road network that connect the north and the south is mainly located in the center and the west of the city. The total length of the road is 2,053km. Besides that, there are 4,100km-long pedestrian walkways and 45km-long bike lanes.9)

Figure Ⅱ-6 Major road network in Medellín

* Road #.18 (Vía Medellín-Santa Fe de Bogotá) of table III-3 is not marked on this map Source: Own contenrs based on Plan de Movilidad Segura de Medellín 2014-2020, Medellín, 2014

9) MOLIT, 2016, ITS Master Plan for Medellín, MOLIT

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Table Ⅱ-9 Major roads in Medellín

# Name of road Description

∙ Arterial road that connects north and south of Medellín 1 Carrera 65 ∙ Located in western part of Medellín

∙ Road that connects Guayabal (Zone 15) and Robledo (Zone 7) 2Avenida 80 ∙ Located in western part of Medellín

3 Autopista Sur y Norte ∙ Expressway that connects north and south of Medellín

4 Carrera Carabobo ∙ Road that connects centeral area and north of Medellín

Avenida Oriental o Avenida 5 ∙ Road that connects centeral area and El Poblado (Zone 14) Jorge Eliécer Gaitán

6 Carrera 45 ∙ Arterial road that connects north and south of northeastern Medellín

∙ Road that connects east and west of northeastern Medellín 7 Calle Barranquilla ∙ There are university and national hospital on this corridors

∙ Road that connects east and west of center of Medellín 8 Calle 50 o calle Colombia ∙ There are cultural and commercial facilities on this corridors

9 Calle 44 o Avenida San Juan ∙ Ditto

∙ Road that connects southeast and northwest of center of Medellín 10 Avenida Bolivariana ∙ The route connects public park and bullring

∙ Arterial road that connects shopping center (el Centro Comercial Sandiego) 11 Avenida 33 and ‘la Castellana Medellín’ ∙ There are an university and an exhibition convention center

12 Avenida 30 ∙ Road that connects El Poblado (Zone 14) and Belen (Zone 16)

∙ Road that connects El Poblado (Zone 14) and Guayabal (Zone 15) 13 Calle 10 ∙ There are public park and shopping center on this corridors

∙ Road that connects shopping center (el Centro Comercial Sandiego) and 14 Vía Las Palmas International airport of eastbound of Medellín (Internacional José María Córdova)

∙ Road that connects Ayacucho of central Medellín and International airport 15 Carretera de Santa Elena of eastbound of Medellín (Internacional José María Córdova)

∙ Road that connects Medellín and Itagüí 16 Avenida Guayabal ∙ There is an exhibition convention center in the end of the route

17 Carretera al Mar ∙ Road that connects Medellín and West border of Antioquia

Vía Medellín-Santa Fe de 18 ∙ Road that connects Bello and eastbound of Antioquia Bogotá

Source: Medellín, 2014, Plan de Movilidad Segura de Medellín 2014-2020, Medellín(Re-writing)

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2) Public transportation status

a) Masivo

The modes of mass transportation in Medellín City are categorized into Masivo, which accommodates a large number of passengers and Colectivo, the general mode of public transportation.

Masivo, which accounts for 8.8% of transportation in Medellín, consists of four modes such as Metro, Tranvia, MetroPlus and Metrocable.

Metro, which started service in 1995, has two lines, Line A and Line B. Across the nation, Medellín is the only city that operates Metro. Line A carries passengers in the Niquia-La Estrella section, which is the south-north axis of the city. Line B is for the San Antono-San Javier section between the east and the west. However, Tranvia operates between the east and the west of the San Antono-Oriente section while Line B is located close to the west of Medellín.

Tranvia is a tram that was introduced in 2015. Spaces for pedestrians and the tram are not separated and the tram rail is located on the pedestrian walkways. Considering the construction period, economic feasibility and safety, Colombia prefers to operate the above-ground rail system instead of the underground system. Introduction of Tranvia is a part of this trend. However, the number of passengers is decreasing unlike the preliminary estimation. The Metro de Medellín attributes it to motorcycles.

MetroPlus is a mass transportation mode like BRT (Bus Rapid Transit) in Korea. Under this system, buses run on two lanes designated for buses between U. de M. and Parque Aranjuez sections, sharing the traffic volume of mass transportation in the central area. Buses running on Lane 1 are trolley buses that can accommodate twice as many passengers per ride as the buses running on Lane 2.

Medellín is located in the basin where the east and the west sides are high-altitudes. Due to its topographic characteristics, residental areas are developed on the slope of this basin. Accordingly, the city government started introducing Metrocable from 2004 to enhance accessibility of people living in slums on the hillside to stations or other public transportation modes (Metro, Metroplus) and allow them to transfer to improve connectivity across the region.

Medellín is the first city that adopted Metrocable as the mode of mass transportation. Currently, three Metrocable are in operation: K, J, L lines. Two more lines that allow passengers to transfer to Tranvia are now being constructed: H, M lines.

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Masivo infrastructure was constructed with financial support from the central government. The Metro de Medellín, a public enterprise, operates and maintains the Masivo infrastructure. Under the law of Colombia, local governments need to provide operation cost for the Masivo infrastructure instead of the central government. Currently, the mass transportation system is operated only by fares from passengers without financial support of local or central governments.

However, the number of passengers is decreasing for some lines since the volume of personal modes of transportation such as motorcycles is increasing. In case of Tranvia, the infrastructure was established 100% by the capital of Medellín City in collaboration among the city, PPP-related organization and the Metro de Medellín. But the number of passengers is lower than the estimation, causing a financial burden to the city government.

Figure Ⅱ-7 Metro Map of Medellín’s Masivo (including planned lines)

Source: Metro de Medellín Homepage (https://www.metrodeMedellín.gov.co/)

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Table Ⅱ-10 Masivo in Medellín

Metro Metrocable Metroplus Tranvia Category A B J K L H M 1Bus 2Bus T-A Volume 160 100 (Passenger 400 400 10 10 10 10 10 (Trolley (General 300 /Vehicle) type) type)

Length 25.8 5.5 2.7 2.07 4.8 1.4 1.05 12.5 13.5 4.2 (km)

3 Transfer #. Of stops2174 4222208station 6 Stoprs

55 units #. Of vechicles 11993554451254712 (total 165 vehicles)

Time 40 10.5 12 9 15 5 4 45 60 17.5 (Oneway, min)

Speed 40 40 18 18 18 18 18 16 13 16 (km/h) (Max 80) (Max 80)

Interval time 3‘30“ 4‘45“ 12“ 12“ 14“ 13“ 9“ 2‘40“ 6‘ 3‘30“ (peak time)

Volum/hour 35,555 13,100 3,000 3,000 1,200 1,800 2,500 2,000 1,000 5,400

Undue Undue Open 95.11.30 96.02.29 08.03.03 04.08.07 10.02.09 construction construction 11.12.22 13.04.22 Pilot

Source: Rewriting based on promotional material of Metro de Medellín (MAPA Metro)

Figure Ⅱ-8 Different Types of Public Transportation in Medellín

Metro Tranviá MetroPlus, BRT Metrocable

b) Colectivo

Modes that consist of Colectivo are buses and microbuses. Their transport share rate is around 28.8%. In the Medellín metropolitan region, a total of 7,080 mass transportation vehicles are in operation which consists of 4,499 buses and 2,581 mini and micro buses.10)10

10) MOLIT, 2016, ITS Master Plan for Medellín, MOLIT

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In addition to this, public bicycle services were introduced as a part of the policy to promote sustainable means of transportation.

To ensure transparency in collection of mass transportation fares, Medellín City introduced the CIVICA transportation card. This card can be used for all transportation systems operated in Medellín. Passengers can use the CIVICA transportation card for Masivo and intra-city buses which is Colectivo. The card also provides the transfer discount.

c) Taxi

Since there is no designated route or station for taxis, they are categorized as semi-mass transportation mode. In Colombia, taxis play an important role to provide mobility in the urban areas not just in Medellín City but also across the nation. Currently, around 27,000 taxis are registered and operating in the region of Aburrá Valley. In average, taxis generate 300,000 cases of passagers per day. According to the O/D data in 2005, traffic generated by taxis in the Medellín metropolitan region (Aburrá Valley) accounts for 6% of the entire traffic. Taxi fares are relatively affordable compared to other major cities such as Cali and Cartagena.

Figure Ⅱ-9 Types of Colevtivo and semi-public transportation in Medellín

Busetas de Medellín Microbus Taxi EnCicla(Public bicycle)

d) Mode share

The Plan de Movilidad Segura de Medellín 2014-2020 analyzed the transport share in Medellín as of 2012, which is shown in the Figure Ⅱ-10. Pedestrian trips accounted for 25% of the entire trip while personal transportation modes accounted for 25%. Around one third of the trip was carried by public transportation modes. However, Colectivo operated by the private sector showed a higher transport share than Masivo. Also, total trip of Medllín city accounts for 75% of the Medellín Metropolitan area’s, which shows the necessity of transportation infrastructure development in Medellín.

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Figure Ⅱ-10 Mode share in Medellín

Mode share in Medellín Mode share in Medellín Metropolitan

Source: Medellín, 2014, Plande Movilidad Segurade Medellín 2014-2020, Medellín(Rewriting)

1.3.3. Related Plans

1) Antioquia Development Master Plan 2016-2019

The state of Antioquia has geographical advantages such as rich natural resources. But there is inequality issues due to gaps across the regions. To promote balanced development across the regions and respond to social changes, the state government established “Antioquia Development Master Plan 2016-2019 (Plan de Desarrollo Antioquia Piensa en Grande 2016- 2019)”. This development plan is being implemented under the visions of establishment of competitive infrastructure for railways and transportation, development of rural areas, social mobility, protection of environment, safety and human rights protection, and good governance in the region.

Since the rail system can transport a large volume of passengers and cargoes, “Antioquia Development Master Plan 2016-2019” states that the connectivity among Medellín and other cities in Antioquia will be strengthened based on the rail system. In particular, the master plan revealed the plan to introduce commuter trains that run between Barbosa, the northernmost area of Aburrá Valley, Caldas and Rionegro in the southernmost area. This plan indicates that the rail system is expected to be the main mode of transportation to improve accessibility in the Medellín metropolitan region. Since it promotes construction of transportation infrastructure, it will bring about a sustainable development in the region.

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2) Aburra Valley Mobility Plan 2006-2019

The Meadellin metropolitan government has established Plan for Maestro de Movilidad, 2006-2030 (hereinafter refer to "Mobility plan for the Aburrá Valley 2016-2019") to improve the traffic environment of all countries as well as the Aburrá Valley. This plan contains various reviews for the mobility expansion of Aburrá Valley.

Major contents include planning and implementation of integrated traffic information system, analysis of traffic infrastructure in metropolitan city and related policies, establishment of the priority and strategies for realizing the integrated public transportation system, review of transportation infrastructure of the Medellín valley, establishment of Medellín valley's railroad plan. Sustainable regional development of Medellín metropolitan areas are expected by promoting construction of transportation infrastructure with this plan.

3) Medellín Development Master Plan 2016-2019

“Medellín Development Master Plan 2016-2019 (Proyecto de Acuerdo Plan de Desarrollo 2016-2019)” is a four-year-long development plan established by the Medellín city government based on the Article 313 and 339 of the national constitution, related laws and development agreements. It provides a blueprint for comprehensive development in the short and mid-term, which was developed by Medellín citizens and the city government. It contains future plans to make Medellín a safe and equal city with the high quality of life. It also contains a joint development plan such as ‘National development plan 2014-2018’, ‘Antioquia Development Master Plan 2016-2019’, and ‘Medellín development plan’ for the constancy and correlation of these plans.

The transportation-related part of the plans is aimed at creating an environment where citizens can easily access transportation and a safe and comfortable traffic environment. The contents are largely composed of three parts. First, they include access enhancement between Medellín and satellite cities. Detailed plans include a project "study on diversification of railway utilization for transportation of people, cargo, and waste. The second part is the enhancement of mobility within Medellín, which contains plans for improvements and the introduction of urban transportation systems. Particularly, it includes plans for the introduction, design, implementation of public transportation in the 80th street related to this project as a plan for mobility improvement in the city. Finally, the transportation system management part contains integrated transport systems (Sistema Integrado de Transporte de Valle de Aburrá (SITVA) in the Aburrá Valley and maintenance plans for the traffic system that actively utilizing non-motorized transportation. It also includes the importance of traffic safety and plans for the introduction of eco-friendly transportation systems such as electric cars.

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4) Plan Maestro 2006-2030

The municipality of Medellín and the Metro de Medellín established the Plan Maestro (2006-2030) for development of urban transportation infrastructure and provided the futurity for development and expansion of the public transportation system in Medellín Metropolitan. Since 1999, the plan has been updated at the interval of five years with the latest plan released in 2015. With aims to achieve systematic operation and management, economic feasibility and social integration in the long term, the plan provides modes of transportation in various scales while focusing on strategies to promote urban transportation in Medellín. This plan includes the mass-scale transportation system to meet demands from the Aburrá Valley, such as expansion of urban train lines and construction of new stations. Under this plan, new lines and the existing ones to be expanded are divided according to the spatial scope.

The three-staged Plan Maestro is categorized into short, mid and long terms. The short-term development plan (2011-2015) targets four lines including one for Corredor Avenida 80. Various preliminary studies and surveys have been conducted for the Corredor Avenida 80 line. The mid-term development plan (2016-2020) has eight action plans including the establishment of the Oriental-80 line that connects Corredor Avenida 80 and the central part of the city. The long-term plan (2021-2030) is based on ten action plans which include integration of the urban train lines 1, 2 and 3.

Among the projects, the Corredor Ayacucho project attempts to establish new Tranvia lines of 4.3km-long. Currently, the Tranvia line is in operation as a pilot projet. Users of this line can transfer to 2 Metrocable lines located in the Medellín Villa Hermosa (Zone 8), Buenos Aires (Zone 9), La Candelaria (Zone 10) regions. It plays a role to promote introduction of new transportation system under the PUI (Urban Integration Project) for the Medellín Centro region. Centering on San Antonio station, it consists of three stations and six stops. Since it accommodates 81,700 passengers per day, it is expected to vitalize the public transportation in the region and improve traffic congestion caused by motorcycles. However, current demand is only half of the existing forecast, which has led to an increase in debt of Medellín.

There are many undergoing studies on the short-term development plan, Corredor Avenida 80. Many projects other than the Corredor Avenida 80 are currently experiencing difficulties with financing. With the depreciation of the pesos in relation to the US dollar, the Colombian government also refrains from providing adequate financial support. Henceforth, the introduction of this project has been delayed. Metro de Medellín plans to use the Avenida 80 project as a reference when pursuing other planned routes in the future. In sum, the Avenida 80 represents an important benchmark for future projects.

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Figure Ⅱ-11 Medellín Public Transportation Expansion Plan (2006-2030)

Source: Medellín, 2014, Plande Movilidad Segurade Medellín 2014-2020, Medellín(Rewriting)

1.4. Conclusion

1.4.1. Connectivity and Accessibility Expansion Policy

Upper plans and policies at national and state level are based on expansion of connectivity and accessibility between regions. As a way to realize them, we are pursuing introduction of sustainable and eco-friendly public transport.

In other words, the Urban Development Plan related to Medellín emphasizes the connectivity between the regions in common, and actively pushes ahead with the introduction of public transportation infrastructure as a means of implementation.

1.4.2. PPP Included by Government

The Colombian government established the PPP law (Article 1437 and 1580) in terms of financial stability to pursue the upper plan execution. The law is only limited to implementation of public infrastructure. The law specifies basic rules for progress of feasibility study, financing

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strategy, trust funds, and composition of network to carry out the project. Also, it defines methods and period of projects regarding project progress.11)

In accordance of the legal basis, the Colombian government is promoting private-public cooperation, for the introduction of public infrastructure. For example, according to the PPP report of DNP Colombia for the first quarter of 2015, a total of 322 projects have been registered in PPP Registration System (RUAPP) and have been in progress as of March 2015. 59% of them are transportation infrastructure projects including railroad projects.12)

1.4.3. Inactive Financial Support from the Central Government

In Colombia, the general practice to finance an urban infrastructure project is that the central government provides 70% of financing while the local government provides 30%. However, the Colombian central government is suffering from lack of financial resources due to weakening peso against the US dollar and falling oil prices. One example of this case is that the “Fourth Generation Road Construction Project (the 3rd),” which was planned to construct eight roads. The Colombian government started the bidding process for only three roads out of eight due to lack of financial resources.

Therefore, there is a growing possibility that the Medellín city government would not receive active financial support from the central government, just as they did for the Corredor Ayacucho (Tranvia line) which started operation as a pilot project. Also, the financial crunch poses a challenge for the city government to pursue and operate the MEP.

1.4.4. Need for a Revision of the Financing Plan

For many reasons mentioned above, Colombia needs to look for new ways of financing and business structure rather than resorting to the conventional government financing methods. It also needs to seek for a solution that creates the best efficient use of limited budget during a particular project.

In addition to reviewing such financing arrangements, Colombia should strive to restore sound financing by investing in efficient budgets that truly reflects the relevant plans of national and local governments. By efficiently using the planned budget in urban infrastructure development, the Colombian government will be able to pursue and implement its national development objectives.

11) KEXIM Bank, 2015, Smart City Technical ProjectDesign and Implementation Plan for Valledupar and Villavicencio, Colombia, KEXIM Bank 12) Homepage of ‘Embajada de la Republica de Corea en la Republca de Colombia’

28 Ⅲ. A Case Study on South Korea's PPP

Ⅲ. A Case Study on South Korea's PPP

1. Current Status of Korea's PPP

1.1. Development Process of South Korea’s PPP

1.1.1. Development Process of the PPP law and associated systems

In the 1980s, South Korea sought to curb the government's spending on private sector economies, which slowed down the investment in infrastructure, such as highways, railroads and ports. As a result, there was a shortage of infrastructure, railroads, seaports and airports in the early 1990s, resulting in a sharp increase in logistics costs compared to gross domestic product (hereinafter referred to as the “GDP”)13)

As the government found it difficult to raise enough funds for increasing demand of infrastructure on its own budget, it decided to attract private investment on the establishment of infrastructure facilities. Accordingly, the government enacted ‘the Promotion of Private Capital in Social Overhead Capital Investment Act’ in August 1994, enabling the private sector to invest in Social Overhead Capital (hereinafter referred to as the “SOC”) fields.14)

However, in the latter half of 1997, PPP projects were put into a difficult situation with the financial crisis in Korea. To deal with the financial crisis, the government enacted ‘the Private Participation in SOC Infrastructure Act’, utilizing PPP as a means to boost the economy. The government attempted to vitalize PPP by introducing the Minimum Revenue Guarantee (hereinafter referred to as the “MRG”), a government support system.

In 1998, the government enacted ‘Private Participation in SOC Infrastructure Act’ for private

13) Kyu-Young, Lee, 2015, Activation plan for SOC in railway sector, University of Hanseo 14) Jun-Ho, Ko, 2015, PPP projects of right rail in Seoul Metropolitan City to improve underdeveloped urban area, Seoul Policy Arc hive

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sectors to receive a subsidy if the actual revenue is lower than the minimum operating revenue under the MRG. However, because of the environmental changes such as increased financial burden of the government and continued level of low interest rate, the government decided to abolish the MRG in 2006. After that, ‘the Private Participation in Infrastructure Act’ was newly enacted to introduce a new risk sharing system to substitute the MRG and tried to address the problems of the existing PPP law.

The progress of the PPP law and system are as follows.

Table Ⅲ-1 Progress of PPP law and system

Classification Period Details

∙ PPP projects were established and conducted based on Stage 1 1968~1994 individual laws (the Road Act, the Harbor Act, etc.) ∙ System is not fully developed yet.

∙ As the economy develops, the government realized it was difficult to construct infrastructure on its own budget. ∙ With the enactment of the Promotion of Private Capital in Stage 2 1994~1998 SOC. Investment Act, the private sector began to invest in public works. ∙ Systemization of PPP learning program was required for the private sector who lacked experiences.

∙ System for the facilitation of PPP projects was reorganized, after the financial crisis. ∙ System was introduced to motivate private sector to investment and participate in PPP projects. Stage 3 1999~2004 ∙ Government established systematic supporting institution for PPP projects such as the Public and Private Infrastructure Investment Management Centre (“PIMAC”) ∙ The unsolicited model (in BTO scheme) was newly introduced in addition to the solicited model.

∙ Demand of infrastructure increased for non-profitable facilities in the field of environment and welfare. ∙ The system and law for PPP were revised and re-organized. ∙ BTL methods were newly introduced to promote PPP projects. Stage 4 2005~present ∙ MRG for new projects was abolished. ∙ The profit sharing system and its detailed guideline on refinancing were introduced. ∙ The restructuring of standard cost support (“SCS”) was implemented.

Sources: MOLIT, 2014, Research on PPP scheme on railway business field, MOLIT(re-writing)

30 Ⅲ. A Case Study on South Korea's PPP

1.1.2. Annual Performance of Private Investment

The scale of PPP projects has been expanded since the relevant laws and regulations were enacted in 1994. However, the financial crisis in 1997 caused a shortage of government budget for PPP projects, resulting in the decrease of PPP scale in 1998 compared to 1997. With the governmental policy such as the newly introduced MRG as a risk sharing mechanism, the scale of PPP projects started to be revitalized again in 1998.

Especially, unsolicited projects, newly implemented system during the third stage (from 1999 to 2004) contributed to the invigoration of private investment projects.

During the fourth stage (from 2005 to present) the number of PPP projects decreased, resulted from the abolishment of the MRG in 2006. To cope with this depression, the government decided to expand the scope and schemes of PPP. However the number of PPP projects is still decreasing, as the merit of newly introduced system is not attractive enough considering the decrease of profitability resulting from the MRG abolishment.

Figure Ⅲ-1 Annual Performance of PPP Project

Source: KDI, 2015, Annual report of public investment management center, KDI(re-writing)

1.2. Model of PPP Projects in Korea

1.2.1. Existing PPP Model

Primary PPP models in Korea include Build-Transfer-Operate (hereinafter referred to as the “BTO”) and Build-Transfer-Lease (hereinafter referred to as the “BTL”). There also exist other

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models like Build-Operate-Transfer (hereinafter referred to as the “BOT”) and Build-Operate- Own (hereinafter referred to as the “BOO”). More detailed introduction of each model is as follows.

1) Build-Transfer-Operate (BTO)

In the BTO model, the proprietorial right of the facility is transferred to the government as soon as the construction is completed. The project operator, then, acquires the operating rights of the facility and recovers the investment expenses by collecting usage fee directly from the facility user. This recovery structure makes the profitability as the most important factor of the project. In general, the BTO model is utilized in the field of transportation such as road, railways, and ports.

2) Build-Transfer- Lease (BTL)

In the BTL model, as with the BTO model, proprietorial rights of the facility are transferred to the government as soon as the construction is completed and a project operator acquires the operating rights of the facility. The project operator, however, does not collect the usage fee directly from the facility users. Instead, he or she receives lease payments and operating expenses from the government during a certain period. The amount paid by the government is calculated by the formula based on the initial investment costs and operating expenses. BTL model is usually applied to particular types of facilities which have a difficulty in recovering investment costs from collecting usage fees. Examples of those facilities are schools, welfare facilities, environmental facilities, and military residential facilities.

3) Build- Operate-Transfer (BOT)

In the BOT model, unlike the previous two models, the proprietorial right of the facility is not transferred to the government as soon as the construction is completed. The project operator operates the facility while maintaining its ownership for the pre-arranged period. After the contract expires, the ownership is transferred to the government.

4) Build- Own-Operate (BOO)

In the BOO model, a project operator does not transfer the proprietorial rights of the facility to the government. As soon as the construction is completed, the project operator owns the facility and has the operating rights of the facility.

32 Ⅲ. A Case Study on South Korea's PPP

1.2.2. New PPP Model

Two new PPP models, BTO-risk sharing (hereinafter referred to as the “BTO-rs”) and BTO-adjusted (hereinafter referred to as the “BTO-a”), were introduced by the MOSF in February 2015. New models were devised to promote PPP projects by enabling the private sector and the government to share the risk of a project. The structure of the newly introduced model is as follows:

Figure Ⅲ-2 New PPP Model (BTO-rs and BTO-a)

Source: MOSF, 2015, Act on public-private partnership in infrastructure, MOSF

1) BTO-rs

BTO-rs model is based on the existing BTO model, but differs in that the government shares project risks with the private sector through different sharing ratios depending on the features of the project. BTO-rs has a disadvantage of creating lower usage fees and profitability, as the government shares not only the losses but also the gains of the project. In other hands, it also has an advantage of converting high risk-high return into mid risk-mid return, which makes BTO-rs model more suitable to be applied for the PPP projects in the field of train and light railway - where stable operation is needed.

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2) BTO-a

BTO-a model is also based on the existing BTO model, but differs in that the government shares profit and loss with the private sector by guaranteeing minimum standard operating cost and collecting a certain proportion of excess return. If the operating income is below the minimum operating cost, the government pays the difference. On the other hand, if the operating income is higher than pre-determined level, the government shares the excess return with the private. BTO-a model is considered to be adequate for projects with high public interest.

1.2.3. Comparison of PPP Models

The BTO model provides relatively more returns to the private investors compared to the BTL scheme. As the BTO model involves demand risk, however, risk sharing mechanism such as the MRG or SCS is required and the demand of the facility should be accurately estimated. The BTO model is suitable for projects where constructed facilities are located in areas with sufficient demand so investors could recover investment costs by collecting usage fees from the facility users. Examples are transportation infrastructures such as roads, railways, and ports.

The BTL model does not provide high return to the private investors compared to the BTO model, but makes the project more stable as it is free from demand risk. The real rate of return is only 2 to 3% in the BTL model, so the negotiation between a project operator and the government is required before implementing the project. The BTL model is suitable to the projects for the facilities such as schools, hospitals, and military facilities where direct collection of the usage fee from users is relatively difficult.

The BTO-rs and BTO-a model are newly devised to complement the disadvantages of the BTO model. In the BTO-rs model, the project risks are shared between the government and private investors, making high-risk and high-return of BTO model convert into mid-risk and mid- return. With the BTO-rs model, the government seems to relieve the financial burden caused by support system for railway and light rail projects in the BTO model.

In the BTO-a model, the government assures the minimum standard operating cost and shares the excess return, making the high-risk and high-return in BTO model convert into the low-risk and low-return. The BTO-a model is considered to be suitable for the water and sewage facilities.

34 Ⅲ. A Case Study on South Korea's PPP

Comparison of pros and cons of each PPP model is as follows.

Table Ⅲ-2 Comparison of PPP Schemes

Category Advantage Disadvantage Appropriate Types

∙ Transportation facilities such BTO ∙ High project return ∙ High demand risk as roads, railways, ports. etc.

∙ Converts high risk, high ∙ Relatively low BTO-rs return to mid risk, mid ∙ Railway, light rail transit, etc. project return return projects

∙ Converts high risk, high ∙ High public interest projects ∙ Relatively low BTO-a return to low risk, low such as water and sewage project return return projects facilities

∙ Low project ∙ Schools, welfare facilities, BTL ∙ No demand risk return etc.

Source: Hun-Gu, Ha, 2002, Research on Risk Sharing and Management of SOC and PPP Projects, Korea Transportation Development Institute (re-writing)

PPP projects have a complicated business structure and high risk, as they involve lots of stakeholders such as authority in charge, financial investors, construction investors, etc. More specifically, the risk of PPP projects consists of political risk, construction risk, financial risk, and operating risk. Among those risks, political risk, construction risk, and financial risk are not subjecte to the PPP model. Only the operating risk is subject to the PPP model, as it is caused by the income decrease resulting from the shortage of demand.

In comparison with the operating risk by each model, BTO model has the highest risk as a project operator collects usage fee directly from the users. On the other hand, BTL model has the lowest risk as a project operator gets a lease payment from the government during the terms of the agreement. The newly introduced BTO-rs and BTO-a model have intermediate level of risk between the BTO model and the BTL model, which means that they respectively have a medium risk and medium return and low risk and low return.

The schematized comparison of demand risk by each model is as follows:

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Figure Ⅲ-3 Level of Demand Risk for Private Investors

Source: Our own content

1.3. Procedure for Korea’s PPP Project implementation

There are four ways to implement the PPP project: solicited BTO project, unsolicited BTO project, solicited BTL project, and unsolicited BTL project. The details of each procedure are as follows:

1) Procedure for Solicited BTO project

For the PPP projects that require total project cost more than KRW 50 billion and government subsidy more than KRW 30 billion, the authority in charge should ask for a preliminary feasibility analysis (hereinafter referred to as the “PFA”) to the MOSF. Except for the case of converting existing public funded projects into privately funded projects, the MOSF should request VFM to the specialized agency to confirm whether the project is suitable for the PPP project.15)

Meanwhile, for the PPP projects that require more than KRW 200 million of the total project cost, the authority in charge should request PFA and value-for-money (hereinafter referred to as the “VFM”) test to the PIMAC. The process of PFA and VFM are as follows:

15) MOSF, 2014, Public-Private Partnership Infrastructure Projects, MOSF

36 Ⅲ. A Case Study on South Korea's PPP

Figure Ⅲ-4 PFA and VFM Test for Solicited BTO Project

Source: ADB, 2011, Public-private partnership infrastructure projects, ADB

If the designation of PPP project is eligible, the authority in charge makes a public announcement about the plan of designated project. Then, the private investors submit business proposals to the authority in charge based on the request for proposal (hereinafter referred to as the “RFP”), and the authority in charge assesses the RFP and selects a preferred bidder. Then, the authority in charge and preferred bidder makes a negotiation on the main component of the project such as total project cost, concession period, and usage fees. Upon completion of this negotiation, the concession agreement is signed.

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Figure Ⅲ-5 Procedure for Solicited BTO Project

Source: ADB, 2011, Public-private partnership infrastructure projects, ADB

38 Ⅲ. A Case Study on South Korea's PPP

2) Procedure for Unsolicited BTO Project

Unsolicited project, unlike the solicited project, is initiated and suggested by private investors, thereby not requiring PFA.

For the project where the total project cost exceeds KRW 200 billion, the VFM test from the PIMAC should be conducted to confirm whether the demand estimation is appropriate and the costs and benefits are favourable compared to the case where the same project is implemented by the government. For the project where the total project cost does not exceed KRW 200 billion, the authority in charge reviews the proposed project based on its own qualification survey. The VFM test phases are as follows:

Table Ⅲ-3 VFM Test Phases

Category Description

Phase 1 Feasibility assessment (Decision to invest)

Phase 2 Decision on PFI

Phase 3 Establishment of PFI alternatives

Source: KDI, 2010, Detailed guideline for value for money test for BTO and BTL projects, KDI

At the first phase, the economic and policy analysis are conducted. The economics analysis judges that the project is feasible when the ratio of discounted benefit to the present value is more than 1. The policy analysis judges the feasibility of the project using an analytic hierarchy process (hereinafter referred to as the “AHP”).

At the second phase, the quantitative and qualitative comparison is conducted between the case where the project is implemented as a PPP project and the case where the same project is implemented as a government project to settle the best scenario.

At the third phase, the implementation alternative of the private investment is devised. For the projects that are determined to be eligible or has a potential to be implemented as PPP projects, the financial plan is evaluated, considering whether the expected government burden is reasonable or not. The flow chart of the VFM is as follows.

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Figure Ⅲ-6 VFM Test Process

Source: KDI, 2010, Detailed guideline for value for money test for BTO and BTL projects, KDI

The authority in charge should inform the initial proposer regarding the result of VFM test and makes public announcement about the plan of the PPP project. When the privates submit proposals in line with the announced plan, the authority in charge evaluates them including those of the initial proposer. The process of singling out the preferred bidder and signing the concession agreement is the same as that of solicited BTO project described above. The procedure of the unsolicited BTO project is as follows.16)

16) PIMAC, 2015, Feasibility Analysis and Eligibility Test for BTO Project, PIMAC

40 Ⅲ. A Case Study on South Korea's PPP

Figure Ⅲ-7 Procedure for Unsolicited BTO Project

Source: ADB, 2011, Public-private partnership infrastructure projects, ADB

3) Procedure for solicited BTO Project

The initial procedure for the solicited BTL project is identical to that of the solicited BTO project, in that the authority in charge directly identifies PPP projects and asks for PFA or VFM tests to the PIMAC. After analysing the PFA and VFM, PIMAC submits the results to the MOSF.

Based on the PFA and VFM tests submitted by the PIMAC, the MOSF determines the aggregate maximum amount of budget for the BTL project. The MOSF submits it to the National Assembly, and the National Assembly decides whether to pass the budget limit through the resolution. When the budget proposal is passed, the authority in charge notifies the basic plan of the PPP project. The remaining processes of designating a preferred bidder and signing the concession agreement are the same as other schemes described above. The detailed procedure for solicited BTL project is as follows.

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Figure Ⅲ-8 Procedure for Solicited BTL Project

Source: ADB, 2011, Public-private partnership infrastructure projects, ADB

4) Procedure for unsolicited BTL project

The BTL project could be promoted only by the solicitation of the government, however, the private sector has become able to solicit the BTL project since the revision of the PPP Act in March 2016. Detailed criteria are currently being set by the MOSF.

1.4. Main Considerations by the Progress of PPP Project

The PPP project procedure described above can be generally divided into 4 phases: preparation, contraction of the concession agreement, construction and operation. At each phase, stakeholders such as the government (the authority in charge), equity investor, constructor, design supervisor, accounting firm, law firm and financial institution, perform tasks in legal, technical and financial aspects. The following is a summary of the tasks performed by each stakeholder by the progress of the project.

42 Ⅲ. A Case Study on South Korea's PPP

Table Ⅲ-4 Role of the stakeholders by the Progress of the Project

C.A. Preparation Stake- Contract Construction Operation holders Establishing Submitting Establishing Consortium RFP SPC

∙ Contracting ∙ Making a concession public agreement ∙ Managing and supervising project Authority in ∙ Evaluating announcemen and ∙ Providing supports according to Charge RFP t of master designating the concession agreement plan project operator

∙ Establishing ∙ Establishing SPC ∙ Supervising and operating ∙ Requesting authorization of Equity O&M consortium execution plan Investor ▶Submitting ∙ Operating facilities according to

RFP its scheme (BTO, BTL, etc.)

∙ Constructing according to Constructor Construction its equity Co. proportion

∙ Managing and Design ∙ Basic design and execution supervising

Supervisor design the construction

∙ Analysing project profitability ∙ Calculating Accounting ∙ Supporting ∙ Auditing and providing other proper usage Firm taxation advisory services fee ∙ Other accounting advisories

∙ Providing legal advice on re-concession agreement, shareholder agreement, article, etc. ∙ Providing legal Law Firm ∙ Supporting resolution on dispute advice related financial affairs ∙ Providing advisory related with SPC establishment

∙ Providing advisory services on project bankability ∙ Managing escrow account and Financial ∙ Discussing financing conditions collecting principal and interest Institution and contracting loan ∙ Providing advisory services on (financing, commitment reinsurance to manage project insurance) ∙ Selecting leading bank for risk financing the project and composing lenders

Source: Jong-yoon, LEE, 2014, handbook of public private partnership, Book Lab

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1.4.1. Phase 1: Preparing Project and Contracting Concession Agreement

In the phase of project preparation and contraction of the concession agreement, the consortium is established, mainly led by construction companies who have expressed their intention to participate. It is common to organize three teams: a coordination team administering general affairs, a financing team responsible for financing and pricing, and a technical team responsible for design and technology. In addition to that, the consortium usually consults with external experts such as design supervisors, accounting firms, legal firms, and financial institutions to design a competitive project structure. The legal, technical and financial considerations required to be considered by a consortium in this phase are as follow.

1) Legal Considerations

Advices from law firm are required to minimize disputes and to build reasonable project structure, when preparing general agreements, shareholders agreements, and articles. Especially legal review is important for the infrastructure projects with high publicity, since the project operator usually receives subsidies from the government during the construction and operation period or the early termination payment clause is included in the concession agreement.17) In addition, it is necessary to clarify the matter of responsibility of potential issues and set an arbitration institution in advance, in order to prevent the possibility of finance-related disputes.

2) Technical Consideration

When executing basic and detailed design, it is necessary to examine technical feasibility such as location, route, and traffic demand and construction plan under the advice of design supervisor. Particularly, the project operator must pass the social economic analysis and the environmental impact assessment to receive the business approval. Therefore, social benefits should be secured from the planning stage and the required environmental standards should be met.

3) Financial Consideration

Financial feasibility related with profitability, financing structure, and waterfall schedule should be considered. In order to secure project profitability, proper fare and toll should be calculated considering both publicness and project feasibility. In general, the calculated project IRR should be higher than the expected return. To enhance financial feasibility, the subsidiary

17) Jong-yoon, LEE, 2014, handbook of public private partnership, Book Lab

44 Ⅲ. A Case Study on South Korea's PPP

business is sometimes considered.

Financing is an important factor that could determine the success or failure of a project. Therefore, it is necessary to design an efficient and competitive financing structure. The equity to debt ratio should be designed according to the project’s characteristics, and stable and low-cost financial resources should be secured utilizing development finance and the reinforcement of the credit of the consortium through guarantees.18)

Lastly, an issue of fluctuation of total investment cost due to the project time difference should also be considered. Since it takes at least five years from the announcement of the project and the authorization of the implementation plan, the total investment cost can be greatly increased due to the time difference and inflation fluctuation. Therefore, it is necessary to constantly monitor the change in total investment cost during the project preparation period.

1.4.2. Phase 2: Construction

During the construction phase, the government carries out the management and supervision tasks and fulfills the commitments that the government agreed to support. Construction companies generally participate in construction according to their proportion of equity. The legal, technical and financial considerations required to the construction phase are as follow.

1) Legal and Financial Considerations

In the construction phase, project construction and compensation payment could be delayed. In this case, issues happen to arise regarding who shall be responsible for the compensation expenses between the authority in charge and project operator. In some cases, additional financing may be required due to the increase in total investment cost.

2) Technical Considerations

In the process of supervision, there can be friction between the supervisor and the project operator. Particularly in Korea, the authority in charge selects the supervisor, but since the supervisor makes a contract with the project operator, the project operator often does not know the contents of the bidding announcement of the government.19) Therefore, in order to prevent disputes during the supervision, it is necessary for the authority in charge to make sufficient consultations with the project operator about the details of the tender.

18) Jong-yoon, LEE, 2014, handbook of public private partnership, Book Lab 19) Jong-yoon, LEE, 2014, handbook of public private partnership, Book Lab

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1.4.3. Phase 3: Operation

At the operational phase, the government directly operates the facilities or just manages and supervises them according to the type of project. The project operator generally reimburses the principal and interest with the facility operation income and subsidies. The key considerations for the operational phase are as follows.

1) Legal and Financial Considerations

Under the Concession Agreement, it is regulated in the agreement to increase fare every year reflecting the inflation. However, in the case of infrastructure projects, it is difficult to raise the fare according to the agreement due to high publicity. Therefore, the possibility of freezing rates at the operation phase should be considered. In addition, there is a possibility that the actual debt payment may be hindered if the actual demand falls short of forecasted demand. Once the financing structure has been set up, it would take lots of time and money to restructure it, therefore demand verification and sound financing structure setting must be carefully considered.

2) Technical Considerations

As the facility ages, additional costs could occur due to maintenance. In this case, there may be some issue regarding who should pay for the maintenance. Therefore, the government in charge and the project operator should consult this issue in advance.

1.5. Current Status of Korea’s PPP investment

1.5.1. PPP Investment By Schemes and Facilities

As of the end of 2015, 654 projects with total investment costs of KRW 102.2 trillion, were undertaken upon the concession agreement between the authority in charge and private investors. BTO and BTL schemes comprise the majority of PPP projects, although the PPP Act in Korea allows various types of PPP schemes such as BTO, BOO, BOT, and BTL. Of the total number of projects undertaken, BTO scheme accounts for 32.6% and BTL scheme accounts for 65.8%. In addition, BTL scheme has a lower average cost of investment than BTO scheme, as it is primarily used in facilities difficult to collect usage fees such as schools, welfare centres and dormitories.

46 Ⅲ. A Case Study on South Korea's PPP

Table Ⅲ-5 PPP investment by Schemes

Ave. Category Number Weight TIC (billion) Weight TIC(billion)

BTO 223 32.6% KRW 7199.61 70.4% KRW 32.28

Operating BOO 4 0.6% 65.8 0.6% 16.45 Type BOT 7 1.0% 135.04 1.3% 19.29 Sub Total 234 34.2% 7400.45 72.3% 68.02 Lease Type BTL 450 65.8% 2825.11 27.7% 6.27 Total 684 100.0% 10225.57 100.0% 14.95

Source: KDI, 2015, Annual report of public investment management centre, KDI

Statistics of PPP investment in facilities as of the end of 2015, shows that the road (42.1% of the total) and railroad (17.9%) comprise the majority of the investment among the 11 sectors which have been sanctioned by the private investment law.

Table Ⅲ-6 PPP investment by Facilities

Ave. TIC Category Number Weight TIC (billion) Weight (billion)

Education 227 33.3% KRW 984.45 9.6% KRW 4.34 Environment 183 26.9% 1,379.45 13.5% 7.54 Roads 91 13.3% 4,307.50 42.1% 47.34 National Defence 72 10.5% 570.15 5.6% 7.92 Cultural tourism 40 5.8% 170.99 1.7% 4.27 Ports 18 2.6% 673.34 6.6% 37.41 Airports 14 2.0% 77.98 0.8% 5.57 Welfare 14 2.0% 49.16 0.5% 3.51 Rails 14 2.0% 1,832.76 17.9% 130.91 Logistics 6 0.9% 154.43 1.5% 25.74 Info-communications 5 0.7% 25.36 0.2% 5.07 Total 684 100.0% 10,225.57 100.0% 14.95

Source: KDI, 2015, Annual report of public investment management centre, KDI

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1.5.2. PPP Investment in Transportation Infrastructure

As of the end of 2015, 6 urban metro projects were included in 14 PPP projects in the railway business sector. All urban metro projects were undertaken by the BTO scheme, involving a total investment cost of KRW 9,797.5 billion, with KRW 6,639.7 billion of private investment cost excluding the construction subsidy (66% of the total investment cost).

As for the BTL scheme in the rail sector, 2 intercity rail projects were included in railway business sector, involving a total investment cost of KRW 1,099.9 billion, with KRW 1,004.4 billion of private investment cost excluding the construction subsidy (90% of the total investment cost).

Table Ⅲ-7 Status of PPP in Rail Sector of Korea

Total Total Private Construction Construction Operation Category Investment Gov’t Support Investment Subsidy Period Period Cost

4 Years 30 Years Standard Cost Seoul Line 9 1,167.7 747.7 420.0 (’06-’09) (’09-’39) Support

8 Years 30 Years Standard Cost Ever Line 1,012.7 635.4 377.3 (’05-’13) (’13-’43) Support

10 Years 34 Years Standard Cost AREX1 4,031.0 3,201.4 829.6 B (’01-’10) (’07-’40) Support T Shin- 7 Years 30 Years MRG 80% O 1,580.8 840.7 740.1 (’05-’11) (’11-’41) (First 5 Years)

6 Years 20 Years MRG 80% U-Line 676.7 382.5 294.2 (’07-’12) (’12-’32) (First 5 Years)

Busan-Gimha 6 Years 20 Years MRG 76% 1,323.6 832.0 491.6 e LRT (’06-’11) (’11-’31) (First 10 Years)

Sub-total 9,792.5 6,639.7 3,152.8 - - -

Iksan-Sinri 6 Years 20 Years Double-track 636.5 565.4 74.1 - (’07-’12) (’12-’32) B Railway T Haman-Jinju L 6 Years 20 Years Double track 463.4 439.0 24.4 - (’08-’13) (’13-’33) Railway

Sub-total 1,099.9 1,004.4 98.5 - - -

Total 10,892.4 7,644.1 3,251.8 - - -

Source 1) MOLIT, 2014, Activation Plan for PPP scheme on railway business field, MOLIT 2) MOSF, 2015, The status of private capital station, MOSF 3) MOSF and KDI, 2013, Comprehensive evaluation on the PPP project, MOSF and KDI (re-writing)

48 Ⅲ. A Case Study on South Korea's PPP

2. Subsidiary Business–Construction of Private Capital Station

2.1. Overview

The main business in the railway business is construction and operation, however it is possible to further develop other subsidiary businesses such as advertising agency in the capital station, lease business, storage services, etc. Among them, the development of the private capital station, which is a representative subsidiary business, is closely related to the development of the station influenced area utilizing railway site. The development of private capital station has an advantage of maximizing land use efficiency, as it considers the connectivity to the station influenced area and aims to three-dimensional city, which makes it possible to secure the business profitability. Therefore, if private investment in private capital station is activated in Colombia, it would help to secure profitability of railway related business.

2.2. Regulations Related to Private Capital Station in Korea

The regulations related to the development of private residents are specified in the Railway Construction Act, the Railway Service Act, and the Korea Railroad Corporation Act. Details of each law are as follows:

2.2.1. Railroad Construction Act20)

1) Purpose and Definitions

The purpose of this Act is to contribute to the efficient expansion of railroad networks and the development of public welfare by prescribing the matters on the establishment of a railroad network building plan, railroad construction and development of station economic zones in order to expand the railroad networks, and promote station economic zone development.

The term “railroad facility” refers to station facilities (including logistic facilities, transfer facilities and sales facilities, and job facilities, neighbourhood facilities, lodging facilities, culture and assembly facilities located in the same building as the station building), architecture and architectural equipment used for operation of the railroad.

20) MOLIT, revised 2015, English version of the Railroad Construction, National Law Information Center

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2) Development of Station's Sphere of Influence

In the event that the Korea Rail Network Authority (including a corporation invested by Korea Rail Network Authority) and an operator seek to install facilities in the Railroad Facility owned and managed by the state in order to promote the Railroad Facility and improve passenger convenience, the Minister may allow for the occupation of the building or other facilities to be installed in accordance with the conditions as prescribed by the Presidential Decree by defining the kind and period of such Facilities.

2.2.2. Railroad Service Act21)

1) Purpose

The purpose of this Act is to maintain the orderly railroad enterprise and to create efficient operational conditions for the railroad enterprise in order to ensure the sound development of the railroad enterprise and the conveniences of railroad users and passengers with the ultimate aim of contributing to the development of the national economy.

2) Practical Use and Support for Facilities of National Railroad

When the establishments for which anyone who obtains the permission to occupy and use intends to construct are wholly or partially related to the management of the railroad facilities, the Minister of Land, Infrastructure, and Transport (hereinafter referred to as the “MOLIT”) may construct them directly on commission by anyone who obtains the permission to occupy and use at his/her expense or may have the Korea Rail Network Authority that is established under the Korea Rail Network Authority Act to construct the establishments

Anyone who obtains the permission to occupy and use shall pay fees for occupation and use to the MOLIT.

21) MOLIT, revised 2015, English version of the Railroad Service Act, National Law Information Center

50 Ⅲ. A Case Study on South Korea's PPP

When anyone who intends to transfer the right and duty that accrue from the permission to occupy and use shall obtain an authorization thereof from the MOLIT.

Anyone who obtains the permission to occupy and use shall, when the period for occupation and use expires or he/she discontinues the occupation and use, restore the railroad property for which the permission to occupy and use is granted to the original state: provided that when the restoration of such railroad property to the original state is deemed impossible or inappropriate, the MOLIT may exempt the obligation to restore the railroad property to the original state.

When the MOLIT exempts the obligation to restore the railroad property to the original state, he/she may do so on the condition that the establishments, etc. built on the railroad property revert to the state without compensation therefor.

2.2.3. Korea Railroad Corporation (“”) Act

1) Development project for Station's Sphere of Influence

Anyone who intends to ensure the conveniences of railroad users and passengers can initiate development projects for station’s sphere of influence, including job facilities, sales facilities, parking lot, passenger terminals, and cargo terminals. The government can provide administrative and financial support, if necessary.

2.3. Status of Promoting Private Capital Station in Korea

2.3.1. Background on Private Capital Station

The purpose of developing private capital station is to ensure the conveniences of railroad users by modernizing narrow and outdated facilities and expanding passenger convenient facilities. By constructing station facilities with private capital, the government could cut railroad maintenance budget, and the railroad operator could get benefit in managing the business from equity dividends as well as fees for occupation and use. In addition to that, the increases

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in local taxes and new employment could contribute to boosting the local economy. Lastly, the government could exploit extra advantages by improving the surrounding environment and creating new downtown, which eventually leads to the regional growth.22)

2.3.2. Procedures to Implement Private Capital Station

The procedure to develop the private capital station is composed of two stages; to select a project operator and establish a special purpose company (hereinafter referred to as the “SPC”), which is initiated by Korail and project operator, and to gain approval by the local government, which is initiated by the project operator.

Project implementation procedure initiated by Korail, project operator or private capital station is as follows:

Figure Ⅲ-9 Project Implementation Procedure

Authorization procedure of the local government, after establishing Private Capital Station, is as follows.

Figure Ⅲ-10 Authorization Procedure

22) Written by the office of business development in Korea Railroad Corporation

52 Ⅲ. A Case Study on South Korea's PPP

2.3.3. Schemes and Participants

Every Private Capital Station project in Korea is implemented by the BOT scheme, and is applying 3 sector scheme which is composed of Korail (approximately 25% share of equity investment), project operators (approximately 25% share of equity investment), and general investors (approximately 50% share of equity investment).

Among the participants, the Koreail provides railway sites and is responsible for investing in SPC. The municipal government approves a proposal of private capital stations, and the project operator is in charge of financing the business, supporting management techniques, and managing and operating the private capital after its completion. The general investors participate only in the equity investment but does not play any role such as managing the business. The SPC for private capital station leads the development plan, Consults with the municipal government, gets a permission for private use form Korail, and selects the construction company

The most important part of these roles is financing, which is responsible for the project operator. In order to secure more financial resources, the project operator would expand its sales and the space for lease, and promote the development of commercial facilities. The role of each participant is summarized as follows.

Table Ⅲ-8 Roles of Participants in Private Capital Station

Participant Roles Korail Providing a site for railways and investing in SPC The Municipal Approving proposal of private capital stations. No financial participation Government financing, supporting management techniques, and managing & Project Operator operating the private capital station General Investor Providing capital through equity participation Initiating to plan the Private Capital development project, Consulting SPC for with the municipal government, getting a permission for private use Private Capital Station form Korail, selecting construction company

2.3.4. Financing for Private Capital Station

During the construction phase of the private capital station which requires a large initial construction cost, there is no support from national level other than korail’s rail bed and participating equity investment. Therefore, financing is unilaterally managed by the project

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operator. Project operator utilizes financing means such as prior sale, deferred payment construction, bank loan, sales revenue, and lease deposits.

Table Ⅲ-9 Financing Schemes Utilized by Project Operator

Category Details

- Financing scheme that project operators usually depend on - Securing financial resources to cover initial construction cost is difficult, `Prior sale Scheme as it is not sure whether pre-sale and other lots and attracting leases are sufficient at the early stage of construction

- Because the construction cost is huge and budget is limited, this scheme Deferred Payment delays the payment period of the construction cost and utilizes the construction Scheme pre-sale revenue to cover construction cost - Financing scheme to cover the initial construction cost Bank Loan Scheme - Divided into corporate financing and project financing

Source: Jin, Nam, 2002, Proposed policy guidelines for national railroad station development, Seoul Municipal Development Institute

The above funding schemes are all intertwined. Especially for the bank loan scheme, the project financing method is mainly used rather than the corporate finance. A description of corporate finance and project financing is shown below:

1) Corporate Finance

The company who want to receive loans from financial institutions, must provide collateral or guarantees for its risks. Therefore, small business corporations with good financial and business performance face more difficulties to participate in the project as a project operator than the large corporations. This scheme was used at the beginning stage or the development of the private capital station.

2) Project Finance

Even small business corporations with good business prospects can receive loans from financial institutions if their projects have project feasibility. However, due to the lack of collateral and guarantees, risk management is very important and the business structure is complex. Accordingly, contracts and insurance between business participants are essential.

54 Ⅲ. A Case Study on South Korea's PPP

2.4. Examples of Private Capital Station in Korea

Currently, there are 13 (5 in Seoul, 6 in Seoul, 2 in Incheon, and 5 in Gyeonggi) private capital stations are under operation out of the 247 operating stations operated by Korail. As of the end of 2016, the sales of the private capital station accounted for 2% of KRW 95.5 billion out of the total KRW 569.36 billion of the Korea Railroad Corporation. Among the private capital station, Wangsimni Station is a representative successful case by introducing various facilities (mart, movie theater, shopping mall, etc.) reflecting the needs of its floating population and local residents. On the other hand, Sinchon Station and Chang-dong Station are examples of failure cases the business has been running under a deficit operation or was stopped due to the error in demand estimation and lack of characteristics. Details of each station are as follows:

Table Ⅲ-10 Private Capital Stations in the Metropolitan Area

Category Operating Profit Introduced Facilities Facilities Information Station’s picture (2015, KRW million)

Seoul Station High-speed ∙ Sales/Business/ Land: 67,660㎡ Railway - Public Building: 37,558㎡ Construction ∙ Parking Ground 5 / Basement 2 Projects

Yeongdeungpo Station Land: 57,507㎡ ∙ Sales/ Parking Urban Planning - Building: 29,510㎡ ∙ Culture and Meeting Facilities Ground 10 / Basement 5 Projects

Cheongnyangni Station ∙ Sales/ Land: 59,327㎡ Urban Planning - Neighbourhood Building: 33,399㎡ Facilities ∙ Culture and Meeting Ground 9 / Basement 3 Projects

Yongsan Station Land: 126,931㎡ High-speed ∙ Revenue: 133,292 ∙ Sales/Sports/Parking Building: 56,533㎡ Railway ∙ Profit: 26,260 ∙ Culture and Meeting Ground 9 / Basement 3 Construction Projects

Wangsimni Station Land: 44,162㎡ ∙ Revenue: 26,173 ∙ Sales/Sports/Parking Urban Planning Building: 24,535㎡ ∙ Profit: 7,465 ∙ Culture and Meeting Facilities Ground 17 / Basement 3 Projects

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Operating Profit Category (2015, KRW million) Introduced Facilities Facilities Information Station’s picture

sinchon station Land: 18,065㎡ Urban Planning ∙ Revenue: 1,460 ∙ Sales/ Parking Building: 9,645㎡ Facilities ∙ Profit: (3,995) ∙ Culture and Meeting Ground 6 / Basement 2 Projects

Dongincheon Station ∙ Sales/Business/ Land: 15,093㎡ Urban Planning - Parking Building: 8,173㎡ Facilities ∙ Culture and Meeting Ground 10 / Basement 3 Projects

Bupyeong Station Land: 28,180㎡ ∙ Revenue: 13,040 ∙ Sales/Sports/Parking Urban Planning Building: 10,949㎡ ∙ Profit: 1,227 ∙ Culture and Meeting Facilities Ground 9 / Basement 2 Projects

Bucheon Station Land: 27,195㎡ ∙ Revenue: 135,697 ∙ Sales/ Parking Urban Planning Building: 20,557㎡ ∙ Profit: 8,890 ∙ Culture and Meeting Facilities Ground 9 / Basement 2 Projects

Anyang Station Land: 28,047㎡ Urban Planning ∙ Revenue: 10,168 ∙ Sales/Sports/Parking Building: 19,806㎡ Facilities ∙ Profit: 535 ∙ Culture and Meeting Ground 9 / Basement 3 Projects

Suwon Station ∙ Sales/lodging/ Land: 88,812㎡ Urban Planning ∙ Revenue: 142,760 Neighbourhood Building: 47,299㎡ Facilities ∙ Profit: 10,683 ∙ Culture Ground 9 / Basement 3 Projects

Pyeongtaek Station Land: 43,872㎡ ∙ Revenue: 41,981 ∙ Sales/Parking Urban Planning Building: 20,799㎡ ∙ Profit: (2,040) ∙ Culture and Meeting Facilities Ground 10 / Basement 3 Projects

Uijeongbu Station Land: 53,965㎡ ∙ Revenue: 15,818 ∙ Sales/Parking Urban Planning Building: 30,099㎡ ∙ Profit: (32,779) ∙ Culture and Meeting Facilities Ground 11 / Basement 2 Projects

Source: Korail Data and electronic disclosure system of Financial Supervisory Service (The operating profit of Seoul, Yeongdeungpo, and Dongincheon station is confidential)

56 Ⅲ. A Case Study on South Korea's PPP

3. Infrastructure Fund

3.1. Overview

Infrastructure fund is a special type of mutual fund to invest in infrastructure facilities project, by pooling funds from a number of investors and distributing accrued to investors.23) In Korea, the first infrastructure fund was established in 1999 and the infrastructure market is steadily growing. The major features of Korea Infrastructure funds including the legal basis, type, operation structure, status, characteristics, and examples will be introduced in this chapter. Infrastructure funds make easier for private investors to access to the infrastructure market, thereby contributing to stimulating private investment in infrastructure project. If the infrastructure fund market of Colombia matures, it would contribute to the reduction of the government’s financial burden to improve the urban transportation infrastructure.

3.2. Regulations Related to Infrastructure Fund

The type of infrastructure fund available in Korea under the current law, are as follows: a special asset fund pursuant to the Financial Investment Services and Capital Markets Act (hereinafter referred to “the Capital Markets Act”), and an investment and financing fund pursuant to Public-Private Partnerships in Infrastructure (hereinafter referred to the “PPP Act”).

3.2.1. Special Asset Fund pursuant to the Capital Markets Act

According to the paragraph 3, the Article 229 of the Capital Market Act, a special asset fund refers to a collective investment scheme that invests the collective investment property in special assets in excess of at least 50/100 of the collective investment property. Under the Capital Market Act, a special asset fund can be classified into a public offering and private offering special asset fund, depending on the method of raising funds. A special asset fund can also be classified into a special asset investment trust and special asset investment company, depending on the legal structure. The comparison of regulations by the legal structure is as follows.

23) Jong-Sun, Kang, 2011, The status and forecast of infrastructure fund, KDB Infra

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Table Ⅲ-11 The Comparison of Regulations by the Legal Structure

Category Investment Trust Investment Company

•In accordance with the incorporation procedure under the •After signing a contract with Commercial Law, all promoters a trust manager, a collective should prepare articles of investment company must incorporation, then print their Set Up and pay the entire trust’s names and affix their seals, and Establishment principal specified in the then take over the total number of trust contract by cash shares to be issued and register •No limit on the minimum the establishment amount of net assets •The minimum amount of net assets is one billion won Collective Investment •A beneficiary certificate •Stock Securities •An investment trust holds a general meeting of •An investment company holds a beneficiaries consisting of all general meeting of shareholders beneficiaries, and the consisting of all investors, and the Decision of Investors meeting adopts resolutions meeting adopts resolutions for for only those matters only those matters provided for provided for the Capital the Capital Market Act or articles Market Act or the trust of incorporation contract •Dissident beneficiaries have •Dissident shareholders have the the right to request the Purchase Claim right to request the purchase of purchase of beneficiary beneficiary certificates certificates •A trust business entity and Surveillance •A trust business entity surveillance director

Sources: Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI

3.2.2. Investment and Financing Fund Pursuant to the PPP Act

According to the Article 41 of the PPP Act, infrastructure fund can establish an investment and financing company for the purpose of investing its assets in an infrastructure facility project to distribute benefits accruing therefrom to shareholders, or an investment and financing trust for the purpose of distributing its benefits accruing therefrom to beneficiaries24).

24) Sung-Ho, Lee, 2014, Trends and future tasks of domestic fund industry, KDB

58 Ⅲ. A Case Study on South Korea's PPP

According to the Section 5 of the Article 41 in the PPP Act, the infrastructure fund can be established by recruiting investors by public offering (open-scheme) or by a private offering (closed-scheme). In the case of a private offering, the number of investors should not exceed thirty.

Differences between the SOC private equity trust and SOC private equity company under PPP Act, are as follows.

Table Ⅲ-12 Differences According to Legal Term Under the PPP Act

Category SOC Private Equity Trust SOC Private Equity Company

Relevant •Article 41 or article 44 of the PPP Act Statutory • Applying the Capital Markets Act, according to paragraph 4, Article 41 of Provisions the PPP Act

Investment Object • Infrastructure project (PPP)

Establishment • Consultation with the Ministry of Strategy and Registering Finance and Procedure the Financial Supervisory Commission

Borrowing Loans • 30% of total beneficiary certificates • 30% of the capital and Issuing Bonds

Investment Cap • No limitation

Credit Line • 30% of total beneficiary certificates • No limitation

Voting Right • No limitation

Repurchase • Repurchase prohibition

Sources: Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI

Except for special cases provided in the Act, the Capital Markets Act shall be applicable to the infrastructure fund established under the PPP Act25). Depending on whether or not to apply a special case to the PPP Act, it can be classified as a private asset fund pursuant to the Capital Markets Act and an infrastructure investment and financing fund pursuant to the PPP Act. More details are as follows.

25) Yong-Seok, Bark, 2014, Facilitation plan for financing of PPP project, Korea Institute of Construction Industry

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Table Ⅲ-13 Comparison of Infrastructure Fund

Funds under Funds under Category PPP Act Capital Market Act

Relevant Statutory •The PPP Act and the Capital • The Capital Markets Act Provisions Markets Act • At registration, KRW 10 billion • At registration, KRW 100 as a minimum capital is million as a minimum capital is Investment required. required Capital and Company • After establishment, more than • After establishment, more Minimum KRW 5 billion in net assets is than KRW 1 billion in net Net Assets required assets is required Investment • No limitation on the minimum net assets Trust • Obliged to invest in excess of Scope of Investment 50% of special assets • Limited to PPP related projects Object • Otherwise will be generally accepted • Direct loans and acquisition of SOC ABS to corporations for the purpose of implementing • Direct loans are not allowed, PPP are allowed but the same effect can be Direct Loan Availability • Direct loan from investment achieved by acquiring SOC and financing trust should be ABS within 30% of total beneficiary certificates • Both public offering and private equity funds are excluded from • Private equity fund is partially Limitation on Asset the asset management excluded from the asset Management regulations under the Indirect management regulations. Investment Act • Borrowing loans and issuing • Borrowing, debt guarantees or bonds are allowed, within 30 % collateral is prohibited. of the capital or beneficiary Borrowing Loans and • In case of mass repurchase, certificate Providing Mortgages temporary borrowing is • No limitation on private equity allowed within 10% of total funds assets • Collateral is allowed

Sources: Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI

60 Ⅲ. A Case Study on South Korea's PPP

3.3. Structure and Operation of the Infrastructure Fund

3.3.1. Structure of the Investment Trust

As described above, the infrastructure fund in Korea can be divided into the special asset fund pursuant to the Capital Markets Act and the SOC investment and financing fund pursuant to the PPP Act. Both the Capital Markets Act and the PPP Act were allowing infrastructure funds to be operated as an investment trust and an investment company.

1) Composition of Investment Trust

The investment trust is created by trustors contracting a trust agreement. As an investment trust does not have a legal personality, a trustor becomes the subject of rights and obligations and an asset management company manages and directs the property.26) The asset management company entrusts general office affairs to the general office management company and entrusts the sales of beneficiary certificate to the sales company. The composition of an investment trust is shown below.

Figure Ⅲ-11 Composition of Investment Trust

Sources: The Financial Supervisory Service, 2007, An Introduction of the Finance Supervision 2007, The Financial Supervisory Service (re-writing)

26) Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI

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2) Composition of Investment Company

The investment company, pursuant to the Capital Markets Act and the PPP Act, is not allowed to hire full-time employees. Therefore, the company has to entrust its affairs, including asset management, asset custody, general affairs, and sales to asset management company, asset custodian, sales company, and general administrational management company, respectively. The composition of the investment company is shown below.

Figure Ⅲ-12 Composition of Investment Company

Sources: The Financial Supervisory Service, 2007, An Introduction of the Finance Supervision 2007, The Financial Supervisory Service (re-writing)

3.3.2. Operation of the Infrastructure fund

The asset management company is needed to operate infrastructure funds, according to the Capital Markets Act and the PPP Act. At present, the asset infrastructure fund management companies in Korea include Korea Infrastructure Asset Management, Macquarie Shinhan Infrastructure Asset Management, Darby Hana Infrafund Management, KB Asset Management, Woori Credit Swiss Asset Management, and Shinhan BNP Paribas Asset Management. The following is more detailed explanation of infrastructure fund, including operation structure, investment status, and typical cases.

Unlike traditional funds which raise capital after selecting an investment target, infrastructure funds in Korea operate on a blind pool basis, which collect funds first then choose the target. In addition, unlike general funds which set a target capital amount before calling for capital,

62 Ⅲ. A Case Study on South Korea's PPP

infrastructure funds in Korea uses a capital call basis which raises funds through a capital increase when necessary.27)

After the fund is raised, an infrastructure fund invests in SPC in three ways; lending, bond acquisition, and equity investment. Using the invested capital, SPC constructs an infrastructure facility and transfers the constructed facility to the government. In exchange of the ownership of the facility, the government and local government provide SPC a right to manage and operate the facility. SPC operates the facility and earns a usage fee from customers, which is used to pay interest and principal on the debt and dividends on the equity investment. Infrastructure fund distributes its profit using received interest, principal and dividends.28)

Figure Ⅲ-13 Operation Structure of Infrastructure Fund

Sources: Yong-Seok, Bark, 2014, Facilitation plan for financing of PPP project, Korea Institute of Construction Industry (re-writing)

3.4. Investment Status of Infrastructure Fund

3.4.1. Establishment Status of Infrastructure Fund

As of the end of 2013, 116 infrastructure funds are in operation. Of the 116, 106 are trust type funds and 10 are company type funds, making the trust type funds the majority in Korea.

27) Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI 28) KB Financial Group, 2012, Alternative investments using infrastructure funds, KB Financial Group

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Infrastructure funds have been steadily increasing, since the foundation of the Korea Infrastructure Investment and Financing Co., a company-type infrastructure fund established in January 2000. With the introduction of SOC investment and financing company and the BTL scheme under the revised PPP Act in 2005, 8 investment and financing companies were newly established. In 2006, additional infrastructure funds for BTL projects were created, contributing greatly to the growth of Korea's infrastructure funds. The number of established infrastructure fund and the amount of purchase by year are as follows.

Number of Established Infrastructure Fund and Purchase Table Ⅲ-14 Amount by Year

Date of Number of funds Amount of Purchase (KRW billion) Establishment Number Weight Amount Weight

2000 1 (BTO) 1% 33.486 0%

2002 1 (BTO) 1% 1,670.986 12%

2005 1 (BTO) 1% 587.306 4%

14 2006 12% 4,879.443 35% (BTL:12,BTO:2)

6 2007 5% 1,044.118 7% (BTL: 5, BTO: 2)

5 2008 4% 285.7 2% (BTL: 3, BTO: 2)

7 2009 6% 520.263 4% (BTL: 4, BTO: 3)

20 2010 17% 1,391.844 10% (BTL: 15, BTO: 5)

16 2011 14% 923.396 7% (BTL: 10, BTO: 6)

20 2012 17% 1,437.412 10% (BTL: 7, BTO: 13)

25 2013 22% 1,268.728 9% (BTL: 11, BTO: 14)

Total 116 100% 14,042.682 100%

Source: Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI (re-writing)

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3.4.2. Features of Korea Infrastructure Fund

Classifying 116 infrastructure funds by relevant acts and legal structures as of the end of 2013, there are 11 infrastructure funds under the PPP Act and 105 under the Capital Markets Act. The funds under the Capital Markets Act comprise 90.5% of the total infrastructure funds, most of which are investment trust type, whereas the funds under the PPP Act are investment company type.

Korea's infrastructure funds generally choose to invest in PPP projects by lending or bond purchase rather than equity investment. As of the approval date of the implementation plan, the equity investment ratio of BTL scheme is about 38.65%, and that of BTO scheme is about 11.75%. The annual equity investment ratio of Korea’s infrastructure fund is as follows:

Table Ⅲ-15 Annual Equity Investment Ratio in Infrastructure Fund

(Unit: KRW million)

Approval BTL Scheme BTO Scheme Year Equity Fund Weight (%) Equity Fund Weight (%) 1997 - - - 729,800 (7) 29,700 (1) 4.07% 1998 - - - 50,284 (5) - - 1999 - - - 130,985 (10) 6,574 (1) 5.02% 2000 - - - 783,462 (10) - - 2001 - - - 588,177 (14) - - 2002 - - - 696,084 (18) - - 2003 - - - 201,158 (15) - - 2004 - - - 1,057,391 (17) 12,123 (2) 1.15% 2005 4,841 (2) - - 1,570,382 (18) 86,000 (1) 5.48% 2006 206,639 (50) 30,011 (12) 14.52% 688,291 (11) 91,037 (3) 13.23% 2007 417,830 (78) 136,109 (34) 32.58% 746,179 (15) 116,311 (4) 15.59% 2008 426,573 (84) 195,625 (47) 45.86% 445,992 (13) 95,516 (2) 21.42% 2009 305,342 (64) 94,231 (23) 30.86% 1,321,267 (12) 104,963 (4) 7.94% 2010 228,591 (69) 68,133 (35) 29.81% 954,625 (12) 199,666 (4) 20.92% 2011 297,301 (36) 211,015 (23) 70.98% 541,729 (12) 132,201 (2) 24.40% 2012 89,884 (29) 28,039 (15) 31.19% 747,146 (11) 453,334 (6) 60.68% 2013 1,811 (1) 1,631 (1) 90.06% 27,700 (1) - - Total 1,978,812 (413) 767,794 (190) 38.65% 11,280,652 (194) 1,327,425 (30) 11.77%

Note 1) In parentheses is the number of businesses Source: Sang-Hoon, Lee, 2014, A study of the investment status and measures to improve regulation on funds for PPP, KDI (re-writing)

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Even though the BTL scheme generates a lower rate of return, the annual equity investment ratio shows that infrastructure funds in Korea are more actively investing in equity of BTL scheme projects than that of BTO scheme. This is because BTL scheme is free from the demand risk, as the authority in charge guarantees the calculated revenue considering total investment cost and expected rate of return.

In addition, infrastructure funds in Korea tend to invest in equity of SPC of projects in operational phase rather than in construction phase to avoid construction risk. This tendency lowers the equity investment ratio of BTO scheme compared to the BTL scheme at the time of approving the implementation plan.

On the other hand, investments in PPP projects may take time to retrieve the invested capital due to a long period of investment and payback. Additionally, strict restrictions on dividend payment of equity investment, such as payment priority for senior debts, aggravate the investment condition. Thus, Korea's infrastructure funds are seeking to recover the invested capital sooner by executing subordinated loans at the same time as equity investment.

3.5. Investment Cases of Infrastructure Fund in Korea

Infrastructure funds in Korea are investing PPP projects in various ways, including equity investments, senior and subordinated loans, and bond purchases. The following are introductions of Yongin-Seoul Expressway and Daegu-Busan Expressway PPP cases where equity investment and subordinated loans were simultaneously executed.

3.5.1. Yongin–Seoul Expressway

Macquarie Korea Infrastructure Fund (hereinafter referred to as the “MKIF”), Korea Infrastructure Fund (hereinafter referred to as the “Korea Infra”) and NongHyup Bank are the shareholders of the Yongin-Seoul Expressway after refinancing. MKIF and Korea Infra, established pursuant to the PPP Act, hold ordinary shares, and NongHyup Bank, a trustor pursuant to the Capital Market Act, holds preferred shares. MKIF and Korea Infra also own subordinated bonds with the interest rate of 15.5%, which is more than twice the interest rate of senior bonds.

Considering cash-yield29) MKIF and Korea Infra chose to lend and invest in equity at the same time. Financing structure of the Yongin-Seoul Expressway based on the audit report at the end of 2015, the first financial year after the refinancing, is as follows.

29) Cash-yield = Cash inflow (loan interest, loan principal, participation fee, dividend/ cash outflow (loan and equity investment)

66 Ⅲ. A Case Study on South Korea's PPP

Table Ⅲ-16 Financing Structure of Yongin­Seoul Expressway (As of the End of 2015)

(Unit: KRW million) Shareholder Status Long Term Loan Shareholder Type of Interest Amount Stake Loan Source Amount name Loan Rate Nonghyup Bank 4.40% 324,700 MKIF 51,599 43.75% Senior Korea Development 2.84% 60,000 Bank, Etc. Sub-total 384,700 Korea Infrastructure 36,856 31.25% Macquarie Korea Fund Ⅱ 15.5% 99,633 Infrastructure Fund Sub Korea Infrastructure Nonghyup Bank 15.5% 71,167 29,485 25.00% Fund Ⅱ (Trust business entity) Sub-total 170,800 Total 117,940 100.00% Total 555,500 Source: Writing based on the audit report of Gyeongsu Expressway Co. (2015, December)

3.5.2. Daegu–Busan Expressway

Balhae Infrastructure Fund (Balhae Infra), established pursuant to the PPP Act, and National Pension Service are the shareholders of the Daegu­Busan Expressway. Balhae Infra and National Pension Service own subordinated loans, interest rate of which is quite high, ranging from 12 to 40%.

Considering cash-yield, Balhae Infra and National Pension Service chose to lend and invest in equity at the same time. Financing structure of the Daegu­Busan Expressway based on the audit report at the end of 2015 is as follows.

Table Ⅲ-17 Financing Structure of Daegu­Busan Expressway (As of the end of 2015)

(Unit: KRW million) Shareholder Status Long Term Loan Shareholder Type of Amount Stake Loan Source Interest Rate Amount name Loan National Pension 6.70% 179,645 Service Senior Kyobo Life National 2.7~6.7% 547,930 94,176 59.08% Insurance, Etc. Pension Service Sub-total 727,575 National Pension 12~40% 352,852 Service Sub Balhae Balhae 12~40% 244,379 Infrastructure 29,485 25.00% Infrastructure Fund Fund Sub-total 597,231 Total 117,940 100.00% Total 1,324,806 Source: Writing based on the audit report of New Daegu-Busan Expressway Co. (2015, December)

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4. Case Study of the PPP Projects in Korea

4.1. Overview

Since 1990’s, the demand for urban transport infrastructure has increased rapidly. The government of Korea has utilized Public-Private Partnership as a financing alternative to provide urban transport infrastructure. Among urban transport infrastructure PPP projects in Korea, we selected Seoul Metro Line 9, Incheon Bridge Project, and Ever-line as case studies, because 1) Seoul Metro Line 9 is a representative case financed from private equity infrastructure fund, 2) Incheon Bridge Project is a representative case initiated by a financial investor, and 3) Ever-line is a representative case financed through restructuring and refinancing. The details of each case are to follows.

4.2. Seoul Metro Line 9

4.2.1. Summary of the Seoul Metro Line 9 Project

For the expansion of urban transportation, the Seoul Metropolitan Government proposed the 3rd Seoul urban metro construction plan in 1993 and finalized it in 1997. However, due to the Asian financial crisis in 1998, three out of the four previously planned lines were cancelled and only Seoul metro line 9 remained. Considering the difficult financial situation including a high level of debt related with the urban metro, the Seoul Metropolitan Government decided to construct the superstructure of the 1st phase of Metro Line 9 (Gangseo-Gangnam) as a PPP project.

Seoul Metro Line 9 phase 1 project (hereinafter referred to as the “Seoul Metro Line 9 project”) was implemented under the BTO scheme. After its completion, the ownership of metro line 9 was transferred to the government and the right to manage and operate was given to the Seoul Metro Line 9 Corporation (a project operator) for 30 years from July 2009 to July 2039. After managing and operating the metro for 30 years, the Seoul Metro Line 9 Corporation will hand over the licenses and the right to manage and operate. Summary of the Seoul Metro Line 9 project is as follows.

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Table Ⅲ-18 Summary of the Seoul Metro Line 9 Project

Category Description

Project Name •PPP Project of Seoul Metro Line 9 Phase 1

Project Operator •Seoul Metro Line 9 Corporation

•Before restructuring: Hyundai Rotem, Hyundai Construction and others Investor (construction investors and financial investors) •After restructuring: financial investor (infrastructure fund)

Contractor •Hyundai Construction Consortium

The Authorities in •Seoul Metropolitan City Charge

PPP Scheme •BTO (Build-Transfer-Operate)

•Total length 27 km, 25 stations Seoul City: Substructure (civil work) construction Project Scope Private: Superstructure (system, train, design, track) Construction and operation

Concession •May 2005 Signing of the initial concession agreement Agreement •October 2013 Signing of the revised concession agreement

Construction Period •June 2006 ~ July 2009 (38 months)

•July 2009 ~ July 2039 (30 years) Operation Period (Start date of operation: July 24th , 2009)

Total Investment •KRW 1,167.7 billion (based on the initial concession agreement) Cost (Private: KRW 675.8 billion, Construction subsidy: KRW 492.2 billion) •MRG Mechanism and Refund of excess revenue (based on the initial concession agreement) - Providing subsidy up to 90% (1st -5th year), 80% (6th -10th year), and 70% (11th -15th year) of estimated operating revenue - Refunding excess revenue in excess of 110% (1st -5th year), 120% Risk Sharing (6th -11th year), and 130% (11th -15th year) of estimated operating System revenue •SCS (based on the revised concession agreement) - Providing subsidy up to the minimum operation cost (total amount of depreciation of the right to operate and manage, revenue from the right to operate and manage, and operating and managing cost)

Source: Jin-Young, Park, etc., 2013, The effect and implication of Korea’s Railway PPP Projects, Monthly Transportation

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4.2.2. Background of the Seoul Metro Line 9 Project

The Seoul metropolitan area had grown rapidly, with an increase rate of more than 600% from 1950s to the 1990s. To meet the drastic increase in traffic demand in Seoul, a new metro line was under construction in accordance with the 2nd Seoul urban metro construction plan in 1991, however, the necessity of establishing the 3rd urban metro construction plan was being brought up. Accordingly, the government announced the 3rd Seoul urban metro construction plan in 1993, with the aim of increasing the share of subway transportation to 75%, which was 32%. The 3rd plan included new construction of metro lines 9 to 12 and extension of metro line 3.

The 3rd Seoul urban metro construction plan was originally planned to be started in 1998, but was delayed due the reduction of the government budget followed by the Asian financial crisis in 1997. To make matters worse, the mayor of Seoul who was newly inaugurated in 1998 instructed to reassess the entire metro line included in the 3rd metro plan, resulting in indefinite delay. As a result, the plans were changed or cancelled except for the construction of metro line 9 and the extension of metro line 3.

After completing the feasibility analysis of the Seoul Metro Line 9 project, the MOSF decided to build the superstructure with government budget and the substructure with PPP investment using BTO model.30) The sections of each stage of the Seoul Metro Line 9 project including the PPP section are as follows:

Figure Ⅲ-14 Map of the Seoul Metro Line 9

Source: Joon-Ho, Koh, 2015, Seoul Metro Line 9 Construction Introducing Express Train System, Seoul Policy Archive

30) Joon-Ho, Koh, 2015, Seoul Metro Line 9 Construction Introducing Express Train System, Seoul Policy Archive

70 Ⅲ. A Case Study on South Korea's PPP

4.2.3. Progress of the Seoul Metro Line 9 Project

The Seoul metro Line 9 project is the first privately funded urban metro project in Korea whose upper structure was designated as a PPP project in March 2001 by the MOSF. In April 2002, a consortium composed of six companies including Ultra Construction (hereinafter referred to as the “Ultra Consortium") solely submitted a proposal for the project, and was singled out as a preferred bidder by the local government. However, the Ultra Consortium failed to submit supplementary data about investors, capital procurement scheme, total construction cost, and operating structure during more than 100 negotiations from July 2002 to December 2002, and lost the status of the preferred bidder in April 2003.

The authority in charge made a bidding again in May 2003. The Hyundai Rotem and other 14 companies (hereinafter "Lotem Consortium") and Kukdong E&C and other 5 companies (hereinafter referred to as "Kukdong Consortium") submitted the proposal, and among them the Lotem Consortium was selected as a 2nd preferred bidder. Lotem Consortium established the Seoul Metro Line 9 Corporation for the purpose of running the service of metro line 9, and, pursuant to the PPP Act, its implementing ordinances, and the basic plan for PPP Projects, the Seoul metro Line 9 Corporation was selected as a project operator after signing a concession agreement with the government in May 2005. The project operator completed the construction of super structure of the Seoul Metro Line 9 with its equity and debt in July 2009, and implemented refinancing in October 2013. The progress of the Seoul Metro Line 9 project is as follows.

Table Ⅲ-19 Progress of the Seoul Metro Line 9 Project

Date Progress Sep. 2000 Approval of the construction plan for Line 9 Phase 1 (MOLIT) Mar. 2001 Line 9 PPP project approval (MOSF) Oct. 2001 Line 9 PPP project bidding announcement May 2002 The Ultra Consortium (project proposer) was chosen as the preferred bidder Apr. 2003 Negotiation between Ultra Consortium and Seoul City failed May 2003 2nd PPP project bidding announcement Nov. 2003 Hyundai Rotem Consortium was chosen as the preferred bidder May 2005 Signing of the concession agreement and appointment of the project operator Approval of the implementation plan and beginning construction of the Line 9 upper Jun. 2006 structure Jul. 2009 Seoul Metro Line 9 opened Oct. 2013 Decision for project restructuring

Source: World Bank, 2013, Case study of PPP projects in Korea, World Bank

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4.2.4. Capital Structure of the Seoul Metro Line 9 Project

The capital structure of the Seoul Metro Line 9 project is as follows.

Figure Ⅲ-15 Capital Structure of the Seoul Metro Line 9 Project

Source: Own Contest

To construct and operate the Seoul metro line 9, the SPC, Seoul Metro Line 9 Corporation, was established. Eight construction investors represented by Hyundai Rotem contributed 51% of its equity of SPC and six financial investors represented by Macquarie's Korea Road Infrastructure Fund contributed 49% of its equity.

4.2.5. Project Concession Agreement

1) Total Project Cost and Total Investment Cost

The total project cost of the Seoul Metro Line 9 project amounts to KRW 899.5 billion (Jan 2003 constant price, VAT excluded), and total investment cost amounts to KRW 1,167.7 billion (based on the initial concession agreement). The details of total project cost and total investment cost are as follows:

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Table Ⅲ-20 Details of Total Project Cost and Total Investment Cost

Category Amount (billion)

Design 18.3

Construction 823.2

Total Project Cost Incidental 29.8 KRW 899.5 billion Operating Equipment 2.5

Operational Readiness 25.7

Total Project Cost 899.5

Total Project Cost 899.5

Total Investment Cost Escalating Cost 230.3 KRW 1,167.7 billion Interest During Construction 37.9

Total Investment Cost 1,167.7

Source: Writing based on the report of PPP project of Seoul Metro Line 9 Phase 1 (Superstructure)

Figure Ⅲ-16 Proportion of the Total Project Cost

Source: Writing based on the report of PPP project of Seoul Metro Line 9 Phase 1 (Superstructure)

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2) Operating Expenses

The operating expenses based on the initial concession agreement in 2003 are as follows:

Table Ⅲ-21 Estimated Operating Expenses

Year Expense Year Expense Year Expense Year Expense

2009 43.2 2017 75.1 2025 101.2 2033 124.1

2010 56.0 2018 116.9 2026 106.1 2034 81.1

2011 59.1 2019 118.3 2027 85.6 2035 82.2

2012 61.0 2020 77.2 2028 136.6 2036 85.5

2013 63.6 2021 77.4 2029 136.5 2037 82.7

2014 71.6 2022 80.6 2030 155.8 2038 79.4

2015 73.4 2023 111.2 2031 175.8 2039 19.3

2016 75.1 2024 109.2 2032 121.9 2040 -

Total Estimated Operating Expenses for 30 years: KRW 2,842.7 billion

Source: Writing based on the report of PPP project of Seoul Metro Line 9 Phase 1 (Superstructure) 1) Based on 2 January 2003 constant price 2) Estimated operating expenses exclude applicable taxes

3) Subsidies

According to the concession agreement, the authority in charge provided a construction subsidy of KRW 420 billion, equivalent to 46.7% of the total project cost. In addition, the authority in charge also promised to provide additional vehicles in kind during the operation period of Seoul metro line 9 and to conserve 50% of the fare loss for the 5 years.31) The estimated cash outflows and inflows to calculate the subsidy are as follows.

31) KEXIM Bank, 2015, Enhancing Public-Private Partnership for Urban Metro Projects in Ho Chi Minh City, KEXIM Bank

74 Ⅲ. A Case Study on South Korea's PPP

Table Ⅲ-22 Estimated Cash Inflows and Outflows

(Unit: KRW billion) Category Amount 1. Total Project Cost 899.5 2. Operating Expenses 3,305.7 Total Cash Outflows (1+2) 4,205.2 Discounted Total Cash Outflows 1,138.3 3. Revenue from Operations 4,525.9 4. Revenue from Affiliated Business 469.0 5. Revenue from Subsidiary Business - 6. Government Subsidy 441.2 - Construction Subsidy 420.0 - Financial Aid 21.2 Total Cash Inflows (3+4+5+6) 5,436.1 Discounted Total Cash Inflows 1,138.3

Source: Writing based on the report of PPP project of Seoul Metro Line 9 Phase 1 (Superstructure)

4) Project Profitability

At the first concession agreement, the authority in charge and project operator agreed on 8.9% of after-tax internal rate of return (IRR).

5) MRG and Refund of Excess Return

The concession agreement included the clause of the MRG and refund of excess return. According to the clause, the Seoul Metropolitan City is obliged to conserve the difference between the actual revenue and estimated revenue determined at the concession agreement, and has the right to refund the excess revenue.

Table Ⅲ-23 MRG and Refund of Excess Revenue Condition

Category Term Base (%) 1st ­ 5th Year 90% Minimum Revenue Guarantee 6th ­ 10th Year 80% (MRG) 11th ­ 15th Year 70% *Not applicable if the revenue is below 50% 1st ­ 5th Year 110% Refund of Excess Revenue 6th ­ 10th Year 120% 11th ­ 15th Year 130%

Source: Writing based on the report of PPP project of Seoul Metro Line 9 Phase 1 (Superstructure)

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6) Early Termination Payment

The clause of early termination payment was included in the concession agreement as one of the risk sharing systems. According to the clause of early termination payment, Seoul Metro Line 9 Corporation can terminate a concession agreement with the Seoul Metropolitan City and ask for a payment at the time of termination, if the facility cannot be maintained due to the reasons prescribed by the law and regulation.32)

7) Operation and Management

The Seoul Metropolitan Government owns the ownership of the subway facilities and manages the project operators. However the concession right to manage and operate is owned by Seoul Metro Line 9 Corporation, the SPC established to promote the Seoul metro line 9. Seoul Metro Line 9 Corporation consigns the maintenance and operation service to Seoul Line 9 Operation Co. Ltd., and Seoul Line 9 Operation Co. Ltd., sub-consigned the car maintenance service to Maintrans Co. Ltd.. The contract of the maintenance and operation would valid for ten years from the first date of the operation.

Figure Ⅲ-17 Structure of Seoul Metro Line 9 Operation

Source: Young-Soo, Lee, 2015, Report of Seoul Metro Line 9 Public Policy, Institute for People

32) KEXIM Bank, 2015, Enhancing Public-Private Partnership for Urban Metro Projects in Ho Chi Minh City, KEXIM Bank

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8) Fare Decision Process

As the Seoul Metro Line 9 project was implemented under the BTO model, the project operator would redeem the investment cost by the fare collected from passengers. The project operator can freely determine the fare based on the fare matrix agreed at the concession agreement. The agreed fare matrix is as follows;

Table Ⅲ-24 Fare Table per Concession Agreement

Year ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18

Constant Base 1,00 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Fare (Won) 0

Real Fare 3.41 3.41 3.41 3.41 3.41 3.41 3.41 3.41 3.41 3.41 Increase (%)

Constant Fare 1,264 1,307 1,352 1,398 1,446 1,495 1,546 1,599 1,653 1,710 (Won)

Current Fare 1,539 1,643 1,766 1,858 1,979 2,108 2,245 2,391 2,547 2,713 (Won)

Year ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 ‘27 ‘28

Constant Base 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Fare (Won)

Real Fare 1.49 1.49 1.49 1.49 1.49 - - - - - Increase (%)

Constant Fare 1,735 1,761 1,787 1,814 1,840 1,840 1,840 1,840 1,840 1,840 (Won)

Current Fare 2,836 2,964 3,099 3,239 3,386 3,487 3,592 3,700 3,811 3,925 (Won)

Year ‘29 ‘30 ‘31 ‘32 ‘33 ‘34 ‘35 ‘36 ‘37 ‘38

Constant Base 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Fare (Won)

Real Fare ------Increase (%)

Constant Fare 1,840 1,840 1,840 1,840 1,840 1,840 1,840 1,840 1,840 1,840 (Won)

Current Fare 4,043 4,164 4,289 4,417 4,550 4,687 4,827 4,972 5,121 5,275 (Won)

Source: Writing based on the report of PPP project of Seoul Metro Line 9 Phase 1 (Superstructure) * 3.0% (Average of past 10 years was used for CAGR of Consumer Price Index since 2013)

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4.2.6. Financing and Restructuring

1) Capital Structure Based on the Initial Concession Agreement

According to the initial concession agreement in 2005, the total investment cost of Seoul Metro Line 9 project was KRW 3,569.9 billion, and the total investment cost of the superstructure constructed under the PPP scheme was KRW 1,167.7 billion. Of the total investment cost, the government paid KRW 492.2 billion as a construction subsidy, and the private investors paid remaining KRW 675.8 billion, in the form of 25% of equity (KRW 167.1 billion), 64% of senior debt (KRW 436 billion), and 11% of subordinated debt (KRW 72.7 billion).

As the actual construction period was shortened by three months from initially estimated 42 months, the total investment cost was reduced from KRW 1,167.7 billion to KRW 1,136.7 billion. Excluding the construction subsidy of KRW 466.8 billion, the total private investment cost of KRW 669.9 billion was funded by equity of KRW 167.1 billion, senior debt of KRW 436 billion, and subordinated debt of KRW 666.8 billion. The capital structure of Seoul Metro Line 9 project is as follows:

Table Ⅲ-25 Initial Capital Structure of Seoul Metro Line 9 Project

(Unit: KRW Billion) Initial Concession Category Completion (2009) Agreement (2005)

Total Investment Cost 1,167.7 1,136.7

Construction Subsidy 492.2 466.8

Total Private Investment 675.8 669.9

Equity 167.1 (25%) 167.1 (25%)

Financing Senior 436.0 (64%) 436.0 (65%)

Sub 72.7 (11%) 66.8 (10%)

Sources: Writing based on the initial concession agreement and audit report on the Seoul Metro Line 9 project

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2) Capital Structure According to the Restructuring

As a restructuring of the project was decided, the authority in charge paid KRW 746.4 billion, the remaining undepreciated balance of the right to manage and operate, to the existing shareholders and called for new shareholders and creditors. After restructuring, equity decreased from KRW 167.1 billion to KRW 74.6 billion through paid-in capital decrease, and subordinated debt was fully repaid. The commitment amount of senior debt increased from KRW 436.0 billion to KRW 585.8 billion, but interest rates decreased from an average of 7% to an average of 4% to 5%. The capital structure of the Seoul Metro Line 9 project after the restructuring is as follows.

Table Ⅲ-26 Capital Structure of the Seoul Metro Line 9 Project After Restructuring

(Unit: KRW Billion) Category Before Restructuring After Restructuring

Total Investment Cost 1,167.7

Construction Subsidy 492.2 746.4

Total Private Investment 675.8

Equity 167.1 (25%) 74.6

Senior 436.0 (64%) 585.8 Financing Sub 72.7 (11%) Subordinated debt repayment

Short-term Debt - 47.0

Sources: Writing based on the initial concession agreement and audit report on the Seoul Metro Line 9 project

Under the initial concession agreement, construction investors and financial investors participated in the business as shareholders at a ratio of 51 to 49, but after the restructuring of the business, the infrastructure private funds became the shareholders of the project. As for the debt, the subordinated was fully redeemed, and the senior was replaced by three fixed-rate and two floating-rate senior debt. What is worth noting is some of the fixed-rate senior debt was raised by the institutional investors purchasing loans from public offering funds. Composition of equity and debt of Seoul Metro Line 9 project according to the restructuring is as follows.

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Table Ⅲ-27 Composition of Equity and Debt of the Seoul Metro Line 9 Project

(Unit: KRW Billion) Number of Investment Category Weight Shares Amount

Investment Trust 7,464,000 37.3 billion 50.0% Company 1 Financial Investors Equity Investment Trust 7,464,000 37.3 billion 50.0% Company 2

Total 14,928,000 74.6 billion 100.0%

Annual Interest Loan Category Weight Rate Amount

- 4.21% Fixed Rate I - 4.31% 100 billion 17.1% (Public Offering) - 4.42% - 4.52%

Fixed Rate II 4.90% 115.4 billion 19.7% Senior Debt Fixed Rate III 5.20% 123.4 billion 21.1%

Variable Rate I Initially 3.34% 161 billion 27.4%

Variable Rate II Initially 8.71% 86 billion 14.7%

Total - 585.8 billion 100.0%

Note 1) Debt based on the end of 2015 Source: Writing based on the audit report or the Seoul Metro Line 9 Project

4.2.7. Characteristics of the Seoul Metro Line 9 Project

1) Dividing Project into Superstructure and Substructure

PPP projects in railway sector need relatively higher total investment cost compared to other types of PPP projects such as roads and ports. However, the high publicness of railway business makes it difficult to meet the expected return of private investors only by operating revenue from facility users. Considering this characteristic of PPP projects in the railway sector, Seoul Metro Line 9 project divided the construction into the superstructure and substructure.

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More costly portion of the construction, substructure (civil work) was taken by the Seoul Metropolitan Government, the authority in charge, and the superstructure construction and operation (system, car, construction, orbits) was carried out by the private sectors. As the private investors took charge of the less costly superstructure construction, it could save the total investment cost and was able to negotiate 8.6 % of the project return with the authority in charge through the initial concession agreement.

2) Securing Business by Accurately Predicting Demand

From the opening year of Seoul Metro Line 9, estimated demand compared to actual demand maintained above 80%. In 2013, the fifth year of the opening, the number of passengers increased to the extent that actual demand exceeded forecast demand, proving that basic data, policies and environment are correctly reflected in the demand forecast. Since the authority in charge and project operator had thoroughly verified the estimated demand before signing the initial concession agreement, they could calculate accurate demand and ensure business value. When the project was restructured, the guaranteed business value attracted more financial investors, such as financial institution, enabling the project operator to procure capital on better terms.

Table Ⅲ-28 Actual Number of Customers Compared to Agreed Projected Demand

(Unit: persons/day) Category 2009 2010 2011 2012 2013 2009 2010

Agreed Projected 165,625 192,952 220,279 226,903 236,773 243,196 254,687 Demand

Actual Number of 138,012 172,840 194,630 222,320 241,848 253,196 256,730 Customers

Ratio (%) 83.3% 89.6% 88.4% 98.0% 102.1% 104.1% 101.0%

Note 1) The average number of customers per day exclude the number of transfer passengers Source: Writing based on the statistics on boarding and leaving the Seoul Metro Line 9 by year

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3) Utilizing Private Equity Infrastructure Fund

In Korea, PPP projects was mainly financed by loans from financial institutions. Even when using funds or bonds utilizing securities, financing was carried out by private equity scheme, preventing small investors to participate.33) On the other hand, in the case of Seoul Metro Line 9 project, not only private funds but also public offering funds were used.

Institutional investors participated in private equity funds by purchasing securities, and the private equity fund management company invested in the equity of this project. In the case of public offering fund, individual investors as well as institutional investors participated in funds through security purchase, and the public offering fund management company lent money to the SPC. The capital structure of the Seoul Metro Line 9 project, according to the restructuring is as follows.

Figure Ⅲ-18 Structure of the Seoul Metro Line 9 Project after Restructuring

Source: Jun-Kyung Kim, 2014, Long-term Investment Activation Plan for PPP projects, KDI

33) Jun-Kyung Kim, 2014, Long-term Investment Activation Plan for PPP projects, KDI

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4.3. Incheon Bridge

4.3.1. Summary of the Incheon Bridge Project

The Incheon Bridge project is to construct a marine bridge connecting the southern part of Incheon and Island where the Incheon Airport is located. After its opening in 2009, the Incheon Bridge has dramatically improved the connectivity between Yeongjongdo Island and southern part of Incheon, and successfully played its role as an alternative of the Yeongjong Bridge, the first bridge on Yeongjongdo Island. As a BTO model, the proprietorial rights of the Incheon Bridge transferred to the government after its construction, and the right to manage and operate was given to the Incheon Bridge Corporation, the project operator, for 30 years from October 2009 to October 2039.

Table Ⅲ-29 Summary of the Incheon Bridge Project

Category Description

Project Name •The PPP Project of Incheon Bridge

Project Operator •Incheon Bridge Corporation

Investor •AMEC, Incheon Metropolitan City, and financial investors

Contractor •Samsung joint venture (Samsung Construction and 6 others)

The Authorities in •The Korean Government (Ministry of Land, Infrastructure and Transport, Charge Government Authority Agency: Korea Expressway Corporation)

PPP Scheme •BTO (Build-Transfer-Operate)

•Total length 21.38 km - Private: 12.34km (Two-way, 6-lane expressway, bridge width 31.4m, Project Scope longest span 800m) - Connected Section: 9.04km

Concession •June 2003 Signing of the concession agreement Agreement •May 2005 Signing of the revised concession agreement

Construction Period •June 2005 ~ October 2009 (52 months)

•October 2009 ~ October 2039 (30 years) Operation Period (Start date of operation: October 24th, 2009)

•KRW 1,665.6 billion Total Investment (Private: KRW 897.3 billion, construction subsidy: KRW 768.3 billion, based on Cost the revised concession agreement)

•MRG mechanism and refund of excess revenue - Providing subsidy up to 80% (15 years after the operation starts) of Risk Sharing System estimated operating revenue - Refunding excess revenue in excess of 120% (15 years after the operation starts) of estimated operating revenue

Source: Korea Investors Service Inc, 2011, Feasibility assessment report for the Incheon Bridge, Korea Investors Service Inc,

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The Incheon Bridge Corporation was established in December 1999 to construct and run toll expressway business, and selected as a project operator of the Incheon Bridge project in June 2003, after contracting concession agreement with the government, pursuant to the PPP Act, its implementing ordinances, and the basic plan for PPP Projects. The Incheon Bridge Corporation completed the construction of the Incheon Bridge with its equity and debt in October 2009. After managing and operating the bridge for 30 years, the Incheon Bridge Corporation plans to hand over the license and the right to manage and operate the Incheon Bridge project. The summary of the Incheon Bridge project is as follows:

4.3.2. Background of the Incheon Bridge Project

As one of the main SOC of the Incheon Free Economic Zone, the Incheon Bridge makes connection with the second Gyeongin Expressway, third Gyeongin Expressway, the Seoul Ring Expressway, the Gangnam Circulation Expressway, and the Planned Anyang-Seongnam Expressway. Therefore, the Incheon Bridge project was expected to accommodate the demand for the access to Yeongjongdo Island and Incheon Bridge in the southern part of the capital area.

Since Korea was undergoing the Asian financial crisis when this project was first planned in 1998, the Korean government decided to implement this project using private capital rather than using public capital, so AMEC Co. which specialized in project management proposed and led the project. The map of the Incheon Bridge constructed by the private sector is as follows:

Figure Ⅲ-19 The map of the Incheon bridge constructed by the private sector

Source: MKIF homepage

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4.3.3. Progress of the Incheon Bridge Project

Incheon metropolitan city and ARGA (currently AMEC) Co. which specialized in project management in Canada, established KODA Development Co. in December 1999 to propose and implement the Incheon Bridge project. KODA Development Co. submitted the Incheon Bridge PPP project proposal to the government and was designated as a preferred bidder after approval by a deliberation committee of PPP projects.

In June 2003, KODA Development Co. signed initial concession agreement with the authority in charge to agree the design, contractor, and total cost of the Incheon Bridge project, and in May 2005, Samsung JV was selected to design and construct the Incheon Bridge through a public tender. KODA Development Co. then estimated the total cost of the project based on the design and construction cost calculated by Samsung JV, and confirmed the key components such as total cost, operating cost, the MRG, the rate of return, and government construction contribution through consultation with the authority in charge, which went through revision after the initial concession agreement. The main construction of the PPP section began in July 2005 and completed in October 2009, making the whole section to be in service. The progress of the Incheon Bridge project is as follows:

Table Ⅲ-30 Progress of the Incheon Bridge Project

Date Progress Dec. 1999 Establishment of KODA Development Co. (AMEC, Incheon Metropolitan City Joint Venture) Feb. 2000 Submission of PPP project proposal by Canada AGRA Co. May 2000 Acquisition of Canada AGRA Co. by British AMEC Co. Mar. 2001 Completion of the deliberation of the project proposal on Incheon 2nd Bridge Jul. 2001 Designation of preferred negotiation partner for PPP Jun. 2003 Designation of concessionaire & signing of the concession agreement May 2004 Selection of design and construction contractor (Samsung JV) Jun. 2004 Order for implementing the 2ndbridge’sconnectedsectorproject(Publicsector,MOLIT) Oct. 2004 Order for implementing pre-construction Nov. 2004 Designating Incheon 2nd bridge as the expressway 110 (Second Gyeongin Expressway) May 2005 Signing of the ARCA Jun. 2005 Confirming official name as the Incheon Bridge, and holding the groundbreaking ceremony Jul. 2005 Beginning construction (private sector) Dec. 2005 Contract, and beginning the construction (public sector) Aug. 2009 Completion of the project (public sector) Oct. 2009 Completion of the Project (private sector), and both public and Private sector are in service

Source: Kyung-Won, Cho, 2013, Historical Background of the Incheon Bridge Project, Yonshin Engineering Institution

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4.3.4. Financing and Capital Structure of the Incheon Bridge Project

According to the revised concession agreement in 2005, when all relevant conditions were agreed, the total investment cost was KRW 1,665.6 billion. The government provided construction subsidy which amounts to KRW 768.3 billion, and private investors funded the remaining KRW 897.3 billion. The project operator pledged to borrow KRW 897.3 billion, in the form of 18.3% of equity (KRW 164.6 billion), 64.5% of senior debt (KRW 164.6 billion), and 17.2% of subordinated debt (KRW 154.7 billion).

As the actual construction period was shortened by 19 months with the implementation of the Fast-Track method, the total investment cost was reduced from KRW 1,665.6 billion to KRW 1,597.6 billion. Excluding the construction subsidy of KRW 733.5 billion, the total private investment cost of KRW 864.1 billion was funded by equity of KRW 164.6 billion, senior debt of KRW 544.8 billion, and subordinated debt of KRW 154.7 billion. The capital structure and equity and debt composition of the Incheon Bridge project is as follows:

Table Ⅲ-31 Capital Structure of the Incheon Bridge Project

(Unit: KRW Billion) Category ARCA (2005) Completion (2009)

Total Investment Cost 1,665.6 1,597.6

Construction Subsidy 768.3 733.5

Total Private Investment 897.3 864.1

Equity 164.6 (18.3%) 164.6 (19%)

Financing Senior 578.0 (64.5%) 544.8 (63%)

Sub 154.7 (17.2%) 154.7 (18%)

Sources: Writing based on the aamended and restated concession agreement on the project of Incheon Bridge, and the audit report on the Incheon Bridge Corporation

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Table Ⅲ-32 The Composition of Equity and Debt of the Incheon Bridge Project

Investment Category Number of Shares Weight Amount AMEC Finance 7,581,568 37.9 billion 23.03 % Asia Ltd

Incheon 1,966,460 9.8 billion 5.93 % Metropolitan City

KB Bank 4,935,343 24.7 billion 14.99 % Equity Industrial Bank 4,935,343 24.7 billion 14.99 % of Korea

Private Infrastructure 13,505,520 67.5 billion 41.02 % Investment Korea

Total 32,924,234 164.6 billion 100.00 % Loan Category Annual Interest Rate Weight Amount - Construction Period: 8.0 % Fixed Senior 544.8 billion 77.9 % - Operation Period: AA- + 1.9%

Debt - Construction Period: 12.0 % Fixed Sub 154.7 billion 22.1 % - Operation Period: AA- + 6.0%

Total - 585.8 billion 100.0%

Note 1) based on loan agreement between the project operators and creditors on July 13, 2005 Source: Writing based on the aamended and restated concession agreement on the project of Incheon Bridge, and the audit report on the Incheon Bridge Corporation

4.3.5. Characteristics of the Incheon Bridge Project

1) Financial Investor Initiative

In the case of previous PPP projects, construction companies participated in projects as construction investors and led projects by establishing consortiums. However, the Incheon Bridge project encouraged a participation of financial investors, by excluding construction companies from equity investment and instead letting a professional business manager develop a competitive project implementation plan. As financial investors took an initiative of the project, the project operator could reasonably estimate the expenses of design and construction, which resulted in successful financing.

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2) Project Progress by Phase

Unlike other projects, the Incheon Bridge project could resolve possible conflicts among stakeholders by signing concession agreement stage by stage. The Incheon Bridge project first signed the concession agreement, and then determined the construction company through public tender and calculated the cost of design and construction. Public tender made it possible to secure transparency of the total settlement process, resolve conflicts between the project operator and the construction company, and save about KRW 270 billion in construction expenses.

3) Securing Financial Resources

The project operator successfully completed the financing structure by contracting reasonable loan agreement through a strictly validated demand estimation. Both senior and subordinated debts used variable interest rate linked to the market interest rate, enabling the financial structure to follow the market condition and reducing financial cost. At the end of 2015, the Incheon Bridge project’s interest rate for senior debt is 4.05% and for the subordinated is 8.15%, which is lower than that of the Incheon Airport Expressway project, 4.3% for senior debt (fixed rate) and 13.5% for subordinated.

4.4. Ever-Line

4.4.1. Overview of the Ever-Line Project

The Yongin Ever-Line project (hereinafter “Ever-Line”), the light rail line connecting the eastern and western regions of Yongin City, was planned to improve the traffic condition deteriorated by the population growth and pursue balanced development throughout the city. After the completion under the BTO scheme, the ownership right of Ever-Line was transferred to the government, and Yongin Light Railway Co., Ltd., a business operator, was granted the right to manage and operate for 30 years from April 2013.

Yongin Rapid Transit Corporation, the initial project operator of the Ever-Line PPP project, was established in April 2004 to run the light rail business and selected as a project operator in July 2004, after signing concession agreement with the government pursuant to the PPP Act, its implementing ordinances, and the basic plan for PPP Projects. The Yongin Rapid Transit Corporation nearly constructed Ever-Line with its equity and debt; however, it liquidated its investment in June 2012 after a conflict with the Yongin city government regarding the completion confirmation issue. The new project operator, Yongin Ever-Line Co., Ltd. completed

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the construction in April 2013, and planned to hand over the license and the right to manage and operate, after managing and operating the Ever-Line for 30 years. The summary of the Ever-Line project is as follows:

Table Ⅲ-33 Overview of the Ever-Line Project

Category Description

Project Name • The PPP Project of Yongin Ever-Line

•Before the change of operator: Yongin Rapid Transit Corporation Project Operator •After the change of operator: Yongin Ever-Line Co., Ltd.

• Before restructuring: BTIH, Daelim Industrial, and others (construction investors Investor and financial investors) • After restructuring: financial investor (Consus Asset Management)

Contractor • Canada Bombardier Consortium

The Authorities in •Yongin City Charge

PPP Scheme • BTO (Build-Transfer-Operate)

Project Scope • Total length 18.4 km (15 stations, 1 Vehicle Base)

• July 2004 Signing of the initial concession agreement Concession • July 2009 Signing of the 1st revised concession agreement Agreement • June 2012 Signing of the 2nd revised concession agreement (change of project operator and project restructuring)

Construction • December 2005 ~ April 2013 (89 months) Period

• April 2013 ~ April 2043 (30 years) Operation Period (Start date of operation: April 26th, 2013)

Total Investment • KRW 1,012.7 billion (based on the initial concession agreement) Cost (Private: KRW 635.4 billion, Public: KRW 377.3 billion)

• MRG mechanism and refund of excess revenue (based on the initial concession agreement) - Providing subsidy up to 90% (30 years after the operation starts) of estimated operating revenue - Refunding excess revenue in excess of 110% (30 years after the operation starts) of estimated operating revenue

•MRG mechanism and refund of excess revenue (based on the revised concession Risk Sharing agreement in July 2009) System - Providing subsidy up to 79.9% (30 years after the operation starts) of estimated operating revenue - Refunding excess revenue in excess of 110% (30 years after the operation starts) of estimated operating revenue

•SCS (based on the revised concession agreement in June 2012) - Providing subsidy up to the minimum operation cost (total amount of depreciation of the right to operate and manage, revenue from the right to operate and manage, and operating and managing cost)

Source: MOLIT, 2014, Activation Plan for PPP scheme on railway business field, MOLIT

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4.4.2. Background of the Ever-Line Project

The Ever-Line project was planned to effectively resolve the increasing transportation needs of Yongin City and to provide timely service to the citizens of Yongin. In addition, it was expected to revitalize the regional economy and contribute to the balanced development of Yongin City by improving accessibility thought out the city, including major tourist sites such as Folk Village, Everland, golf courses, and ski resorts.

As the first case of the light rail construction project in Korea, the Ever-Line PPP project was implemented under BTO scheme,34) and was promoted under the initiative of a consortium led by Canadian Bombardier (hereinafter referred to as the “Bombardier Consortium”). The map of the Ever-Line is as follows.

Figure Ⅲ-20 The Map of the Ever-Line

Source: Official homepage of Ever-Line

4.4.3. Progress of the Ever-Line Project

The basic PPP plan for Ever-Line construction and operation was first reviewed in 1996, but the approval of the project was once rejected by the Ministry of Construction and Transportation (now MOLIT) because of difficulties in securing financial resources. The project was re-designated as a PPP project in December 1999, since the central government encouraged PPP projects nationwide. In July 2002, the authority in charge took the PPP project proposal from private investors, and designated the Bombardier Consortium as the preferred bidder in September. In April 2004, the Bombardier Consortium established Yongin Rapid

34) Central Government Employee Training Centre, 2011, Study of Policy Administration development: Yongin light rail, Central Government Employee Training Centre

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Transit Corporation to construct and run the Ever-Line, and signed initial concession agreement with the authority in charge in September. The Ever-Line project was originally planned to be completed in July 2009 after the commencement of construction in November 2005. However, unexpected changes in transportation conditions of Yongin city in 2009 and the legal conflict between the project operator and the authority in charge in 2011 caused the project to delay. By changing the project operator and restructuring the project, the Ever-Line could start its operation in April 2013. The detailed progress of the Ever-Line project is as follows.

Table Ⅲ-34 Progress of the Ever-Line Project

Date Progress

Apr 1996 Basic plan for Ever Line construction and operation Dec 1999 Re-approval of the PPP scheme Dec 2001 Notification of the Ever Line project under PPP scheme Jul 2002 Submission of the PPP project proposal Sep 2002 Designation of the preferred bidder Mar 2004 Approval by the PPP Review Committee Jul 2004 Designation of the project operator, and signing of the concession agreement Nov 2005 Approval of the detailed construction plan Dec 2005 Beginning of the construction May 2009 Revision of the concession agreement ­ deletion of damage compensation provisions Project operator requested the termination of the agreement as the project was Jan 2011 delayed. Feb 2011 Project operator filed a mediation in the Court of International Arbitration The authority in charge notified the termination of the agreement attributable to the Mar 2011 project operator Sep 2011 Decision by the Court of International Arbitration (Authority in charge lost the suit) Oct 2011 Proposal of a resolution (Authority in charge to Project Operator) Dec 2011 Agreed on instalment payment of the settlement. Dec 2011 Negotiation for the normalization of the project ­ restructuring Apr 2012 Signed the memorandum of understanding (“MOU”) for the normalization of the project Revision of the concession agreement ­ change of the project operator and Jun 2012 restructuring Apr 2013 Opening of the Ever Line Source: Writing based on the official homepage of Yongin Ever-Line Co., Ltd.

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4.4.4. Capital Structure of the Ever-Line Project

1) Capital Structure at the Initial Concession Agreement

At the initial concession agreement, the total investment cost of the Ever-Line project was KRW 1,012.7 billion. Of the total investment cost, KRW 377.3 billion was funded as construction subsidy and KRW 635.4 billion was invested with a proportion of 61% of debt and 39% of equity. For the equity, construction investors participated 33% of its shares, and financial investors participated 67% of its shares.

Table Ⅲ-35 Capital Structure of the Ever Line Project

(Unit: KRW Billion) Category Initial Concession Agreement (2005)

Total Investment Cost 1,665.6

Construction Subsidy 768.3

Total Private Investment 897.3

Equity 164.6 (18.3%)

Financing Senior 578.0 (64.5%)

Sub 154.7 (17.2%)

Sources: Writing based on the Amended and Restated Concession Agreement on the project of Incheon Bridge, and the Audit report on the Incheon Bridge Corporation

2) Capital Structure after the restructuring

Since the change of the project operator and restructuring of the project in 2012, the financing structure has changed to 90% of debts and 10% of equity. The portion of debts increased by 29%P compared to the 61% at the initial concession agreement. For the changed equity, financial investors participated at a rate of 100%, which was contrast to the 67% participation of construction investors. By restructuring the project, the interest rate could be lowered compared to that of the initial concession agreement, resulting in the reduction of financial cost during the operation period.35)

35) KEXIM Bank, 2015, Enhancing Public-Private Partnership for Urban Metro Projects in Ho Chi Minh City, KEXIM Bank

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Table Ⅲ-36 Comparison of PPP Schemes

(Unit: KRW Billion) Category Initial Concession Agreement (2005) Restructuring (2012)

Capital Structure Debt:61% Debt:90% Ratio Equity:39% Equity:10%

Construction Investors: 67% Equity Investors Financial Investors: 100% Financial Investors: 33%

Senior A: CD+2. 70% Senior B: 8.90% Senior A: 4.53% Senior C: CD+2.10% Interest Rate Senior B: 5-Year Gov’t Senior D: 8.30% of Debt Bond + 7.30% Mid-Tranche: 14.95% Subordinated: 6.65% Mid-Tranche A: 12.50% Subordinated: 15.00%

Sources: Gun-Ho, Jung, 2014, Research on Stimulating Railway PPP Projects, MOLIT (re-writing)

4.4.5. Characteristics of the Ever-Line Project

1) Failure to Forecast Accurate Demand

For the case of the Ever-Line Project, accuracy and reliability of projected demand were considerably low, which caused several issues in implementing the project. An average of 161,000 people per day was expected to ride the Ever-Line in 2011 according to the projected demand in the initial concession agreement (2004), but it decreased to 65,000 people per day when re-estimated in 2010. The increased potential of financial burden from the MRG payments caused a conflict between Yongin City and Yongin Rapid Transit Corporation, resulting in the delay of the project until the MRG is replaced by SCS through restructuring. After the Ever-Line commenced its service, to make matters worse, the actual demand per day turned out to be 8,700 people, which was mere 14% out of the re-estimated demand in 2010 causing the total estimated operating loss to reach 2.5 trillion in 30 years.36)

36) Kil-kon, Ko, 2012, Integrative Model of Learning from Policy Failure: A Case Study of Light Rail Transit Projects, A collection of administrable treatises, 53 (1): 142. KP&P

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Table Ⅲ-37 The Comparison of Forecasted Demand and Actual Demand

(Unit: KRW Billion) Category 2011 2016 2021 2026 2031 2036

Concession Agreement 161,000 179,000 188,000 194,000 200,000 204,000 (2004)

Activation plan (2010) 65,000 93,000 100,000 111,000 122,000 134,000

Actual Number 8,700* 25,872 - - - -

Weight (%)* 14% 28% - - - -

Note1: The number of visitors after delayed opening in 2003 Note2: The ratio of actual number of activation plan Sources: 1) Kil-kon, Ko, 2012, Integrative Model of Learning from Policy Failure: A Case Study of Light Rail Transit Projects, A collection of administrable treatises, 53 (1): 142. KP&P 2) Dae-Ho, Choi, Jan. 2017, Don’t wasted tax ... Citizens’ litigation appeal KRW 1 trillion- Yongin Light Rail, NEW1 (re-writing)

2) Lack of Prior Agreement on Technical Standards

In the case of the Ever-Line project, the authority in charge and the project operator did not negotiate thoroughly on possible important matters to the project before agreeing on the concession agreement, which brought to an arbitration by the International Court of Arbitration. In 2011, the Yongin Rapid Transit Corporation requested the completion confirmation, but Yongin City denied the confirmation judging that it needed to repair defects. As the interested parties did not discuss the technical certification standards required to confirm the completion when the initial concession agreement was signed, the argument led to a legal battle. The project operator filed a lawsuit to the Court of International Arbitration to terminate the concession agreement. Even though the project was able to be resumed after the judgement of the court, a substantial economic and social loss was occurred, including 262.8 billion in damages Yongin City had to pay to the Yongin Rapid Transit Corporation due to the delay.37)

3) Utilization of International Arbitration Trial

The Ever-Line project was in crisis when lawsuits were filed between Yongin City and Yongin Rapid Transit Corporation in 2001. However, the dispute was quickly resolved by the International Chamber of Commerce (hereinafter referred to as the “ICC”) International Arbitration Court in Paris, France, which was included in the initial concession agreement as

37) Yang-Su Kim, 2012, Yongin City, Paying Additional KRW 260 Billion to Operate the Light Rail, Joong-Ang Press

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an arbitration institution. Receiving a request for an arbitration in February 2011, the ICC International Arbitration made its first ruling in October, which contributed for the authority in charge and the project operator to make an agreement on “MOU for refinancing and restructuring contract” in April 2012. After that, through the business normalization process in accordance with the MOU, the Ever-Line could begin operating in April 2013.

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IV. Capital Supply

1. Overview

Infrastructure is closely related with the life of people and spans of economics, so the government of each country traditionally initiated the construction and management of SOC with its budget collected from tax. However, the demand for new infrastructures and the needs for maintenance, repair and replacement of existing old facilities have increased gradually, the government started to find it difficult to cover all required cost on its own budget. To compensate for the lack of budget, the government devised available methodology utilizing private capital to implement infrastructure project. As a result, the market-led-initiatives structure has become an alternative to procure private capital to the infrastructure project. Compared to the government-led-initiatives structure, the financing scheme of the market-led-initiatives structure is to be determined according to the business structure. Therefore, it is necessary to understand the business structure prior to analysing alternatives for capital supply. The structure of infrastructure project by financing scheme is as follows.

Figure Ⅳ-1 Structure of Infrastructure Project by Financing Scheme

Source: Hun-Gu, Ha, 2002, Research on Risk Sharing and Management of SOC and PPP Projects, Korea Transportation Development Institute (Re-writing)

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Infrastructure implementation schemes involving private sector can be categorized into three schemes: corporate financing scheme, pure private driven PF scheme, and PPP scheme.

Under the corporate financing scheme, entire private company becomes a project originator to manage infrastructure project. The private company takes all risks of the project and covers infrastructure construction expenses with the cash flow generated by the whole company. If loans are needed, the private company borrows capital based on the credit, collateral, and guarantee of its own.

Under the pure private driven PF scheme, an independent SPC is established by private companies. Loans are offered based on the cash flow generated by the project itself. In general, financial institutions consider the stability of project cash flow, rather than the credit of project originator, which makes business entities and financial institutions share the risks of the project.

Lastly, under the PPP scheme, the public and private sector take a leading role together. The public sector is mainly dedicated to the expansion and operation of infrastructure, and the private sector is dedicated to the application of creativity and know-how in area of capital raising, technology, and management. As a result, the public and private sector continue to cooperate throughout the entire project, including plan, financing, construction and operation of facilities, to provide infrastructure-related public services. In Korea, generally, the government takes charge of plan, evaluation, approval, and support. On the other hand, the private takes charge of design, construction, financing, and operation.38) The public and private sector usually select the financing scheme described above to establish an SPC, and the SPC funded by one or more entities will obtain business approval rights. Then, the government signs concession agreement with the SPC, the project operator, to grant right for project implementation and discuss on profit distribution, government support system and guarantees.

Considering the financial situation of the Colombian government and local government, it would be difficult for the government to implement infrastructure projects with its own budget. In addition, it would be difficult for infrastructure projects to be financed from private investor under the corporate finance scheme or pure private driven PF scheme, because the current status of the capital market in Colombia is considered to be insufficient and unstable.

Judging from the estimated demand, necessity of fee control, and importance as a major transportation facility and the current status of the government’s own budget and the capital market in Colombia, the PPP scheme where the government could supervise and manage the project seemed to be the best alternative to implement the project of urban transportation infrastructure.

38) PIMAC, 2013, What is the PPP Projects, KDI

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2. Alternatives for Capital Supply

2.1. Overview

For the urgently needed and costly infrastructure projects, private sector can participate in the investment using project financing (so called “PF”, hereinafter) scheme with the establishment of SPCs to implement the project.

Funds financed by PF scheme are largely divided into equity and debts. The debt is generally borrowed capital from financial institutions based on the project stability and future cash flows. Financial resources and expected effects of infrastructure projects by project originator are as follows:

Table Ⅳ-1 Capital Supply of Infrastructure Project by Project Originator

Category Originator Resources Expected Effect Tax, budget, government bond, Providing public Government public bond, etc. convenience Construction Profit from construction Investor Operation Internal reserves, capital increase, Equity Profit from operation Priv Investor external borrowing, etc. ate Strategic Long-term purchase/ Investor securing sales Financial Investor Deposit, financial debt Capital gain Public/Private Debts Financial Institution

Source: Seung-Ik, Song, 2007, The Financing Market of PPP Projects, Korea Research Institute for Human Settlements (re-writing)

Considering the limited budget of the government of Colombia, securitized future tax receivable underlying the government’s future tax revenues is considered to be an available financing alternative with the first priority.

In case of utilizing private capital, there are more diverse financing alternatives available. Private capital is largely divided into stocks and bonds. Specific examples are public offering stocks and bonds traded on the exchange market, and non-public stocks and bonds traded over the market. The private can invest in infrastructure projects with following financing alternatives.

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Figure Ⅳ-2 Investment Path of Infrastructure for Private Sector

Source: Della Croce, 2014, Pooling of Institutional Investors Capital: Selected Case Studies in Unlisted Equity Infrastructure, OECD

Among the various ways for private investors to invest in infrastructure project, the following options can be considered as applicable to construct urban transportation infrastructure in Colombia: attracting financial investors by deregulating, raising equity through infrastructure funds, borrowing from MDB, and utilizing Asset-backed security.

2.2. Utilization of Co-Financing

2.2.1. Overview

As developing countries enter the stages of economic growth, the demand for infrastructure developments has increased significantly. Because the government in developing countries cannot fund infrastructure development due to insufficient tax revenue and problems regarding national debt, it is trying to implement methods of PPP to further support infrastructure developments. However, it is hard to attract private investments into such developments due to a large sum of initial investment costs and the longevity of the period of investment. It is particularly challenging for investors to invest in middle and low income countries because such countries lack experience with infrastructure developments, leaving the investors with a large amount of risk. Considering these factors, one way to promote PPP market is to co-finance where different channels of funding are utilized.

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2.2.2. Structure and traits of Co-Finance

One trait of co-financing is the sharing of risk load from the large initial investment and uncertainty of investment through diverse channels of financing. The channels, resources and types of financing through co-financing are portrayed as below.

Figure Ⅳ-3 Reviewing Co-Finance

Source: Our own content

By taking the above diagram into consideration, the structure of co-financing can be the following. The authority executing the PPP project searches ECA funds from different countries and MBD sources of funding to simultaneously receive loans and grants. The ECA and MDB provide not only loans and grants, but also insurance and guarantee for the private investor to securitize the risks. It becomes easier for bidders such as construction companies and suppliers to take part in the business through investments and loans when the public agency provides guarantees and insurance to minimize project risks.

The business risk is dispersed throughout the government, public development banks, and the private through the co-financing business structure. In addition, the co-financing structure creates more investment opportunities for agencies to take part in the business. An example of PPP business structure through co-financing is as follows:

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Figure Ⅳ-4 Structure of Co-Finance

Source: Our own content

2.2.3. Examples

1) MIGA, Guarantee Support for ‘the Line 1 project’

MIGA in WBG provided guarantee service to the financial institutions including Citybank, HSBC, and Mitsubishi Bank, for the construction and operation of the Panama Metro Line 1 project. A total worth of USD 640 million guarantee service was provided twice in 2012 and 2014. The project covered a 13.7-kilometer section connecting northern Los Andes and southwest Albrook, and a total project cost amounts to USD 1.9 billion. Of the total project cost, USD 1.5 billion was financed by the consortium composed of 55% of Brazil (Construtora Norberto Odebrecht SA), and 45% of Spain (Fomento de Construcciones y Contratas SA, “FCC”). Because MIGA provided a guarantee for the project, the private investors faced less risk, which was a more beneficial method of financing.

2) IBRD·IDB, Capital Support for ‘the Lima Metro Line 2 project’ in Peru

The Lima Metro Line 2 project is a large-scale project that undergrounds 35km of roads and constructs 35 stations, with a total construction cost of US 5.658 billion. Nuevo Metro de Lima, a private consortium established in 2014, will operate the metro for 35 years (5

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years for construction and 30 years for operation), and the facility will be contributed to the Peruvian government at the end of the concession period. The private consortium is composed of 43.25% of Spain (Iridum 25%, FCC 18.25%), 46.75% of Italy (Salini Impregilo 18.25%, Ansaldo STS 16.90%, Ansaldo Breda 11.60%) and 10% of Peru (COSAPI 10% of companies). Of US 5.836 billion of total investment cost, 71.1% (US 4.185 billion) was financed from the government of Peru, and the remaining 28.3% (US 1.61 billion) was financed from private investments.

The US 4.185 billion by the government was funded through government bonds at US 2.285 billion and foreign debt at US 1.9 billion. The foreign debt compromised of IBRD and IABD at US 300 million, CAF at US 150 million and the remaining including KfW, AFD, and EIB. through various funding schemes through IFI.39) This project was able to reduce project risks shared by various interest parties and help the concessionaire to negotiate financing conditions more easily and beneficially through co-financing structure.

Figure Ⅳ-5 Structure of the Lima Metro Line 2 Project

Sources: Rewriting based on PLANES DE NEGOCIOS_2015_METRO DE LIMA LINEA 2 and World Bank Data

39) Posco E&C, 2017, Project Introduction of Lima Metro Line 2 Project, Posco E&C

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2.3. Securitization of Future Tax Receivables

2.3.1. Overview

The issuance of asset-backed securities with future bonds as an underlying asset has been widely used in the private and public sector in developing countries since the 1990s. Considering several countries in Latin America including Colombia have issued a variety of securities backed by future tax receivables, it seems appropriate to apply this method to the urban transport infrastructure development in transportation for Colombia.

2.3.2. Concept and Structure of Future Flow Securitization

An originator, who holds future receivables and tries to finance, directly or indirectly, sells its future receivables to international Special Purpose Vehicle (hereinafter referred to as the “SPV”). The SPV then issues bond and raises capital, and obligors pay the consideration to collection account managed by trust.

With this payment, the trust repays the principal and interest to the investor, and the remaining proceeds are distributed to existing holders of future bonds. The structure of typical future flow securitization is as follows:

Figure Ⅳ-6 Structure of Typical Future Flow Securitization

Source: World Bank, 2004, Recent Advances in Future Flow Securitization, World Bank

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Future flow securitization has become a revolutionary way of raising capital for developing countries where access to international capital market is limited. After the financial crisis, many countries ranging from in 1994, East Asia in 1997, to Argentina and Ecuador in the 2000s had difficulties in attracting international investors. However, through the future flow securitization, they could procure capital on favourable terms, such as long term maturity or low cost of capital. These advantages of future flow securitization has made it an attracting financing scheme in developing countries.

The underlying assets that will be collateralized in the future flow securitization are important for the future flow securitization. The bonds held by banks, credit card receivables, and remittances from workers are mainly used as an underlying asset, since the securitization is usually undertaken by the financial sector. When assets like crude oil, which is easy to be securitized in the well-equipped international market and important to the national economy, become the underlying assets for the future flow securitization, they could receive high credit ratings.

2.3.3. Characteristics of Future Tax Receivables’ Securitization

Securitization of future tax receivables could alleviate the transfer and convertibility risk40) through the securitization structure described above, and reduce the risk of bankruptcy as borrowing-lending relationship does not exist other than tax receivables. This makes it possible for operators to receive a higher credit rating than that of an individual country, resulting in low cost of capital with long term maturity. The easier access to various investors and international capital markets is also another advantage of future tax receivables’ securitization.

On the other hand, securitization of future tax receivables also have constraints such as the complicatedness of the structure, large scale of preparation costs, and a long preparation period.

It is difficult to apply this scheme to countries where legal system is not clear and bankruptcy procedures are not well established. It suggests that not all developing countries are able to securitise the future receivables. In addition, when securitization is carried out with local currency, an additional safeguard is required to cover national default and local currency devaluation risks. This can be another barrier to securitization of future tax receivables. From a different point of view, however, these constraints of future tax receivables’ securitization would require developing countries who want to securitize future receivables to foster experts in various fields such as investment banks, law firms, and international rating agencies, and to further improve their investment environment. This process could exert a positive external effect by enhancing the national competitiveness of developing countries.

40) Transfer and convertibility risk: financial risk that creditors will bear, if the borrower belongs to the government who controls the transfer and convertibility of foreign currency.

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2.3.4. Examples of Future Tax Receivables’ Securitization

1) Banco do Brazil’s Securitization of Future Remittance Receivables

In the case of the Banco do Brazil (hereinafter referred to as the “BdB”), a total of USD 250 million was securitized backed by future remittances receivables in US dollars and Japanese yen of Brazilian workers in Japan. At that time, the credit ratings of BdB was from BB - to BB +, while that of the deal was relatively favorable to BBB+.

The SPV, located in New York, sold receivables to investors to raise USD 250 million, and BdB Japan, which is responsible for the remittance of Brazilian workers in Japan, transferred the remittances of Brazilian workers to the trust in New York who would pay the principal and interest to the investors. Since the remittance receivables did not pass through Brazil, the S&P, a credit rating agency, concluded that the trading structure would alleviate the transfer and convertibility risk. Other risks including bankruptcy risk were also able to be minimized by the dominant position of the BdB in Brazil, which is owned by the government. The structure of securitization of BdB’s remittance is as follows:

Figure Ⅳ-7 Structure of BdB’s Remittance Securitization

Source: World Bank, 2004, Recent Advances in Future Flow Securitization, World Bank

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2) Banco de Credito del Peru’s Securitization of Credit Card Receivables

In the case of the Banco de Credito del Peru (hereinafter referred to as the “BCP”), a total of USD 100 million was securitized backed by credit card receivables of the BCP in US dollars. Upon the agreement with Visa International, international card company, the credit card receivables were issued on the 12th of November 1998, and expired on the 14th of November 2005. The securities backed by credit card receivables got credit ratings of AAA from S&P.

Whenever travelers purchase goods and services or draw cash from automatic transaction machines (hereinafter referred to as the “ATM”) with their credit card, credit card receivables are generated. Then, vendors in Peru usually obtain cash by selling the credit card receivables to the local banks. The BCP’s securitization of credit card receivables was designed as follows: the BCP, the receivable-taking bank, issued securities backed by credit card receivables and transferred the future receivables to BCOL Master Trust which was an offshore trust company. The BCOL Master Trust paid principal and interest to the investor based on the amount recovered from the securities, and remitted the remaining recovered amount to the BCP through Banco de Credito Overseas Ltd. located in Bahama. The proceeds from the securities were transferred from investors to the BCP through the BCOL Master Trust and Banco de Credito Overseas Ltd.

Figure Ⅳ-8 Structure of Banco de Credito del Peru’sCredit Card Securitization

Source: World Bank, 2004, Recent Advances in Future Flow Securitization, World Bank

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In securitizing credit card receivables, the collateral was set up due to the fluctuation risk of the number of securities and bankruptcy risk of the bank. Nevertheless, the credit rating agency concluded that there would be sufficient collective payment in the transaction, and in reality, over 2.5 times more than the expected repayment was recovered. In addition, thanks to the structural benefits of the transaction described above, it was able to receive a high credit rating of AAA compared to that of BCP in 1988. The structure of BCP’s credit card securitization is as follows.

2.4. Utilization of ABS

2.4.1. Overview

Asset-Backed Security (hereinafter referred to as the “ABS") refers to the security backed by a specified pool of low-liquidity assets such as loans, receivables and securities41). In general, companies that hold a high percentage of low-liquidity assets utilize ABS to raise funds with increase of liquidity in their asset portfolio. ABS is a very useful way to procure capitals for infrastructure, because it can pool large-scale funds depending on the size of the combined assets. The basic structure of ABS issuance is as follows.

Figure Ⅳ-9 Structure of ABS Issuance

Source: Chang-Uk, Bak & Seong-Won Jo, 2008, Measures To Improve Public Investment Fund Procurement Utilizing Capital Market, Korea Securities Research Institute (Re-writing)

41) Chang-Uk, Bak & Seong-Won Jo, 2008, Measures To Improve Public Investment Fund Procurement Utilizing Capital Market, Korea Securities Research Institute

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A project operator holding ownership or a concession right of the infrastructure pools funds from financial institutions to construct the facility. The financial institutions sell the loans to SPV specialized in liquidation, and the SPV issues ABS with the loans as an underlying asset. The SPV redeems principal and interest to the financial institutions on the date of repayment using the funds raised by ABS.

On the other side, the project operator collects usage fee (future cash flow) from the facility users, and deposits it to the SPV as resources for repayment. Then, using the funds, the SPV repays principal and interest to the ABS investors.

2.4.2. Features of ABS

The most significant feature of ABS is that a project operator who holds assets and a SPV who issues the ABS are separated into two independent entities, keeping the project operator from the risk occurred from the facilities, and the underlying assets of the ABS.

The project operator transfers some or all of the rights of future cash flows from facility to the SPV in the course of securitization and, if necessary, enhances the SPV’s credit rating using products of credit enhancement agencies. In this case, since the principal and interest of the ABS are redeemed based on the repayment ability of the securitized assets with the credit enhancement, the credit of the ABS is evaluated separately and thus is given a higher rating than the project operator.

If the ABS is utilized in financing, firstly, the project operator can avoid risks including credit risk, interest rate risk, and inconsistency risk between operation and procurement. Secondly, the composition of assets such as facilities can be improved. Thirdly, financing cost can be reduced because of the relatively high credit rating of ABS. Finally, it can be possible that the diversification of funding and the expansion of investment base.42)

2.4.3. Examples of ABS43)

In the case of Korean road projects under construction since 2013, a total amount of KRW 198 billion has been procured as debts. The borrowed capital consists of KRW 93 billion in float-rate loans, of KRW 45 billion in fixed-rate loans, and of KRW 60 billion in ABS issued during the construction period with 21-year maturity. The credit rating was AA- + 1.0% for float-rate loans, 5.0% for fixed-rate loans, and 4.24% for ABS.

42) Chang-Uk, Bak & Seong-Won Jo, 2008, Measures To Improve Public Investment Fund Procurement Utilizing Capital Market, Korea Securities Research Institute 43) Jun-Kyung Kim, 2014, Long-term Investment Activation Plan for PPP projects, KDI

108 IV. Capital Supply

This project was able to attract long-term investors with 4.24% interest expense, 0.76% lower than fixed-rate loans, by issuing ABS. A summary of the infrastructure project using ABS under construction phase in Korea is as follows.

Summary of the Infrastructure Project Using ABS Under Table Ⅳ-2 Construction Phase

Financing (in mil.) Interest Rate Remarks

Senior 330 AA- +1.0% Floating-rate Borrowing Senior 450 5.0% Fixed-rate Structure Senior 600 AA- +1.0% Floating-rate Senior 600 4.24% Securitization

Underlying Assets Senior Debt KRW 60 billion / 21.25-year maturity

Issuing Structure KRW 60 billion for 21-year (Post-construction instalment redemption)

Interest Rate 4.24% for 21-year

Investors NH Property and Casualty Insurance, and 2 others

(Long-term Investor) Long-term investment has become possible through securitization of loans for projects under construction (Project Operator) Stability of project has been increased with 0.76% lower Expected Effect interest expenses compared with previous 5% (Construction Investor) The amount of refinancing could be decreased by saving interest expenses

Source: Jun-Kyung Kim, 2014, Long-term Investment Activation Plan for PPP projects, KDI

2.5. Utilization of Infrastructure Fund

2.5.1. Overview

Infrastructure funds can provide opportunities to participate in projects for individual investors and institutional investors who are not able to invest directly in infrastructure. The infrastructure funds not only enable large-scale funding of infrastructure projects, but also enhance the liquidity of invested capital of infrastructure projects.

Infrastructure funds are also able to hedge inflation risks as their fund returns are linked to facility usage fees and to diversify portfolio risks due to low correlation with traditional financial assets such as stocks and bonds. This positive characteristic of infrastructure funds

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has made financial investors including pension funds in advanced countries such as Australia, actively invest in public offered infrastructure funds.44)

2.5.2. Status of Infrastructure Fund

The global infrastructure fund market has a total investment of USD 283 billion as of 2016. For unlisted infrastructure funds, 181 funds accounted for 44% of the total market capitalization of USD 125 billion, a 37% steep increase compared to USD 91 billion invested in 145 funds in 2015. Unlike other investment markets, infrastructure fund market features an oligopoly market where top five investors dominate the market investing USD 117 billion, 41% of the total investment.

Table Ⅳ-3 Top 10 Infrastructure Funds in 2016

Total Rank Name Nation Investment (US million) 1 Macquarie Infrastructure and Real Assets (MIRA) Australia 32,830 2 Brookfield Asset Management Canada 31,985 3 Global Infrastructure Partners U.S. 20,780 4 Borealis Infrastructure Canada 19,246 5 IFM Investors Australia 12,519 6 Colonial First State Global Asset Management Australia 12,452 7 ArcLight Capital Partners U.S. 10,675 8 AMP Capital Australia 7,745 9 KDB Infrastructure Investments Asset Management Company Korea 7,167 10 Ardian France 6,116

Source: PEI, 2016, The Infrastructure Investor 50, Issue 77, PEI (Rewriting)

2.5.3. Characteristics of Infrastructure Fund

Infrastructure funds can be classified into two categories: listed infrastructure funds and unlisted infrastructure funds. Listed infrastructure funds raise capital through an Initial Public Offering (hereinafter referred to as the “IPO") method which lists shares on the stock market, or an open-ended fund method which invests in infrastructure projects with funds collected from lots of investors.

44) Chang-Uk, Bark & Seong-Won Jo, 2008, Measures To Improve Public Investment Fund Procurement Utilizing Capital Market, Korea Securities Research Institute

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The fund managers in charge are responsible for selecting suitable investment products and managing them on behalf of investors. They also distribute risks throughout the whole investment process in an appropriate manner. General investors who want to invest a small amount of capital as well as large institutional investors are able to participate in infrastructure investment with the fund managers.

Unlisted infrastructure funds play a role as a counter for institutional investors who want to invest in infrastructure. Institutional investors who are limited partners (hereinafter referred to as the “LPs") invest in unlisted infrastructure funds operated by investment banks and investment management companies who are general partners (hereinafter referred to as the “GPs"). On behalf of the LPs, GPs manage and operate the fund by investing in the infrastructure project with the capital procured from LPs, and receive the commission agreed upon for the Consignment operation.

2.6. Method to Activate Participation of Financial Investors

2.6.1. Overview

Infrastructure projects are considered to have low investment risks for financial investors including financial institutions, because the projects are implemented based on a concession agreement that guarantees the exclusive operating rights of infrastructure facilities for a certain period. In addition, like the real estate businesses, it belongs to an alternative investment that promotes business based on future cash flow generated from facilities. Therefore, if infrastructure securities are mixed with traditional investment such as stocks and bonds, appropriate level of profitability and well-diversified portfolio can be achieved at the same time.45)

However, private investors are unwilling to make new investment funds in areas where they are not familiar with because investors are unwilling to expose to the unrealized risk involved with construction and operation of infrastructure projects.

However, as private investments are developing, investors became more aware of alternative investment methods, and through experiences derived from such investments, numbers of infrastructure investments are increasing. Currently in South Korea, financial investors in the field of infrastructure include insurance companies, national pension funds, public institutions and private equity fund. As of 2013, the share of financial investors investing in private equity capital records exceed 56% of total investments.

45) Se-Jong, Wang, 2004, Facilitation Plan for SOC PPP Project, Korea Institute of Construction Industry

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In particular, in case of national pension fund, proportion of infrastructure investment is expected to increase gradually, as the purpose of its fund management, which requires long-term and stable cash flow, is in line with the characteristics of infrastructure projects. For national pension plan, a policy is going to be implemented to increase alternative investments in the asset portfolio where 10.7% in 2015 and increasing it to 11.9% at 2017. The details of composition of equity investment in private funding projects is to follows.

Table Ⅳ-4 Share of Equity to Capital Investors in Private Funding Projects

Public Financial Pension Sector Constructor Institutions Institution Fund Operator Fund Total 224 170 0 0 1,723 0 2,116 Airport 11% 8% 0% 0% 84% 0% 100% 25,639 2,081 10,760 5,403 22 17,343 61,247 Road 42% 3% 18% 9% 0% 28% 100% 1,095 0 595 105 1,090 0 2,886 Distribution 38% 0% 21% 4% 38% 0% 100% Information 44 0 0 0 0 0 44 B Communication 100% 0% 0% 0% 0% 0% 0% T 6,707 9,722 2,959 832 3 1,086 21,307 O Railway 31% 46% 14% 4% 0% 5% 100% 7,372 1,511 1,032 851 5,999 3,617 20,382 Port 36% 7% 5% 4% 29% 18% 100% 1,149 0 325 68 324 225 2,091 Environmental 55% 0% 16% 3% 15% 11% 100% 42,230 13,484 15,669 7,259 9,160 22,272 110,073 Total BTO 38% 12% 14% 7% 8% 20% 100% 221 - 132 51 161 884 1,449 Education 15% - 9% 4% 11% 61% 100% 954 - 577 302 408 727 2,968 National Defence 32% - 19% 10% 14% 24% 100% 203 - 118 3 50 279 652 Cultural Tourism 31% - 18% 0% 8% 43% 100% 71 - 32 0 10 37 150 Welfare B 48% - 21% 0% 7% 25% 100% T L Information 3 - 202 0 84 0 289 Communication 1% - 70% 0 29% 0% 100% 447 - 539 179 1 3,281 4,448 Railroad 10% - 12% 4% 0% 74% 100% 1,482 - 1,075 344 88 2,218 5,207 Environmental 28% - 21% 7% 2% 43% 100% 3,381 - 2,675 879 802 7,426 15,162 Total BTL 22% - 18% 6% 5% 49% 100% 45,611 - 18,343 8,138 9,963 29,697 125,235 Total 36% - 15% 6% 8% 24% 100% Source: KDI, 2015, Annual report of public investment management centre, KDI

112 IV. Capital Supply

In case of Colombia, there are not many projects where a financial institution is participated in infrastructure projects as a financial investor. Considering that the PPP laws in Colombia were enacted in the mid 1990’s, the private investments in the infrastructure projects seem to be at the early stage. Because of insufficient experience and professionalism derived from the infrastructure investment, expected profitability and future cash-flow became uncertain, which led to an increase in the investment risk. As a result, this reduces the attractiveness of infrastructure investments.

2.6.2. Method to Activate Participation

In case of financial institutions participating in a project as financial investors, it is common that the funds are operated with assets entrusted by a large number of investors. Therefore, the financial institutions behave as a passive investor seeking stable profits. They try to avoid high-risk securities and focus on both the stability of projects and the continuous cash flow when making decisions.

Accordingly, if investment projects want to increase the participation of financial investors, marketability and transparency of the project should be preferentially secured. Marketability refers to a certain level of profitability that an investor is willing to accept, and transparency refers to consistency and certainty of information about the investment projects. The transparency is important because it helps risk-averse financial investors to decide whether the project can achieve a stable target return or not.

It seems that the government of Colombia is required to guarantee a certain level of project return through financial support such as the MRG and SCS during operation. It is also needed to secure project stability by providing the collateral or guarantee for projects and improve an evaluation process to minimize operating risks.

Financial investors, unlike other investors, usually seek to secure cash flow during construction periods when revenue is not generated. Quasi-equity such as subordinated debts or convertible bonds is utilized. Subordinated debts are one of the credit enhancement methods that increase repayment possibility of the principal and interest of senior debts. If utilizing subordinated debts, therefore, the project can exploit advantages of raising credibility of the project, making financing much easier. In addition, subordinated debts can increase the profitability of the project and the real return after tax, as the increased interest expense caused by subordinated debts reduces corporate tax. The increased profitability may lead to alleviation of financial support burden of governments such as construction subsidies or reduction of usage fee.46) To sum it all up, the government of Colombia may consider mitigating restrictions on quasi-equity including subordinated debts or providing of further incentive to attract financial investors.

46) Yong-Seok, Bark, 2014, Facilitation Plan for Financing of PPP Project, Korea Institute of Construction Industry

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If financial investors decided to contribute equity, it suggests that the stability of profit on the project is secured. Therefore, if the government of Colombia provides financial investors with more incentives to participate, it would become even easier to attract financial institutions to invest in the project.

2.7. Utilization of MDB

2.7.1. Overview

As an international financial institution providing capitals for economic development, MDB is different from the public development banks which aims at the development of a specific country in that it supports a number of countries located in different parts of the world. Examples of major MDBs include the World Bank (hereinafter referred to as the “WBG”), the European Bank for Reconstruction and Development (hereinafter referred to as the “EBRD”), the African Development Bank (hereinafter referred to as the “AFDB”), the Asian Development Bank (hereinafter referred to as the “ADB”), the American Development Bank (hereinafter referred to as the “IDB”) and the Latin American Development Bank (hereinafter referred to as the “CAF”). The characteristics of major MDBs are as follows:

Table Ⅳ-5 Characteristics of Major MDBs

Year Num. of MDB Characteristics Founded Members IBRD 1945 188 • Post-recovery and long-term development funding • Funding for concessions to low-income developing IDA 1960 172 countries IFC 1956 184 • Investing and financing for private companies WBG • Non-commercial risk guarantees of direct investment in MIGA 1988 177 developing countries • Promoting international private investment through ICSID 1966 147 coordination of international investment disputes • Supporting the activation of the bond market for private EBRD 1991 65 companies in Europe AfDB 1964 81 • Supporting economic development in African countries • Promoting investment in private and public capital areas ADB 1966 67 for Asia-Pacific development IDB 1959 48 • Providing public and private project loans in the Americas • Regional economic integration and economic development CAF 1970 19 through financial support of Latin American countries

Source: KOTRA, 2016, The financing methods and procedures of Multilateral Development Bank, KOTRA (re-writing)

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2.7.2. Characteristics of the MDB

The contribution of member countries composes the capital of the MDB, and the rights and obligations are granted to each country based on its contribution. The MDB provides a variety of financial products such as lending and equity investment which enable recipient countries to secure long-term capitals. The MDB also offers guarantee services, especially a wide range of risk management services covering not only credit risk but also political risk.

Projects funded by the MDB can be divided into MDB-initiative projects and investor-initiative projects. In the MDB-initiative projects, the MDB directly identifies and implements the project. On the other hand in the investor-initiative projects, it is not until the investor identified and evaluated the project that the MDB participates in that project. Therefore, the project will be classified as an investor-initiative project, as it was identified by the government and planned to be implemented by the government or private investors.

Getting an approval on financing products of the MDB is time-consuming. In addition, the entry barriers to new investors are considerably high. However, once the products get approved, investors can stand to benefit to procure a large amount of funds in long term and to pass through transparently disclosed financing process.

As a representative example of the MDB, WBG is providing loans to low-income developing countries with low GNI per capita. As of 2016, WBG lending by region and the top 10 recipient countries are as follows:

Table Ⅳ-6 WBG Lending by Region

Latin America Middle East Europe and East Asia and Region Africa and the and North South Asia Central Asia Pacific Caribbean Africa

Rate 21% 15% 18% 16% 13% 17%

Source: World Bank, 2016, Annual report 2016, World Bank (Rewriting)

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Table Ⅳ-7 The Top 10 Recipient Countries invested by WBG

(Unit: US million) IBRD IDA Country Commitment Weight Country Commitment Weight

Peru 2,850 15% Ethiopia 1,862 17%

India 2,820 15% Vietnam 1,670 15%

Kazakhstan 2,058 11% Bangladesh 1,557 14%

China 1,982 10% Pakistan 1,460 13%

Indonesia 1,700 9% Nigeria 1,075 10%

Ukraine 1,560 8% India 1,025 9%

Egypt, Arab Rep. 1,550 8% Tanzania 864 8%

Iraq 1,550 8% Kenya 646 6%

Poland 1,504 8% Congo, Dem. Rep. 600 5%

Colombia 1,400 7% Ghana 500 4%

Source: World Bank, 2016, Annual report 2016, World Bank (Rewriting)

Other major MDBs provide regionalized services. Major recipient countries by the MDB except WBG are as follows.

Table Ⅳ-8 Major Recipient Countries Invested by MDB Except for WBG

Name Major Recipient Countries

Russia (EU 25,400 million), Ukraine (EU 11,861 million), Poland (EU 7,896 million), EBRD Rumania (EU 7,186 million)

AfDB Morocco (UA47) 7,451million),Tunisia(UA5,748million),Nigeria(UA4,880billion)

China (US 5,027 million), India (US 3,595 million), Vietnam (US 3,140 million), ADB Pakistan (US 2,933 million)

Haiti (US 1,110 million), Peru (US 220 million), Ecuador (US 214 million), Mexico IDB (US 210 million)

Colombia (US 6,140 million), Brazil (US 5,230 million), Peru (US 4,394 million), CAF Ecuador (US 3,354 million)

Source: KOTRA, 2016, Plaza of MDB global development funds, KOTRA

47) UA: Monetary Unit of AfDB, 1UA=1.4 USD

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Judging from the existing procurement practices described above and the geographical location of Colombia, financing from the WBG, IDB, and CAF seems to be available for the urban transportation infrastructure in Colombia.

2.7.3. Utilization Plan

If local governments initiate PPP projects, there could be lack of funding and experience compared to the government-initiative projects. In this cases, the local government may get help from the MDB by asking technical assistance services such as ‘building a system for infrastructure expansion.’

The WBG can be divided into IBRD and IDA which provide loans to recipient countries, and IFC, MIGA and ICSID which provide investment, financing and guarantee services to private entrepreneurs. The more detailed services provided by each organization of WBG are as follows.

Table Ⅳ-9 Services Provided by Each Organization of WBG

Service Contents Investment Loans • Loans to support for specific projects for economic development Development •Loans to support for national policy or institutional reform, not for Policy Loans specific projects Loans Program Performance • Loans to intensively support for large government programs Loans IBRD • Managing assets by constructing a comprehensive liquid asset Asset Management portfolio • Including project-based warranty, policy-based warranty, and limited Guarantees warranty • By operating trust funds, providing technical support and policy advice Trust Funds Management on infrastructure, finance, energy, environment. • Providing concessional loans and grants with low or no interest rates IDA to the least developed countries • Providing direct loans, syndicated loans, and on-landing loans for Loans private companies or private projects • Executing direct investment or PEF equity investment to promote Equity Investments long-term growth of companies in developing countries • Managing assets on consignment, after constructing a comprehensive Asset Management IFC liquid asset portfolio •Providing professional advisory services in areas such as improvement Advisory Services of investment environment, implementation of PPP project, development for energy efficiency, etc. •Providing trade-related payment guarantees, asset securitization, and Others acceptance financing for developing country •Providing shareholders and lenders with political risk insurance to MIGA promote foreign direct investment ("FDI") ICSID •Arbitration and mediation of investment dispute Source: KDB, 2016.8, The Progress of WBG, and Business Analysis, KDB

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WBG provides loans to each country in accordance with the following financial support standards:

Table Ⅳ-10 WBG’s Standards of Financial Support by Target Countries

Services Standards

IBRD-only countries •Countries with GNI per capita of $ 1,215 to $ 7,175, with high credit rating

Blend countries •Countries with GNI per capita under $ 1,215 and available to IDA

IDA-only countries •Countries with GNI per capita under $ 1,215, with low credit rating

Source: World Bank, 2016, Plaza of MDB global development fuds, World Bank

With USD 7,140 GNI per capita in 2015, Colombia is classified as IBRD-only country but does not meet IDA support criteria.

The IBRD investment and financing, which accounts for 67% of total new loan commitments, mainly targets for projects to build infrastructure such as SOC. It has a principle that capital should be supplied after fixing the amount of funds and execution schedule. The financing is not done all at once, but spans from three to five years.

Development policy loans are not provided for specific projects, but are directly offered to the government for the purpose of improving overall policies and systems of that country. Therefore, it is expected that the direct support could be provided through this service.

Performance driven loan, which aims at large-scale government projects, has little to do with infrastructure project. However, if it can be applied to this project, funding can be implemented in a way that directly connects the project expenses to the performance evaluation, thereby enhancing the efficiency of the entire project.

Project-based warranty service supported by IBRD can also be applied. Through this service, the risk of other project participants is expected to decrease with the guarantee of IBRD for default risk.

IFC supports private companies and private projects, and usually considers the technology, profitability, and the contribution to regional economic development when evaluating the projects.

When borrowing funds from overseas projects, the payment guarantees of the government or central bank for the loans are generally required. IFC, by contrast, provides investment funds and financing for the private companies without guarantees of government or central

118 IV. Capital Supply

bank. If IMF loans are applied to projects in Colombia, it will be able to reduce the financial burden on the government of Colombia.

Table Ⅳ-11 Overview of IDB by Financial Support Type

Category Detailed Remarks Investment •Loans to support 60-70% of the total cost of a private sector or public loans sector investment project in Latin America Policy loans •Loans to promptly support institutional or policy reform Loans Private loans •Loans to directly support private sector without government guarantee •A system to promptly provide funding for Latin American countries in Emergency the event of a financial, economic or natural disaster loans •Loans to promptly provide funding for Latin American countries in the event of a financial, economic or natural disaster •Grants to support technical cooperation for small-scale public sector and private sector in Latin America (small-scale public sector: MF Donation non-governmental organizations, industry associations, non-profit organizations including chambers of commerce and industry) •Loans and grants provided to the public and private sector through Social the social entrepreneurial program Grants Enterpriser •It can cover start-up expenses, technical support, construction funds investment, equipment and raw material procurement, working capital investment, and marketing expenses. •Funding provided on a trust funded by an individual country or group Trust Fund of countries Assistance •It should be granted to underdeveloped countries such as C and D Group. Public sector •$ 1 Billion Guarantee Disbursement Loan Program enabling client country guarantees to borrow loans •Available up to 10% of IDB loan balance (excluding emergency loans) Private sector •For infrastructure development, capital market development, export guarantees finance, etc., IDB can directly provide guarantees without government guarantee. Guarantees •Available up to 50% of the project cost or $ 150 million Political risk •Including restricted nonfulfillment of a contract guarantee, currency guarantees conversion guarantee •Available up to 25% of the project cost or $ 75 million, but if the capital Credit market is weak and small, a limit of 40% of the project cost or $ 75 guarantees million is applied except •Credit guarantees are available for all risks of commercial loans Multilateral •Enforcing investments in small and medium-sized businesses in Latin Investment America through Small Enterprise Investment Facility (“SEIF”) Equity Funds Investment Inter-American •Supporting small-scale private projects through investment of Investment Inter-American Investment Corporation (“IIC”) Corporation •Free support in the form of grants to assist technology for countries less Grants developed or with weak capital market Technical •Providing capitals for technical cooperation, on the condition that financial Cooperation Conditional support from the IDB or individual lender is available after the project support is concluded. However, if the borrower successfully borrows money from other than the IDB, the funds must be returned to the IDB.

Source: KOTRA, 2016, The Financing Methods and Procedures for Multilateral Development Bank, KOTRA (Re-writing)

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Other than the direct loans, IFC also manages syndicated loans where it directly participates as a director. If syndicated loans are applied to infrastructure projects in Colombia, the large-scale financing can be possible without negotiations with a large number of financial institutions. This advantage of the syndicated loans makes it one of the effective financing methods for the project requiring a large amount of capital.

MIGA provides guarantee services for the political risks, in cases that a company belonging to the MIGA member countries invests in designated developing countries. Supported investment projects are new investment projects for facility expansion, modernization. The covered political risks include transfer and convertibility, breach of contract, expropriation, war and civil disturbance, and total guarantee period of the new loan agreement is up to 20 years. If the guarantee service of MIGA is applied for projects, financing at a lower cost seems to be possible.

Loans from the IDB are favourable to borrowers. It includes local currency funds, flexible repayment options, free conversion interest rate options, and upper limit interest rate. Judging from the borrowing conditions of IDB, stable procurement at a relatively low financial cost could be possible using IDB loans.

As for the investment status of IDB, 90% of the loans provided to Colombia are concentrated in the energy, transportation and finance sector. This is because the IDB’s support strategy for Colombia is the expansion of the national infrastructure. This strategy seems to continue in the future.

Concessional financing is for the most vulnerable member countries, such as Bolivia, Honduras and Nicaragua. Colombia’s economic level is fairly high, on the contrary, so it would be excluded from the concessional financing targets. In addition, most of the grant aid is also provided to the least developed countries, making a grant aid for Colombia’s transport infrastructure difficult.

For the private sector financing, the IDB offers a variety of services to companies located in member countries, such as loans, equity investments, payment guarantees, and syndicated loans. Since infrastructure projects require large-scale financing, the syndicated loans invested by various investors seem to be the most appropriate.

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Table Ⅳ-12 Overviews of CAF by Financial Support Type

Products and Services Contents

•Policy loans and project loans: direct funding of infrastructure, such Loans as roads, transportation, and telecommunications

•A system that can freely borrow and repay funds by project, within Credit Line For Countries the limit and maturity determined by the CAF’s screening results

Credit Line •Funds to relieve liquidity crises in emergency such as war or disaster in •Funds to support debt management of countries with weak financial Emergency infrastructure

•Direct funding of infrastructure, such as roads, transportation, and Loans telecommunications

•A system that can freely borrow and repay funds by project, within For Privates Credit Line the limit and maturity determined by the CAF’s screening results

Equity •Indirect investment with common stock (direct equity investment), Investment potential common stock, investment fund, etc.

Source: CAF homepage (Re-writing)

As for the CAF, 35% of its investment portfolio is concentrated in transportation field in Latin America. The CAF is famous for its financial transparency and a stable portfolio compared to other MDBs, therefore a very conservative credit rating is carried out when evaluating the investment. To complete the evaluation, it takes at least three months for the loan, nine months for the structured finance, and one year for the equity investment.

The CAF, like the IDB, provides financing in the form of co-financing for large projects. However, as the CAF entered into a protection clause from political risks with the member countries, its financial cost is relatively lower than that of other MDBs that entails political risks.

Private sector financing in CAF is realized in the form of a credit line rather than a single loan agreement. Companies to borrow funds can freely borrow and redeem them within the limits, once the loan conditions such as the maximum amount of funds, interest rate, period is determined by the evaluation of CAF. Therefore, the private sector financing in CAF is expected to contribute to the liquidity management of Colombia’s transportation infrastructure.

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2.8. Measures to Decrease Construction Costs

2.8.1. Overview

It can be a limitation when the government provides construction costs to the private investors only with its own budget, because large scale of fund is required to develop infrastructure at the early stages of construction. In case of the infrastructure requiring long term government subsidy due to low profitability, it is difficult for developing countries to provide long term subsidy to provide investors because of its unstable tax revenues and insufficient budget. The following explains the stages of Built-Transfer (hereinafter referred to as the “BT”) where infrastructure funding is allocated to other developments through granting land, to minimize cash outflows from construction costs and to foster further developments of infrastructure.

2.8.2. BT business structure and traits

Under the scheme of BT, the SPC is established to build the infrastructure and raise capital. The infrastructure shall be contributed to the authority once completed. The authority would provide partial redemption or grant land to the private investor as the consideration of investment cost. The business structure of BT is as below.48)

Figure Ⅳ-10 BT Business Structure

Source: KRIHS, Report of infrastructure funding for Vietnam and Philippine, 2010 ‘KRIHS’

48) KEXIM Bank, 2015, Enhancing Public-Private Partner ship for Urban Metro Projects in Ho Chi Minh City, KEXIM Bank

122 IV. Capital Supply

When the government assigns partial redemption as the consideration, the private investor can return the investment without taking the risk from operating the infrastructure. In case the government grants land as the consideration, the private investor can return the investment by leasing out the land and housings sales.

Due to low GDP per capita in developing countries, it is difficult for private investors to return investment only through revenues from users of the infrastructure. Because business structure of BT may help private investors face away from operation risk, the government of Colombia can attract private investors and vitalize PPP projects in Colombia by adapting BT as scheme of PPP.

2.8.3. Case: Vietnam, Ho Chi Minh City BT Project by GS E&C

GS E&C constructed 13.653 km of the intersection, Ho Chi Minh City’s inner roads, connecting Tan Son Nhat Airport and Xuan Heip (So called “TBO Road”, hereinafter). As the consideration for construction costs, GS E&C was granted the rights to develop five subareas of Ho Chi Minh City.

GS E&C established the SPC through 100% private investments. The TBO road has been under the construction since 2008 and is to be completed by 2017. GS E&C acquired the rights to develop land once construction of the TBO road began, and when the construction is finished, the right will fully grant to the GS E&C. The total construction costs of the TBO roads amount to KRW 315 billion, and the GS E&C expects to return investments through developing and leasing out the land. The details of BT project in Ho Chi Minh City are as follows.

Figure Ⅳ-11 BT Project Business Structure, Ho Chi Minh City

Source: GS E&C, ‘GS construction and Engineering; Introductions to New City Developments, 2011, ‘GS E&C’ (Reformatted)

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When the BT projects were initiated, it was planned to construct Riverview (Residence skyscraper), the Tiem, Riverside, Mini New Town, and Grand Court. The area of Riverside and Grand Court project has been sold; however, the remaining three projects are still in progress. The land of Project Riverview has been sold in year 2009 and the construction is completed in year 2012, whereas Thu Tiem project plans to start when the TBO road construction is completed. The Mini New Town project is going to be developed after the opening of Ho Chi Minh City subway, and is projecting high volume of sales because Samsung Electronics is planning to be planted inside the development.

According to a 2016 report from Korea Investments & Securities, the achieved profit rate of GS E&C through the BT Project would be 14.9% even in conservative view. Following profit rate is determined from the sales price of KRW 200 million per unit, where housing sales and commercial facility sales are added and the costs of construction, BT road construction costs and Selling, General & Administrative expenses are subtracted. The following is a detailed scenario of the BT Project profit rate.

Table Ⅳ-13 BT Project Scenario (Million dollars)

Per House Sale (1) 0.20 (2) 0.22 (3) 0.25 Evidence Price

Housing Sales 1,087 1,195 1,385

Commercial Facility Assumed the sales price of KRW 305 305 305 Sales 200~250 million per unit

Total Sales 1,391 1,500 1,663

Construction Costs 845 845 845 Assumed $2,300/3.3 ㎡

Land Acquisition Cost 315 315 315 BT Road Construction Costs

SG & A expenses 70 75 83 5% of Sales

Project Profit 162 266 421

Project Profit Rate 14.9% 22.2% 31.0%

Source: Kyung-Jae, Lee, 2016, Korea Investments & Securities Company Analysis Report, Korea Investments & Securities

The government of Vietnam was able to expand the city’s infrastructure through the BT project even with its insufficient funds, and at the same time it could create new city developments. By utilizing the BT structure, GS E&C can return investments through long term profits from housings sales while it faces away from risks for operating the TBO road.

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V. Policy Recommendation

1. Securing Business Feasibility on PPP

While there are various financing alternatives through PPP scheme, policy supports are required to vitalize funding activities on PPP. First, business feasibility on PPP can be secured by prioritizing projects based on their respective profitability and stability. In case of a project urgently required for social development but there is a lack of profitability and stability, additional supports for securing sufficient profitability and stability are required to attract private capital to the infrastructure projects.

Once a project under the PPP scheme is deemed to be profitable and stable, the project will be able to be financed easily from private investors through various financial instruments. However, urban transportation infrastructure projects have relatively more public interest than other infrastructure projects. Hence, in order to ensure stability of cash flow, many countries provide supports such as guaranteed MRG and early termination payment.

Meanwhile, business feasibility on PPP can be secured by dividing its structure. For example, Seoul subway line 9 project was divided into upper and under structures to promote profitability of the private investors and also to utilize private capital and technology efficiently.

Railway PPP projects require relatively higher initial investment than other infrastructure projects. In addition, with their public interest, social equality should be considered when usage fees and geographic route of the railway PPP projects are decided. Therefore, private investors participated in railway PPP projects will be likely to experience difficulties in recovering invested capital by usage fees.

Considering these traits of railway PPP projects, under structure with low profitability was taken by the government in case of Seoul Metro Line 9 to secure the profitability of private investors. The Seoul Metropolitan Government, the authority in charge, took the construction

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of the higher costing part of the project ­ the under structure such as civil engineering. On the other hand, the private sector exerted its technological expertise in the upper structure such as development of system, vehicles, buildings, and track. As the private sector was able to focus solely on the upper structure, the initial investment cost could be reduced, which ultimately led to a consensus on 8.9% of return at the initial concession agreement. The details of Seoul subway line 9 are provided in the case study of this report.

2. Enhancement of Government Support Policies

2.1. Necessity of Government Support Policies

The government considers both profitability and public interest when initiating a project; however, the private sector prioritizes profitability in their decision making process. Therefore, government supports are required to procure private capital to the infrastructure projects with high public interest. Construction subsidies, tax incentives, and bidding cost compensation can be government support policies applicable to the government of Colombia and local governments.

2.2 Applicable Government Support Policies

2.2.1. Construction Subsidy

Under the PPP laws in Korea, the government is able to grant subsidy to the concessionaire throughout the construction period. The construction subsidies paid to the concessionaire reduces the total private investment cost, which leads to maintain an appropriate level of usage fees subsequent to the completion of the facility.

In case of Colombia, the PPP law in 4th generation has stipulated not to grant construction subsidies. The main reason for this revision on the PPP law is the constant overpayment of construction costs due to subsidies causing delays in construction schedule and financial burden to the government. However, in the case of large-scale PPP projects with relatively higher public interest such as railways and subways, the usage fees can be adjusted adequately through the government subsidies and the total investment cost can be financed easily from private capital due to external effects of government support.49) Therefore, it would be helpful to provide construction subsidies with limitation to the projects with high public interest but low in financial feasibility.

49) KEXIM Bank, 2015, Support for the establishment of Public-Private Partnership in Colombia, KEXIM Bank

126 V. Policy Recommendation

2.2.2. Tax Incentives and Deregulation

Under the PPP laws in Korea, special tax provision applies to infrastructure bonds, surtax, foreign investment zones, and infrastructure funds. Infrastructure bonds are subject to a separate tax rate of 14%, and infrastructure or construction services are subject to 0% of surtax. Also, for foreign investment in the foreign investment zone, corporate tax, income tax, acquisition tax, registration tax, and property tax are exempted or given preferential treatment. For dividends paid to investors of infrastructure funds, the tax rate of 5% applies up to 300 million won, and the tax rate of 14% applies to the portion exceeding 300 million won.50)

If the government provides tax incentives such as tax deductions, required amount of investment would be able to be financed efficiently. In addition, if regulations regarding financing and ancillary businesses are deregulated reasonably, an environment favourable to private investors to participate in PPP projects would be able to be created.

3. Enhancement of Risk-Sharing Policy

3.1. Necessity of Risk-Sharing Policy

There are various project risks such as construction risk, operational risk, financial risk, and political risk in PPP. Coupled with financial risks from high initial investment cost and operational risks from variance on demand makes it difficult for private investors to participate in infrastructure projects. Therefore, it is difficult for the government to draw private investment without the introduction of a risk-sharing policy. Among the risk-sharing policies practiced in Korea, the MRG, infrastructure credit guarantee fund, buy-back rights, and early termination payment are considered risk-sharing policies applicable to Colombia.

3.2. Applicable Risk-Sharing Policies

3.2.1. Infrastructure Credit Guarantee Fund

Infrastructure Credit Guarantee Fund is a risk sharing policy that enhances the project operator’s credibility through public credit insurance institutions. The fund can reinforce the project operator’s credibility in a way that the fund repays debt on behalf in case the project

50) Jay-Hwang Kim, 2011, Public-Private Partnership Infrastructure Project: Case Studies from the Republic of Korea, KDI&ADB

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operator becomes default. With the guarantee, the project operator can receive active investment from financial institutions and lower its borrowing costs under a favourable financing condition. The limit of infrastructure credit guarantee fund increased from KRW 300 billion to KRW 400 billion in 2015, which leads to increase in stability of the infrastructure projects.51)

3.2.2. Buy-Back Rights

Buy-Back Rights are a right where the project operator may request the government to buy back the project including the ancillary businesses when it becomes impossible to build, manage, or operate the facility due to inevitable reasons prescribed in a concession agreement.

3.2.3. Early Termination Payment

Early Termination Payment is a right where the project operator may request the government to terminate the concession agreement and pay the predetermined early termination payment when a project operator is no longer able to maintain the facility due to reasons prescribed in a concession agreement or related regulations. If the termination reasons are satisfied with regulations, the government shall take over the concession right and give the project operator an early termination payment. If early termination payment clause is included in a concession agreement, the project operator will be able to borrow debt with a favourable interest rate.

4. Adaption of New PPP Model

4.1. Application to Changes in Market Condition

Conventionally, infrastructure projects in Korea have been implemented under the BTO or BTL model. Under the BTO model, private investors take project risks and under the BTL model, the government takes project risks. However, private investors’ propensity has been changed from high return-high risk to low return-low risk as the PPP market in Korea became mature. In addition, significant financial support is required to secure a certain level of private investors’ return under the BTO model. In an attempt to prepare for changes in aforementioned external conditions, the government of Korea devised BTO-rs and BTO-a of the new PPP model.

51) Sung-hoon, Joe, 2015, ‘Government, Increase the limit of infrastructure credit guarantee fund from KRW 300 billion to KRW 400 billion’, Money Today

128 V. Policy Recommendation

The mechanism of BTO-rs and BTO-a model was described in the chapter of case study of PPP in Korea. The details of comparison between conventional BTO model and new PPP model are as below.

Table Ⅴ-1 Comparison between Conventional and New PPP Model

Conventional New PPP Model Model BTO BTO-rs BTO-a

Degree of risks exposed to •High •Mediate •Low private sector •Gains: Private sectors share gains with the government •Private sectors share gains •Private sectors on the ratio of 30% and 70%. and losses with the Risk sharing ratio take ;gains and •Losses: Private sectors take government on the ratio of losses up to 30% of losses. Above 50% and 50%. 30% of losses is taken by the government. •The government guarantees •The government guarantees Guarantee •The government 70% of total private certain portion of total provided by the does not investment cost, 30% of investment cost and Gov’t guarantee interest expenses and operating costs. operating cost. Return based on current price as of •7~8% •5~6% •4~5% 2014 Applicable sector •Road, port, etc. •Railway, LRT, etc. •Environment, etc. •Agreed Usage •Agreed Usage fees + Usage fees •State owned enterprise level fees + Inflation Inflation

Source: MOSF, 2015, Comparison between BTO model and new PPP model, MOSF (Re-writing)

The new PPP model is expected to vitalize the development of new PPP projects and to expand long-term capital market, because it can convert from high risk-high return to low risk-low return. It is expected that financial investors including national pension funds seeking long-term stable profitability would be able to participate actively to the infrastructure projects through the new PPP model. In addition, compared to conventional PPP model, return on investment would decrease through the new PPP model, which would lead to reduction in usage fees of the facility or governmental financial support.

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4.2. Case Study of New PPP Model

4.2.1. Case of BTO-rs : Shin Ansan Double Track Line

Shin-Ansan Double Track Line (so called “Shin-Ansan Line”) is expected to be the first PPP project utilizing the BTO-rs model. The government of Korea planned to construct Shin-Ansan Line with its own budget; however, considering its financial burden, the government of Korea changed the plan to construct Shin-Ansan Line through PPP scheme. Through BTO-rs, the government of Korea would be able to share project risk, gains, and losses with private investors on the ratio of 50% and 50%, which would limit an increase in usage fees and maintain its fiscal soundness.

4.2.2. Case of BTO-a : Gyeong-In Express Underground Project

Pursuing to vitalize PPP projects utilizing BTO-a, the government of Korea notifies the public of road, railway, and water treatment projects designated as PPP projects under BTO-a model; however, currently, there are no BTO-a model projects at the stage where the government of Korea and private investors are pursuing a concrete agreement. Most of BTO-a model projects are at the stage of initial feasibility study.

Among BTO-a model projects, Gyeong-In Express Underground Project (so called “Gyeong-In Project”, hereinafter) is expected to be the first PPP project implemented under the BTO-a model. On June, 2015, Gyeong-In Project was initiated and proposed to the authority in charge by a private party. The initial feasibility study of Gyeong -In Project is to be completed by the end of 2017. Throughout all required processes, the construction of Gyeong-In Project is planned to begin in 2017 and end in 2025. The upper and underground section of Gyeong-In Express Way will be operated separately, where the upper section will become a free road and the underground section will become a toll road. However, due to BTO-a model, the toll would be determined to be similar to the toll operated by the government, which could reduce the toll burden of its users.

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VI. Conclusion

As Colombia ranks at the third place in population and the fourth place in GDP among South America countries, the economic in Colombia increases gradually. However, Colombia faces several problems as a result of rapid urbanization. Among the problems, deficiency in urban transportation infrastructure is required to be solved with the first priority, because it relates to the quality of civil life. According to the Global Competitiveness Report by World Economic Forum, Colombian transportation infrastructure condition is ranked below 100th place over 140 countries. Insufficient transportation infrastructure condition is considered to be an obstacle to economic growth in Colombia.52) To improve transportation infrastructure condition in Colombia, the state affair of Juan Manual Santos established the National Development Plan from 2014 to 2018 at the national level. At the local government level, Bogota city government has implemented the construction of metro, and Medellín city government has also established the Development Master Plan 2016-2019 for comprehensive development in the short and mid-term. However, considering that its own budget is not sufficient to cover costs for the demand on urban transportation infrastructure, it is necessary for the Colombian and local governments to consider various financing alternatives to procure required amount to improve the condition of urban transportation infrastructure.

For the efficient execution of transportation infrastructure projects in Colombia, the KSP consulting team has made an in-depth analysis of the current Colombian transportation infrastructure and the case study of PPP projects in Korea. In addition, a workshop was held in Korea to enhance capabilities of the Colombian government officials. After we conducted a policy advisory service to apply the PPP method to the Colombian transportation infrastructure projects, we offered a dissemination seminar to share the research findings and recommendations.

Through the analysis of the current urban transportation infrastructure in Colombia, we have confirmed the necessity for a review of the financing alternatives. Our findings are described as below.

52) World Economic Forum, 2017, The Global Competitive Report 2016-2017, World Economic Forum

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First, Colombia is actively pursuing policies to expand the connectivity and accessibility of its regions. Colombia’s urban development plan actively pursues the introduction of public transportation infrastructure with an emphasis on inter-regional connectivity.

Secondly, the Colombian government is seeking for cooperation with the private sector in the initiation of public infrastructure projects. Through the enactment of the PPP law, the Colombian government aims for stability in public infrastructure projects, particularly in the transportation infrastructure projects such as railway.

Thirdly, the Colombian government has recently been taking a passive stance towards urban infrastructure projects due to various environmental constraints. With the depreciation of the peso in relation to the US dollar, coupled with a drop in oil prices, financing for urban transportation infrastructure projects has become more difficult. Henceforth, projects under development has experienced a reduction in size or delay in execution.

By examining our analysis described above, we came to conclusion that the Colombian government has a strong willingness to develop its urban transportation infrastructure yet currently faces difficulties in financing its projects due to various constraints. Hence, there is a need to develop new ways to attract investment in undergoing projects and to efficiently utilize the government’s limited budget.

In order to discover financing alternatives applicable to Colombia, the KSP consulting team has analysed the current urban transportation infrastructure in Korea. We have analysed and presented the current PPP status in Korea, regulations concerning ancillary businesses and restitution of development gains, and infrastructure fund status. Regarding PPP case studies, we have selected the Seoul Metro Line 9, Incheon Bridge PPP, and the Ever-Line case to come up with the following implications.

First, the Seoul Metro Line 9 was divided into upper and lower structure, securing the profitability of private investors. Under accurate demand forecasting, a favourable negotiating condition was possible through stable operation and restructuring. Additionally, by exercising both private and public equity funds, private investment could be further expanded.

Secondly, the Incheon Bridge PPP was carried out by financial investors and not a construction investors. Therefore, it allowed for the development of a competitive project implementation plan and the selection of a reasonable total investment amount. Moreover, this project was strategically divided step by step and executed a competitive open bid. As a result, conflicts between the project operator and the construction investors were minimized and the total investment cost was reduced. Through an exemplary financing structure, the

132 VI. Conclusion

financial investors were able to borrow debts with a favourable financing condition.

Thirdly, the Ever-Line PPP project has experienced a substantial amount of operational deficit due to inaccurate demand forecasting. The increase in government funding and lack of prior consultation on technical standards led to disputes between the authorities and the operators. The authority in charge had to compensate the project operator for the opportunity cost caused by the delays. On a positive note, an effective dispute settlement clause had been incorporated in the agreement clause, in which disputes would be resolved through the Court of International Arbitration.

Based on our analysis of the current Colombian and Korean urban transportation infrastructure, we have analysed financing alternatives available to expand urban transportation infrastructure in Colombia. As a result of analysis, we suggest the following financing alternatives: 1) utilization of co-financing, 2) securitization of future tax receivable, 3) utilization of ABS, 4) utilization of infrastructure fund, 5) expansion of financial investors’ participation 6) utilization of MDB, and 7) utilization of BT scheme to decrease construction costs.

First, co-financing is a financing alternative where a PPP project is financed from various channel. Borrowing costs are reduced as project risks are shared with various institutions through co-financing, which makes it easier for private investors to participate in the infrastructure projects. The Panama Metro Line 1 project guaranteed by MIGA in WBG and the Lima Metro Line 2 project financed from IBRD and IDB are examples of utilization of co-financing.

Secondly, securitization of future tax receivables is a financing alternative where an originator holding future receivables directly or indirectly sells its future receivables to an international special purpose vehicle, and the SPV then issues bond and raises capital. As the transfer, convertibility, and bankruptcy risks are alleviated through the securitization structure, the operators can receive a higher credit rating than that of an individual country. The fact that the access to various investors and international capital markets can be facilitated easily is also another advantage of future tax receivables’ securitization. However, securitization of future tax receivables also have constraints such as a complicated structure, large scale of preparation costs, and a long preparation period. Banco do Brazil’s securitization of future remittance receivables and Banco do Credito del Peru’s securitization of credit card receivables are examples of securitization of future tax receivables.

Thirdly, ABS refers to the security backed by a specified pool of low-liquidity assets. Since the principal and interest of the ABS is redeemed based on the repayment ability of the securitized assets with the credit enhancement, the credit of the ABS is evaluated separately

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and thus is given a higher rating than the project operator. If utilizing the ABS in financing, the project operator can avoid risks including credit risk, interest rate risk, and inconsistency risk between operation and procurement, which makes it possible to diversify funding and expand investment base. In the case of the Korean roads, KRW 60 billion was procured through issuance of ABS.

Fourthly, infrastructure funds are one of the special asset funds established to invest in infrastructure facilities, providing opportunity to participate in project for individual and institutional investors who are not able to invest directly in infrastructure. The infrastructure funds are able to enhance the liquidity of invested capital of infrastructure projects, to hedge inflation risks, and to diversify portfolio risks due to low correlation with traditional financial assets such as stocks and bonds. This positive characteristic of infrastructure funds has made financial investors including pension funds in advanced countries such as Australia, actively invest in public offered infrastructure funds.

Fifthly, construction investors have generally been leading investments in infrastructure projects. However, it is required for financial investors such as national pension, governmental agency, and equity fund to participate in order to vitalize infrastructure project. The marketability and transparency of the infrastructure projects should be secured in order to attract financial investors to participate in infrastructure projects because the financial investors behave as a passive investor seeking stable profits. In addition, the government of Colombia may consider utilizing quasi-equity including subordinated debts or providing risk sharing policy such as the MRG to attract financial investors. If financial investors decided to contribute equity, it is suggested that the required amount of investment is procured and the stability of profit on the project is secured.

Sixthly, if utilizing MDBs, various services related to projects are able to be provided from international financial institution providing capitals for economic development. Various services compose of loan, grant, guarantee, equity investment, advisory services, and other relevant services. In case of Colombia, various services from IBRD, IFC, MIGA, CAF, and other MDBs could be considered.

Seventhly, we suggested the BT business structure as a measure to decrease construction costs. The BT business structure is a structure where a project originator establishes SPC, to construct infrastructure facility and contributes the facility to the government at the completion of construction. As the government does not pay construction costs in cash but grants the right as the consideration through BT structure, the government while minimizing cash outflow is able to attract private investors to participate in infrastructure projects. Through BT structure, the private investors are able to return investment without taking operational

134 VI. Conclusion

risks from variance on demand. Ho Chi Minh City BT project by GS E&C was provided as an example of BT business structure in this report.

Based on our analysis from urban transportation infrastructure condition in Colombia to financing alternatives for expanding urban transportation infrastructure in Colombia, we suggested following policy recommendations.

First, policy support is required to vitalize funding activities on PPP. Business feasibility on PPP can be secured by prioritizing projects based on their respective profitability and stability. In case of a project urgently required for social development but a lack of profitability and stability, additional support for securing sufficient profitability and stability is required to attract private capital to the infrastructure projects. Urban transportation PPP projects have relatively higher public interest than other infrastructure projects. Considering this trait of urban transportation PPP projects, additional supports including the MRG, early termination payment, and revising business structure are required to secure a certain level of return on investment. In case of Seoul Metro Line 9, under structure with low profitability was taken by the government, which could secure the profitability of private investors.

Secondly, government support policies are needed to be enhanced. Because private investors decide to invest to a project based on its profitability than public interest, adequate government support is required to attract private investors to participate in urban transportation PPP project with high public interest but low profitability. The government of Colombia may consider construction subsidy, tax incentives, and deregulation as government support polices. In case of Colombia, the PPP law in 4th generation has stipulated not to grant construction subsidy; however, it would be helpful to provide construction subsidy with limitation to the projects with high public interest but low in financial feasibility, because construction subsidy reduces the total private investment cost and usages fees, and helps infrastructure project to be financed from private capital with external effects of governmental support. This report provided details of government support policies including tax incentives and exemptions prescribed in relevant laws in Korea. If regulations regarding financing and ancillary businesses are deregulated reasonably, an environment favourable to private investors to participate in PPP projects would be created.

Thirdly, risk sharing policy is required to be adapted. Private investors would not participate in infrastructure projects if they take various project risks from PPP projects. Especially in case of urban transportation infrastructure, a certain level of risks is required to be shared because it has relatively higher project risks from variance on demand than other infrastructure projects. This report described various risk-sharing policies including infrastructure credit guarantee fund, buy-back rights, and early termination payment in Korea. The MRG refers to risk sharing

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policy where the government pays the difference between actual operating revenue and predetermined lower limit and reverts the excess between actual operating revenue and predetermined upper limit. The infrastructure credit guarantee fund could enhance the project originator’s creditability in a way the fund repays debt on behalf in case the project operator becomes default. The buy-back rights refer to a right where the project originator may ask the government to buy the concession right in case the project originator is not able to operate or manage the facility due to inevitable circumstances prescribed in the concession agreement. Early termination payment is a right where the project operator may request the government to terminate the concession agreement and pay the predetermined early termination payment when a project operator is no longer able to maintain the facility due to reasons prescribed in a concession agreement or related regulations. If an early termination payment clause is included in a concession agreement, the project operator will be able to borrow debt with a favourable interest rate.

Fourthly, the adaption of the new PPP model is required to attract the private investors to participate in infrastructure projects. The new PPP model was devised in an attempt to prepare for the change of external conditions in Korea. Through the new PPP model, a certain level of project risks is able to be shared. This report described BTO-rs and BTO-a of the new PPP model in Korea. In addition, Shin-Ansan Double Track Line and Gyeong-In Expressway Underground project to be implemented under such model were provided as case studies of the new PPP model in this report. As this new PPP model allows the government and private investors to take project risks equally, the usage fees of facilities are able to be adjusted adequately, which makes it possible to attract private investors while maintaining government’s fiscal soundness.

With abundant natural resource and 3rd largest population among South America countries, Colombia is located in the northwest region of South America has great potential for growth. However, insufficient transportation infrastructure condition became an obstacle to the economic growth and connectivity among cities in Colombia. Therefore, if transportation infrastructure condition in Colombia is improved, the quality of civil life, logistics infrastructure, and economic condition would be improved. With recognizing the importance of urban transportation infrastructure, the government of Colombia is looking for various financing alternatives to expand urban transportation infrastructure. If the government of Colombia reviews and utilizes financing alternative and structure described in this report, many urban transportation infrastructure projects would be implemented. In addition, if urban transportation infrastructure condition will be improved, the economy of Colombia will be developed.

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