The Republic of Korea's effective legal and institutional frameworks, coupled with its well-developed financial markets, are recognized as the main drivers of the country's economic growth (Kim et al. 2011). The legal framework for PPPs was established by the Public-Private Partnerships in Infrastructure Act of 1994 to tackle a shortage of roads, railways, airports, and other infrastructure. The government, at that time, recognized that the private sector had to be co-opted to help develop the country's infrastructure. The legal framework defines the eligible infrastructure for these partnerships, procurement types and processes, the roles of the parties, policy support, project implementation procedures, regulations for financing and refinancing projects, and risk management mechanisms. An important aspect of the institutional setting for PPPs is that the roles of government agencies involved in the procurement of these projects are clearly identified and set out in laws, regulations, and guidelines.
Strong legal frameworks and institutional settings are crucial to the success of PPPs and their ability to contribute to economic growth and social development.3 These make it easier to carry out complex and long-term projects, reduce transaction costs, ensure regulatory controls, and provide legal and economic mechanisms to resolve contract disputes. Most developing countries in Asia experience difficulties in implementing PPPs because of a lack of capacity to handle these types of projects in the public sector. Typical problems include (i) poor project selection and preparation, which deters investors; (ii) overlaps in newly introduced regulatory frameworks for PPPs with existing regulations, which also deal with the construction of infrastructure facilities; (iii) implementation delays, especially in land acquisitions; (iv) unfamiliarity of local governments with PPP mechanisms; and (v) lack of coordination between central and local governments on PPP projects.
Based on the Republic of Korea's experience, the following suggestions are offered to developing countries in Asia for tackling these problems. First, clear institutional frameworks for PPPs need to be set up. In many countries, numerous agencies play big roles in implementing PPP projects, but there is often a lack of coordination among them. Potential investors, for their part, prefer a one-stop service covering all phases of a project's planning, construction, operation, and monitoring to reduce costs and time incurred by regulatory and administrative processes from numerous agencies handling PPPs. The solution is a dedicated public sector PPP unit. Both the Asia-Pacific Economic Cooperation and the Organisation for Economic Co-operation and Development underscore the importance of these units for establishing robust quantitative and qualitative methods to identify and assess potential PPP projects (APEC 2008; OECD 2010). In the Republic of Korea, the Public and Private Infrastructure Investment Management Center, an independent organization, conducts policy and strategy research on PPPs; provides technical support to the Ministry of Economy and Finance, which develops and implements PPP policies; promotes PPP projects to foreign investors; and develops education programs on PPP systems.
Second, sound legal systems are needed for carrying out PPP projects. It is crucial to have a solid regulatory system in a legal framework. It may be better to have a single piece of legislation-a PPP act-that covers all aspects of implementing and operating PPP projects, rather than this being fragmented and spread across various laws and regulations. PPP acts should specify the responsibilities of all key participants in a PPP and the rules for their participation. A sound legal framework for PPPs can provide stability during administration changes, which will boost the private sector's confidence in government PPP plans. PPP acts should specify the responsibilities of all key participants in a PPP and the rules for their participation.
While drawing up a legal framework for PPPs, detailed guidelines need to be legislated. In the Republic of Korea, these guidelines are set out in the Public-Private Partnerships in Infrastructure Act and the Public and Private Infrastructure Investment Management Center's 13 guidelines that cover sectors and PPP methods. These include guidelines on conducting feasibility tests on BTO and BTL projects, refinancing projects, and for the environment sector and road infrastructure. Transparency, objectivity, and consistency are vital in the formulation of these guidelines, which can be used for the entire life cycle of a PPP project. These guidelines are especially important for giving private investors a clear understanding of their responsibilities as partners in government projects. Beyond their current application, these guidelines could also cover value-for-money, drawing up requests for project proposals, output specifications, and tender evaluations.
Third, government guarantees to provide private partners with appropriate profits and to share risks can be effective in getting PPP projects off the ground. Revenue guarantees sweeten the risk sharing and have proved to be effective in attracting private partners. But long-term revenue guarantees carry fiscal risks and need to be set cautiously. In the Republic of Korea, transport PPP projects largely relied on minimum revenue guarantees, but these became a heavy fiscal burden and were aggravated by overly optimistic demand forecasts. These guarantees were dropped for PPPs in 2009, leaving, in 2011, guarantees totaling W3.15 trillion ($2.9 billion) for 36 PPP projects. When the scheme was ended, private sector participation in transport infrastructure significantly declined.