Value for Money Test in KoreaValue for Money Test in Korea

PIMAC

JungwookJungwook KIMKIMawaker2@kdi.re.krawaker2@kdi.re.krFellow of PPP DivisionFellow of PPP DivisionPublic and Private Infrastructure Public and Private Infrastructure Investment Management CenterInvestment Management Center

2

1. Value for Money Test1. Process of PPP Project Implementation2. VFM : The Theory3. VFM : The Practice in Korea

2. Case Study :

Light Rail Transit of New Boundang Line1. Project Overview2. Estimation of Transportation Demand3. Estimation of Cost4. Feasibility Study5. Quantitative VFM Analysis6. Formulation of PFI Alternatives

Value for Money TestPart-01

1. Process of PPP Project Implementation

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Project Initiation

qq Both the government and a private company can initiate a Both the government and a private company can initiate a PPP projectPPP project

qq Solicited ProjectsSolicited Projectsll A solicited project is that the competent authority identifies a project for A solicited project is that the competent authority identifies a project for

private investment and announces a RFPprivate investment and announces a RFP

ll Competent authorities develop a potential project after considering Competent authorities develop a potential project after considering related plans and demands for the facility. They then weight the related plans and demands for the facility. They then weight the procurement options in order to determine whether the PPP procurement options in order to determine whether the PPP procurement is more efficient than the conventional procurementprocurement is more efficient than the conventional procurement

q Unsolicited ProjectsUnsolicited Projectsll For an unsolicited project, a private company (project proponent) For an unsolicited project, a private company (project proponent)

submits a project proposal, and then the competent authority submits a project proposal, and then the competent authority examines and evaluates the contents and value for money of the examines and evaluates the contents and value for money of the private proposal, and designates it as a PPP projectprivate proposal, and designates it as a PPP project

6

Competent AuthorityReview by PIMAC

Competent Authority

Competent Authority

Selection of PPP Project

Designation as the PPP Project

Announcement of RFPs

Submission of Project Proposals

Evaluation and Selection ofPreferred Bidder

VFM Test

Negotiation and Contract Award(Designation of Concessionaire)

Application for Approval of Detailed Implementation Plan

Construction and Operation

Competent Authority

Private Sector → Competent Authority

Competent Authority

Competent Authority →Preferred Bidder

Concessionaire →Competent Authority

Concessionaire

Solicited ProjectSolicited Project

Procurement Steps of a Solicited Project

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Submission of Project Proposal

VFM Test

Notification of ProjectImplementation

PIMAC

Private Sector →Competent Authority

Competent Authority →Proponent

Announcement of RFPs

Submission of Project Proposals

Evaluation and Selection ofPreferred Bidder

Negotiation and Contract Award(Designation of Concessionaire)

Application for Approval of Detailed Implementation Plan

Construction and Operation

Competent Authority

Private Sector → Competent Authority

Competent Authority

Competent Authority →Preferred Bidder

Concessionaire →Competent Authority

Concessionaire

Unsolicited ProjectUnsolicited Project

Procurement Steps of an Unsolicited Project

2. VFM : The Theory

qq What is Value for Money? What is Value for Money?

ll The best available outcome after taking account of all benefits, costs and The best available outcome after taking account of all benefits, costs and risk over the whole life of the project (HM TREASURY)risk over the whole life of the project (HM TREASURY)

ll Not lowest priceNot lowest price

qq Why it is Used?Why it is Used?

ll Seek the best use of available resourcesSeek the best use of available resources

ll Efficient and effective public service deliveryEfficient and effective public service delivery

ll “ The competent authority uses VFM reports as basic material to make a “ The competent authority uses VFM reports as basic material to make a judgment on whether to move forward with the PPP project proposed by judgment on whether to move forward with the PPP project proposed by the private proponent” according to the Article 7, Paragraph 3 of the the private proponent” according to the Article 7, Paragraph 3 of the Enforcement Decree of the PPP ActEnforcement Decree of the PPP Act

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The VFM Concept

qq VFM is often a comparative assessmentVFM is often a comparative assessmentll Requires a benchmark cost : PSC (Public Sector Comparator)Requires a benchmark cost : PSC (Public Sector Comparator)

qq PSC is a benchmarking and evaluation tool : a Key toolPSC is a benchmarking and evaluation tool : a Key toolll Benchmarks the cost of government service delivery Benchmarks the cost of government service delivery ll Evaluates whether VFM is delivered from bidsEvaluates whether VFM is delivered from bids

qq A Procurement principle, not only for PPPA Procurement principle, not only for PPP

qq Adopted by different countries to meet governmentAdopted by different countries to meet government’’s s procurement practicesprocurement practicesll Not a universal toolNot a universal tool

qq Applied on a project or program basisApplied on a project or program basis

qq Innovation, asset utilization, risk sharing, competition, service Innovation, asset utilization, risk sharing, competition, service integration ate main key drivers of VFMintegration ate main key drivers of VFMll Presence of VFM drivers confirms suitability for PPPPresence of VFM drivers confirms suitability for PPP

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Key Elements of VFM

qq Promote whole life costing early in the projectPromote whole life costing early in the project’’s development s development

qq Assist in assessing the project affordabilityAssist in assessing the project affordability

qq Provide a means for demonstrating VFMProvide a means for demonstrating VFMll Provide a consistent benchmarking and evaluation toolProvide a consistent benchmarking and evaluation tool

qq Encourage bidding competition Encourage bidding competition

qq Based on :Based on :ll Reference Project Reference Project ll Risk analysis Risk analysis ll Cash flow over the life of the project (inflation, cost, revenue, discount Cash flow over the life of the project (inflation, cost, revenue, discount

rate..)rate..)ll Government procurement costs to asses project affordabilityGovernment procurement costs to asses project affordability

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The Role of PSC

12

qq Compare to PSC or between biddersCompare to PSC or between bidders

qq Presence of VFM confirms suitability for PPP.Presence of VFM confirms suitability for PPP.

NPV of Transferable

Risk

PSC PFI

NPV of PPP Contract

QUANTITATIVE VFMNPV of

Retained Risk

NPV of CompetitiveNeutrality

NPV of Raw PSC

NPV of Retained Risk

VFM Assesment

3. VFM : The Practice in Korea

14

qq PIMAC of KDIPIMAC of KDI is in charge of VfM test as stipulated by the is in charge of VfM test as stipulated by the PPP ActPPP Act

qq VfM test is carried out in accordance with ‘Guidelines for VfM test is carried out in accordance with ‘Guidelines for implementation of VfM Test/Review of Proposal for implementation of VfM Test/Review of Proposal for unsolicited BTO projects’.unsolicited BTO projects’.

qq Five interim review meetings are held during the VfM testFive interim review meetings are held during the VfM test

qq The duration of each project research should take up to six The duration of each project research should take up to six monthsmonths

qq Same methodology and procedure are applied both to VfM Same methodology and procedure are applied both to VfM Test and Review of ProposalTest and Review of Proposal

qq Objectivity, consistency, independence as well as Objectivity, consistency, independence as well as professional expertise are important elements in conducting professional expertise are important elements in conducting VfM tests.VfM tests.

Implementation

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qq A VfM test is carried out by a multiA VfM test is carried out by a multi--disciplinary research teamdisciplinary research team

qq KDI (Project Manager)KDI (Project Manager)ll Experts with relevant skills and expertise for the project are selected at Experts with relevant skills and expertise for the project are selected at

the preliminary stagethe preliminary stage

qq External experts (selected from human resource pool)External experts (selected from human resource pool)ll Demand forecasting : university professorsDemand forecasting : university professorsll Cost estimation: engineering companies Cost estimation: engineering companies ll Accounting: accounting firmsAccounting: accounting firms

Organization of a Research Team

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qq Phase 1: Feasibility study (Decision to Invest)Phase 1: Feasibility study (Decision to Invest)ll The costThe cost-- benefit analysis is conducted to determine feasibility of the benefit analysis is conducted to determine feasibility of the

project from a national economy perspective.project from a national economy perspective.

qq Phase 2: Value for Money Assessment (Decision on PFI)Phase 2: Value for Money Assessment (Decision on PFI)ll The government payment of PSC (Public Sector Comparator) is The government payment of PSC (Public Sector Comparator) is

compared against that of PFI (Private Finance Initiative) to assess compared against that of PFI (Private Finance Initiative) to assess whether the PFI achieves VfM. whether the PFI achieves VfM.

qq Phase 3: Formulation of PFI alternativesPhase 3: Formulation of PFI alternativesll Based on the results of phase 2, an appropriate PFI alternatives are Based on the results of phase 2, an appropriate PFI alternatives are

formulatedformulatedll The level of project cost, user fee, subsidy scale, etc. are suggested from The level of project cost, user fee, subsidy scale, etc. are suggested from

the government.the government.

qq Phase 4: Award bonus points to the initial proponentPhase 4: Award bonus points to the initial proponentll Bonus points (10% max.) awarded to the initial proponent are estimated Bonus points (10% max.) awarded to the initial proponent are estimated

based on the results of VfM tests and the quality of the proposal.based on the results of VfM tests and the quality of the proposal.

Scope of a VFM Test

UnsolicitedUnsolicited

With Public PlanSolicited

Private Finance InitiatePFIp

(based on proposal)

PFIp (proposal) PFIG(research team)PFIG (research team)

Public Sector Comparator

PSCp

(estimated by research team)

PSCp (research team) PSCG

(research team)PSCG (research team)

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VfM Analysis Implementation MethodVfM Analysis Implementation MethodVfM Analysis Implementation MethodVfM Analysis Implementation Method

Setting Comparators for VFM Test

18Implementation of PPP Project Rejection

Calculation of bonus points

Project Proposal(PFI0)

Construction of PSC(PSC0)

Construction of PSC1, PFI1

Construction of PFI2-i,

PFI Alternative (PFI2*)

VFM test of private proposal(VFM1=PSC1-PFI1≥0)

VFM test of PFI alternative(VFM2=PSC1-PFI2 * ≥0)

Feasibility analysis

N

N

N

Y

Y

Phase 1

Phases3 & 4

Phase 2

Flowchart of a VFM Test (Unsolicited)

Flowchart of a VFM Test (Unsolicited with Public Plan)

Construction of PSC (PSCp )

VFM test (VFMP1) VFM test (VFMG1)

Construction of PFIs2

Calculation of Bonus Points(VFMp )

Calculation of Bonus Points(VFMp )

PFI Alternative (PFI2* )

With bigger NPV PFI Alternative (PFI2

* )With bigger NPV

Rejection RejectionImplementation of PPPImplementation of PPP

VFM test(VFMP2=PFIp1-PFIp2≥0)

VFM test(VFMg2=PFIg1-PFIg2≥0)

PSCp1, PFIs1 PSCG1, PFIG1

N

Y

Y Y

N N

Y Y

YY

N N

PSC by Public Plan (PSCG)

Phase 1

Phase 2

Phases3 & 4

Construction of PFIs2

Feasibility Test (PSCp PSCG)

Project Proposal (PFIp)

Construction of PSC (PSCG)

Feasibility Test (PSCG)

VFM test (VFMG1)

Construction of PFI AlternativeConstruction of PFI Alternative

RejectionRejectionImplementation of PPPImplementation of PPP

N

Y

N

Y

Construction of PSCG1, PFIG1

Phase 1

Phase 2

Phases3 & 4

Flowchart of a VFM Test (Solicited Project)

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qq Assess project feasibility and necessity in the context of Assess project feasibility and necessity in the context of national economy and policy directionsnational economy and policy directions

qq CostCost--benefit analysis method is used to assess the economic benefit analysis method is used to assess the economic feasibility of a projectfeasibility of a projectll CBA is conducted in accordance with sectoral guidelines (e.g. roads, CBA is conducted in accordance with sectoral guidelines (e.g. roads,

railroads, ports, seaports, dams, and environment facilities) for PFS railroads, ports, seaports, dams, and environment facilities) for PFS (Preliminary Feasibility Study)(Preliminary Feasibility Study)

ll B/C ratios calculated based on Estimation of demand, costs, and B/C ratios calculated based on Estimation of demand, costs, and benefitsbenefits

ll Sensitivity analysisSensitivity analysis

qq Policy analyses, if necessary, are carried outPolicy analyses, if necessary, are carried out

Phase 1: Feasibility Study (1)

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qq Setting a PSC (Public Sector Comparator)Setting a PSC (Public Sector Comparator)ll Setting an appropriate PSC option is very important both to feasibility and Setting an appropriate PSC option is very important both to feasibility and

VfM of a projectVfM of a project

qq A basic assumption of VfM test (including FS) is that theA basic assumption of VfM test (including FS) is that the same same level of servicelevel of service will be provided by both PSC and PFI optionswill be provided by both PSC and PFI optionsll In reality, a PSC option that is compatible with PFI proposal is formulatedIn reality, a PSC option that is compatible with PFI proposal is formulated

qq Total, (risk adjusted) wholeTotal, (risk adjusted) whole--ofof--life cost of the project is life cost of the project is estimated if government is to undertake the project.estimated if government is to undertake the project.

qq User fee and project cost of PSC are not necessarily same as User fee and project cost of PSC are not necessarily same as those of PFIthose of PFIll The user fee of PFI is usually larger than that of PSCThe user fee of PFI is usually larger than that of PSC

Phase 1: Feasibility Study (2)

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qq Policy analyses are carried out if necessaryPolicy analyses are carried out if necessaryll Evaluation in qualitative/quantitative terms whether the project is justified Evaluation in qualitative/quantitative terms whether the project is justified

in relation to relevant policy issuesin relation to relevant policy issuesll Relevant policy issues: balanced regional development; consistency with Relevant policy issues: balanced regional development; consistency with

higher level plan and policy directions; and environment impact analysis, higher level plan and policy directions; and environment impact analysis, etc.etc.

qq The overall feasibility of a project is assessed based on The overall feasibility of a project is assessed based on economic and policy analyseseconomic and policy analyses

qq If the FS results demonstrate that the project is feasible, then If the FS results demonstrate that the project is feasible, then VfM assessment ensues. VfM assessment ensues. ll If not, the VfM test process as a whole is suspended, and PIMAC If not, the VfM test process as a whole is suspended, and PIMAC

recommends the Competent Authority to reject the project proposal.recommends the Competent Authority to reject the project proposal.

Phase 1: Feasibility Study (3)

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qq Government spending of the PSC is compared against Government spending of the PSC is compared against government payment requested by PFI proposal to assess if government payment requested by PFI proposal to assess if PPP procurement improves the value of tax payer’s moneyPPP procurement improves the value of tax payer’s money

qq Features of VfM assessmentFeatures of VfM assessmentll It assists government making decision on appropriate procurement It assists government making decision on appropriate procurement

options: conventional public procurement vs. PPP procurement.options: conventional public procurement vs. PPP procurement.ll It provides a quantitative VfM level and a justification for the decision It provides a quantitative VfM level and a justification for the decision

on procurement option.on procurement option.ll It provides a reliable benchmark and specifies project scope.It provides a reliable benchmark and specifies project scope.ll It encourages project appraiser to consider risks early in the project It encourages project appraiser to consider risks early in the project

lifecycle, and address risk transfer options in the bidding process.lifecycle, and address risk transfer options in the bidding process.ll It reduces negotiation time and increases the efficiency of bidding It reduces negotiation time and increases the efficiency of bidding

costs as the scope of private sector bids are more aligned with the costs as the scope of private sector bids are more aligned with the public sector needs, and risk transfer profiles.public sector needs, and risk transfer profiles.

Phase 2: VFM Assessment (1)

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qq Cost items adjusted for competitive neutrality between PSC Cost items adjusted for competitive neutrality between PSC and PFI optionsand PFI options

ll Revenue from user fee is deducted from government payment of PSCRevenue from user fee is deducted from government payment of PSC

ll Revenue from supplementary project is taken into account in Revenue from supplementary project is taken into account in consideration of both optionsconsideration of both options

ll VAT and other tax payments are adjustedVAT and other tax payments are adjusted

ll Same amount and payment schedule of land acquisition is applied to Same amount and payment schedule of land acquisition is applied to both optionsboth options

ll Administrative costs incurred by governments for project management Administrative costs incurred by governments for project management are excluded from both optionsare excluded from both options

ll Insurance fee are estimated in different ways, reflecting the difference Insurance fee are estimated in different ways, reflecting the difference in market valuation of project risk by project ownersin market valuation of project risk by project owners

ll Additional government support if requested by private company is Additional government support if requested by private company is included in both options based on estimated spendingincluded in both options based on estimated spending

Phase 2: VFM Assessment (2)

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Item PSC PFI

Capital costs

Project costs

Constructioncost

(1) Cost of survey(2) Design cost(3) Construction cost

Constructioncost

(1) Cost of survey(2) Design cost(3) Construction cost

Landacquisitioncost

(4) Compensation for landand other possessions

Landacquisitioncost

(4) Compensation for landand other possessions

Supplementarycost

(5) Cost for feasibility study(6) Cost for transportation

impact assessment(7) Cost for environmental

impact assessment(8) Cost for supervision(9) Insurance costs

Supplementarycost

(5) Cost for feasibility study(6) Cost for transportation

impact assessment(7) Cost for environmental

impact assessment(8) Cost for supervision(9) Insurance costs

(10) Cost for operation equipment (10) Cost for operation equipment(11) Taxes and fees (11) Taxes and fees(12) Business setup costs (12) Business setup costs

Financing costs (13) Financing costs (13) Financing costs

operating costs(14) Operation costs(15) Maintenance costs(16) Management and supervision costs

(14) Operation costs(15) Maintenance costs(16) Management and supervision costs

① Base cost born by the government

(Capital costs + operating costs)- operating revenue

Construction subsidy + land acquisition cost +additional government support

② Risk adjustment costs Cost and time overrun

Total government payment ① + ②

Phase 2: VFM Assessment (3)

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qq Present value of government payments for PSC and PFI Present value of government payments for PSC and PFI options are estimated (discount rate = 5.5%) and VfM(%) is options are estimated (discount rate = 5.5%) and VfM(%) is calculatedcalculated

qq GP(PSC) = Capital costs + operating costs GP(PSC) = Capital costs + operating costs –– RevenueRevenue

qq GP(PFI) = Construction subsidy + Compensation costs + GP(PFI) = Construction subsidy + Compensation costs + Additional government supportAdditional government supportll GP(PFI) is the government subsidy requested by the private party in GP(PFI) is the government subsidy requested by the private party in

the project proposalthe project proposal

)()()((%)

PSCGPPFIGPPSCGPVfM -

=

Phase 2: VFM Assessment (4)

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qq Qualitative VfM assessmentQualitative VfM assessmentll Allocation of risks (construction, operation risks, etc.)Allocation of risks (construction, operation risks, etc.)

ll Improvement of service qualitiesImprovement of service qualities

ll And other ripple effects (positive externalities): Promote the financial And other ripple effects (positive externalities): Promote the financial market through the adoption of an advanced financial technique, etc.market through the adoption of an advanced financial technique, etc.Ø Quantification of project risk transfer is not satisfactory and those qualitative effects are

not incorporated into overall VfM assessment so far

Phase 2: VFM Assessment (5)

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qq Financial analysis and sensitivity analysis are carried out to Financial analysis and sensitivity analysis are carried out to assess the profitability (bankability) of a projectassess the profitability (bankability) of a project

qq Based on the VfM assessment and financial analyses, PFI Based on the VfM assessment and financial analyses, PFI alternatives including the following components, are alternatives including the following components, are formulated:formulated:ll Total project costsTotal project costsll User feeUser feell IRR (Internal Rate of Return)IRR (Internal Rate of Return)ll Total government paymentsTotal government paymentsll Other components related to the implementation of the projectOther components related to the implementation of the project

qq The Competent Authority chooses the most appropriate PFI The Competent Authority chooses the most appropriate PFI option and invites third parties to tenderingoption and invites third parties to tenderingll If it is impossible to formulate a PFI alternative that delivers VfM at a If it is impossible to formulate a PFI alternative that delivers VfM at a

reasonable level of IRR, then the PFI option is rejectedreasonable level of IRR, then the PFI option is rejected

Phase 3: Formulation of PFI Alternatives

30

qq The VfM test team makes decision on bonus points (10% The VfM test team makes decision on bonus points (10% max) to be awarded to the initial proponents based on the max) to be awarded to the initial proponents based on the VfM(%) and quality of the proposalVfM(%) and quality of the proposal

qq The quality of a proposal is evaluated based on the following The quality of a proposal is evaluated based on the following criteria:criteria:① Priority of the project in the mid- to long-term government investment

plan (10 points)② Composition of equity investors (10 points)③ Excellency of construction and operation plan (30 points)④ Accuracy of demand forecast (30 points)⑤ Prior consultation with relevant government agencies and plan of

addressing of civil complaints (10 points)⑥ Adequacy of required documentation (10 points)

Phase 4: Bonus Points for Initial Proponent (4)

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qq The VfM test sets the bottom line to meet the condition ofThe VfM test sets the bottom line to meet the condition of‘VfM≥0’‘VfM≥0’ in selecting preferred bidder and following phases of a in selecting preferred bidder and following phases of a project.project.

qq VfM reports are used as an important reference when tender VfM reports are used as an important reference when tender evaluation committee conducts their work.evaluation committee conducts their work.

qq VfM reports provide useful information to prompt negotiation VfM reports provide useful information to prompt negotiation process.process.

qq VfM reports are used as reference when exVfM reports are used as reference when ex--post VfM tests are post VfM tests are conducted.conducted.

Use of VFM Test Results

Case Study:

Light Rail Transit of New Bundang Line

Part-02

1. Project Overview

Jeongja

Kwankyo

12.7km

qq SiteSite MapMap

Rail Transit of New Bundang LineRail Transit of New Bundang Line

Keymap

SB01

SB02

SB03

SB04

34

Project Overview

qq Project SizeProject Size

ll Total length : 12.7km (main line : 11.1km, entranceTotal length : 12.7km (main line : 11.1km, entrance--exit lines : 1.6km)exit lines : 1.6km)

ll Number of Stations : 6 (underground: 5, ground: 1)Number of Stations : 6 (underground: 5, ground: 1)

ll Operation at Commencement : 6 railroad cars 7 operations/dayOperation at Commencement : 6 railroad cars 7 operations/day

ll Operation at Termination : 6 railroad cars 7 operations/dayOperation at Termination : 6 railroad cars 7 operations/day

ll Minimum Operation Interval : 5.0 min (commencement year, 2014)Minimum Operation Interval : 5.0 min (commencement year, 2014)3.5 min (target year, 2044)3.5 min (target year, 2044)

qq Project PeriodProject Period

ll Construction Period : 2009~2014Construction Period : 2009~2014

ll Gratuitous Operation Period : 2014~2044 (30years)Gratuitous Operation Period : 2014~2044 (30years)

35

Project Overview

qq Total Investment CostTotal Investment Costll Total Project Cost : 1,136.6 billion WonTotal Project Cost : 1,136.6 billion Wonll Construction Cost : 926.5 billion WonConstruction Cost : 926.5 billion Wonll Total Investment Cost : 1,551.1 Billion WonTotal Investment Cost : 1,551.1 Billion Wonll Financial Subsidy during Financial Subsidy during Construction (current) : 728.2 Billion Won

(46.9% of Total investment cost)ll Total Private Sector Investment : 822.9 Billion WonTotal Private Sector Investment : 822.9 Billion Won

(53.1% of total investment cost)ll Minimum Operation Interval : 5.0 min (commencement year, 2014)Minimum Operation Interval : 5.0 min (commencement year, 2014)

3.5 min (target year, 2044)

qq Rate of Return and Usage FeeRate of Return and Usage Feell Real Rate of Return : 7.24%(After Tax 6.52%)Real Rate of Return : 7.24%(After Tax 6.52%)ll Usage Fee : 130.0 billion Won (June 2006, Credit card usage basis)Usage Fee : 130.0 billion Won (June 2006, Credit card usage basis)

36

Project Overview

qq Financial Aid Financial Aid

ll 566 billion Won during construction period i.e. 49.8% of total project cost566 billion Won during construction period i.e. 49.8% of total project cost

qq Support for Compensation CostsSupport for Compensation Costsll Request the government’s responsibility and cost charges to be Request the government’s responsibility and cost charges to be

completed before the commencement of constructioncompleted before the commencement of construction

qq No Request for Guarantee of Operation RevenueNo Request for Guarantee of Operation Revenue

qq Support for Toll Fee DiscountSupport for Toll Fee Discountll Request for financial aid in case of free rides and passenger discounts Request for financial aid in case of free rides and passenger discounts

excluding student discountsexcluding student discounts

qq Aid of Other Administrative CostsAid of Other Administrative Costs37

Requests for Gov’t Subsidy

2. Estimation of Transportation Demand

qq Traditional 4Traditional 4--Step Model of Transportation Demand EstimationStep Model of Transportation Demand Estimation

ll Trip Generation → Trip Distribution → Mode Choice → Trip AssignmentTrip Generation → Trip Distribution → Mode Choice → Trip Assignment

qq Additional adjustment only in the case of a new development Additional adjustment only in the case of a new development business using OD and network provided by KTDBbusiness using OD and network provided by KTDB

qq Estimation of commuters by station using Emme/2, TransCAD, etc.Estimation of commuters by station using Emme/2, TransCAD, etc.

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Process of Estimation for Transportation Demand

qq DemandDemand (Origin(Origin –– DestinationDestination Trips)Trips)

Origin

Destination

O/D Trips : Car, Bus, Truck, SubwayO/D Trips : Car, Bus, Truck, Subway

40

Estimation for Transport Demand

Network (Zone, Link, Volume – Delay Functions)Network (Zone, Link, Volume – Delay Functions)

qq SupplySupply (Highway/Transit(Highway/Transit Network)Network)

Zone

Transit line summary

Transit line itinerary(line by line)

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Estimation for Transport Demand

Traffic Assignment resultTraffic Assignment result

qq FutureFuture TrafficTraffic DemandDemand

ConstructionStation Upbound Downbound

Jeongja 50,075 25,284 13,191 53,626

SB01 6,894 1,721 8,504 3,609

SB02 19,105 4,349 4,100 14,916

SB03 22,304 3,034 2,722 20,369

SB04 1,329 3,415 3,566 1,006

Kwankyo 17,923 - - 15,846

Total 117,630 37,803 32,083 109,372

Jeongja

Kwankyo

Year : 2015 (Unit : trip/days)

SB01

SB02

SB03

SB04

42

Estimation for Transport Demand

3. Estimation of Cost

qq Method of Construction Cost EstimationMethod of Construction Cost Estimationll Estimated on the basis of the proposed design and recent actual construction costsEstimated on the basis of the proposed design and recent actual construction costsll Referred to the “New Bundang Line: Kangnam ~ JungJa” Double Track Subway Referred to the “New Bundang Line: Kangnam ~ JungJa” Double Track Subway

construction project, expected to directly connected to this project and is in construction project, expected to directly connected to this project and is in completion of government agreementcompletion of government agreement

qq Method of Supplementary Cost EstimationMethod of Supplementary Cost Estimationll Estimate the cost according to the project compensation standard and standard Estimate the cost according to the project compensation standard and standard

estimating, and by applying estimating, and by applying 「「Revised and Complemented Study on Standard Revised and Complemented Study on Standard Guidelines for Preliminary Feasibility Studies on Railroad Sector Projects (4Guidelines for Preliminary Feasibility Studies on Railroad Sector Projects (4thth

edition)edition)」」ll Basic design cost is generally not reflected in PFI, but is included in the case of Basic design cost is generally not reflected in PFI, but is included in the case of

PSCPSCqq Cost for Trial run : Estimate the cost for six months including both Cost for Trial run : Estimate the cost for six months including both

technical trial run and business trial runtechnical trial run and business trial runll During PFI construction period, insurance cost includes construction insurance, During PFI construction period, insurance cost includes construction insurance,

preliminary benefit lost insurance, user indemnity responsibility insurance, movable preliminary benefit lost insurance, user indemnity responsibility insurance, movable asset insurance, etc. PSC excludes user indemnity responsibility insurance, asset insurance, etc. PSC excludes user indemnity responsibility insurance, preliminary benefit lost insurancepreliminary benefit lost insurance

ll Financial supplementary cost of PFI consists of interest payment cost which occurs Financial supplementary cost of PFI consists of interest payment cost which occurs according to the capital financing plan, and excludes PSCaccording to the capital financing plan, and excludes PSC.

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Result of Estimation for Total Project Cost

qq Result of Total Project Cost EstimationResult of Total Project Cost Estimation

PFI(0) PSC(0) Reference

Construction Cost 926,500 1,092,879

Cost of survey 0 6,698

Design Cost 29,400 38,307

Supplementary cost 53,293 74,479Cost for design supervision, Cost for supervision, Cost for transportation impact assessment, Cost for construction project management, etc.

Trial run cost 4,047 6,150

Construction Insurance Cost 13,943 14,492

Project Implementation Guarantee Insurance 911 0

Financial Supplementary Cost 8,680 0

Operation Equipment Cost 74,829 40,648

Taxes and fees 0 0

Project Setup Cost 24,997 0

Land Compensation Cost 238,057 185,189

Total Project Cost 1,374,657 1,458,842

Vehicle Purchase Cost 82,449 78,282

(in millions of Korean won)

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Result of Estimation for Total Project Cost

qq Method of Operating Cost Estimation Method of Operating Cost Estimation ll Of the proposed operation cost, wellOf the proposed operation cost, well--grounded portion of the cost will grounded portion of the cost will

incorporate the initiator’s intention to the maximum, but unfounded portion incorporate the initiator’s intention to the maximum, but unfounded portion will be subject to a separate criteria assuming that it is operated by the will be subject to a separate criteria assuming that it is operated by the government. government.

ll Estimated on the basis of operation plan and operation personnel plan, Estimated on the basis of operation plan and operation personnel plan, both of which are recalculated according to the reboth of which are recalculated according to the re--estimated demandestimated demand

ll Major costs : Labor cost, General management cost, Maintenance cost, Major costs : Labor cost, General management cost, Maintenance cost, Electricity cost, Additional purchase cost, alternative investment costElectricity cost, Additional purchase cost, alternative investment cost

qq Operation Personnel PlanOperation Personnel Planll Maintenance staff: Track maintenance & repair (Engineering, Track, Maintenance staff: Track maintenance & repair (Engineering, Track,

Building, Station equipment repair), electric railway maintenance & repair Building, Station equipment repair), electric railway maintenance & repair (Electricity, Signal, Telecommunication system and substation facility repair)(Electricity, Signal, Telecommunication system and substation facility repair)

ll Vehicle maintenance staff, Operation control staff, Train crew, Station staff, Vehicle maintenance staff, Operation control staff, Train crew, Station staff, AdministratorAdministrator

46

Result of Estimation for Operating Cost

qq Result of Personnel Cost EstimationResult of Personnel Cost Estimationll Based on the average wage of Seoul Metro and Seoul Metropolitan Based on the average wage of Seoul Metro and Seoul Metropolitan

Rapid Transit CorporationRapid Transit Corporation

qq Result of Maintenance Cost EstimationResult of Maintenance Cost Estimationll Classified into Station building maintenance, carriage maintenance, Classified into Station building maintenance, carriage maintenance,

System maintenance, etc. System maintenance, etc.

ll Estimate the maintenance cost based on the cost calculated in the Estimate the maintenance cost based on the cost calculated in the New Bundang Line project New Bundang Line project

ll Estimate carriage site maintenance & repair cost with reference to Estimate carriage site maintenance & repair cost with reference to data provided by project initiatordata provided by project initiator

qq Result of Other Operation Cost EstimationResult of Other Operation Cost Estimationll Estimate insurance cost, credit card commission cost, etc. with Estimate insurance cost, credit card commission cost, etc. with

reference to rate of cost presented by proposed by project initiatorreference to rate of cost presented by proposed by project initiator

47

Result of Estimation for Operating Cost

qq Result of Operation Cost estimation Result of Operation Cost estimation

(in millions of Korean Won)

PFI(0) PSC(0) Reference

Labor cost 318,036 338,577

General management cost 165,235 118,110

Maintenance cost 583,216 787,456

Insurance cost 82,403 81,950

Malfunction Asset Substitute cost 52,959 95,768

Total Operation cost 1,201,848 1,421,861

48

Result of Estimation for Operating Cost

4. Feasibility Study

Cost Benefit

Construction OperationOperation Cost Reduction

Reduction in Commute Time

Reduction in Traffic Accidents

Reduction in Environmental Cost

2008 160.2 - - - - -

2009 332.2 - - - - -

2010 1,721.8 - - - - -

2011 3,045.7 - - - - -

2012 2,915.6 - - - - -

2013 4,316.1 - - - - -

2014 1,988.2 50.1 89.6 190.1 10.3 16.6

2015 - 200.3 358.3 760.6 41.1 66.5

2020 - 218.7 363.6 811.9 38.5 76.9

2025 - 244.0 490.2 1,109.4 46.8 89.6

2030 - 244.0 504.1 1,183.7 47.9 100.5

2035 - 258.0 506.9 1,198.5 48.1 102.7

2040 - 336.7 506.9 1,198.5 48.1 102.7

2044 -3,782.0 252.5 380.2 898.9 36.1 77.0

Sum* 15,071.3 7,725.1 14,151.8 32,658.4 1,375.2 2,787.6*

(in millions of Korean Won)

qq PV( B ) = 14,611.05 , PV( C ) = 12,919.1 , B/C = 1.131 , IRR = PV( B ) = 14,611.05 , PV( C ) = 12,919.1 , B/C = 1.131 , IRR = 6.65% , NPV = 1,691.96.65% , NPV = 1,691.9

* Sum is the summation from 2008 through 2044 50

Results of Economic Analysis

5. Quantitative VFM Analysis

qq Formulation of PFI AlternativesFormulation of PFI Alternatives

Contents

VFM

PSC(1)Project finance alternative where the rate of bidding was applied to PSC(0) Public transportation integrated payment system applied

PFI(1) Reassessed demand applied to project initiator’s PFI(0) proposal (e.g. cost, revenue rate, user fee)

52

Basic Assumptions for Analysis

qq Basic Assumptions for Analysis (financial conditions)Basic Assumptions for Analysis (financial conditions)

PSC PFI

Construction Period Oct. 2009~Sep. 2014 (60months) Oct. 2009~Sep. 2014 (60months)

Operating Period Oct. 2014~Sep. 2044 (30 yrs) Oct. 2014~Sep. 2044 (30 yrs

Rate of Interest

5.25%(Oct. 2005 ~Sep. 2006 5-year

provincial bonds weighted average interest)

5.25%(Oct. 2005 ~Sep. 2006 5-year provincial

bonds weighted average interest)

Financial Discount Rate 5.50(constanct) 5.50(constant)

Provincial Bond Procurement Cost

Total required fund procured through provincial bonds

Total financial support fund procured through provincial bonds

Conditions for Repayment 5-year due full repayment 5-year due full repayment

Own Capital - 20.0

Other’s Capital - 80.0

Consumer Price Index 4.0 4.0

53

Basic Assumptions for Analysis

qq Result of Total Project Cost and Operating Cost CalculationsResult of Total Project Cost and Operating Cost Calculations(in millions of Korean won)

PSC(1) PFI(1)

Cost of Survey 64 -

Design Cost 376 267

Construction Cost 10,466 9,265

Compensation Cost 1,894 1,894

Supplementary Costs 836 738

Cost for Operation Equipment 836 738

Project Setup Cost - 244

Financing Cost 3,369 2,025

Total 17,426 15,172

Labor Cost 3,386 3,180

General Management Cost 1,112 1,571

Insurance Cost 819 818

Electric/Water Supply Charges 2,329 1,405

Maintenance Cost 3,239 2,232

Alternative Investment Cost 4,381 2,208

Operation Total 15,267 11,416

54

Result of LCC Calculations by Category

Category PSC(1) PFI(1)

Facility Invest-ment Cost

Total Project Costs

Construction Cost(1) Cost of Survey(2) Design Cost(3) Construction Cost

64376

10,466

0267

9,265

Compensation Cost (4) Compensation for Land and other Possessions 1,894 1,894

Supplementary Cost

(5) Construction Supervision Cost(6) Construction Project Managing Cost(7) Trial Run Cost(8) Financing costs(9) Others

316195630

262

1941503772

285

(10) Cost for Operation Equipment 421 739

(12) Cost for Operation Preparation 0 244

Sum of Total Project Cost 14,057 13,147

Financing Costs (13) Financing Costs 3,369 2,025

Operation Costs(14) Operation and Management Costs

(Labor cost, Overhead expenses)(15) Maintenance Costs(16) Cost for Gov’t monitoring and oversee

5,3189,949

0

5,5705,845

0

① Base Cost born by gov’t

Provincial bonds repayment at face valueFinancial Cost (Provincial Bonds)Operating CostOperating RevenueAffiliate Project Revenue Financial Subsidy during Operating period

11,5543,369

15,267(8,843)(3,656)

0

6,9442,025

000

2,927

② Risk Adjustment Costs 0 0

Total Gov’t Payment (①+②) 17,690 11,895

Sum of Current Value 8,355 5,671

55

Cash Payment Summary Sheet

PSC(1) PFI(1) Reference

1. Total Amount of Provincial Bonds (constant) 14,057 7,870

A. Total Construction Subsidy 0 5,977

Initial Amount of Construction Subsidy 0 5,383

Additional (Reduced) Amount of Construction Subsidy 0 594

B. Compensation for Land 0 1,894

2. Total Gov’t Payment (constant) 16,533 11,437

A. Provincial Bonds Repayment at Face Value 11,554 6,469

B. Financial Cost (Provincial Bond Interests) 3,369 1,886

C. Management Cost 15,284 0

D. Operation Revenue (10,018) 0

E. Affiliate Project Revenue (3,656) 0

F. Financial Subsidy during Operating Period 0 3,082

3. Total Gov’t Payment at Current Price 7,994 5,400

4. VfM Amount - 2,594 (PSC(1)-PFI(1))

5. VFM Rate - 32.45% (PSC(1)-PFI(1))/PSC(1)*100)%

6. Real Revenue Rate before Tax - 7.24%

56

Result of Quantitative VFM Analysis

6.Formulation of PFI Alternatives

qq Total Project Cost EstimateTotal Project Cost Estimatell Apply more reasonable and lower amount (competitive amount) after Apply more reasonable and lower amount (competitive amount) after

comparing PFI and PSC costs by categorycomparing PFI and PSC costs by category

PSC(1) PFI(0)PFI Alternatives

PSC(2-1) PSC(2-2)

Cost of Survey 64 - 64 64

Design Cost 376 267 376 376

Construction Cost 10,466 9,265 9,136 9,136

Compensation Cost 1,894 1,894 1,894 1,894

Supplementary Costs 836 759 770 756

Cost for Operation Equipment 421 739 421 421

Project Setup Cost - 245 246 245

Total 14,057 13,160 12,906 12,892

Labor Cost 3,386 3,180 3,180 3,180

General Management Cost 1,130 1,593 1,331 1,331

Insurance Cost 819 820 799 796

Electric/Water Supply Charges 2,329 1,405 1,405 1,405

Maintenance Cost 3,239 2,232 2,232 2,232

Alternative Investment Cost 4,381 2,208 2,460 2,460

Operation Total 15,284 11,439 11,409 11,406

(in millions of Korean won)

58

Result of PFI Alternative Formulation

qq VfM Result VfM Result ll PFI Alternative PSC(2PFI Alternative PSC(2--1) : Estimation of construction subsidy to satisfy 1) : Estimation of construction subsidy to satisfy

6.00% of rate of return 6.00% of rate of return ll PFI Alternative PSC(2PFI Alternative PSC(2--2) : Apply construction subsidy rate (49.8%) 2) : Apply construction subsidy rate (49.8%)

proposed by project initiatorproposed by project initiator

PFI(0)PFI Alternatives

PSC(2-1) PSC(2-2)

Rate of Return 7.24% 6.00% 6.81%

Construction Subsidy/Compensation

Construction Subsidy (Rate) 5,977(53.05%) 4,813(43.70%) 5,477(49.80%)

Amount of Compensation 1,894 1,894 1,894

Current Amount of Gov’t Payment

Provincial Bonds Repayment at Face Value 6,469 5,512 6,058

Financing Cost 1,886 1,607 1,766

Financial Subsidy during Operating Period 3,082 3,082 3,082

Total Gov’t Payment 11,437 10,202 10,907

Current Amount of Gov’t Payment 5,400 4,742 5,117

VfM 2,594 3,252 2,876

VFM Rate 32.45% 40.68% 35.98%

59

Result of PFI Alternative Formulation

60

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