The Republic of Korea's experience in PPPs has largely been a success story. The use of PPPs for infrastructure since the mid-1990s has delivered significant positive economic and social benefits through the channels of capital inflows, increasing social welfare benefits and better delivery of services, and reducing fiscal burdens through better value for money. That said, there have been bumps along the way, such as the impact on transport PPPs from scrapping government minimum revenue guarantees, as discussed earlier.
As a fiscal stimulus measure, PPPs have been shown to have had only a limited effect. Many countries, including France, the Republic of Korea, and Thailand, promoted PPPs for fiscal stimulus to help recover from the 2008 global financial crisis. But research shows this can crowd out public investment and because PPP investments tend to just replace government spending, they offer very little-if any-fiscal stimulus.
The Republic of Korea's experience with PPPs highlights several challenges in using this financing modality for infrastructure. Because supporting private investment in infrastructure requires the government to borrow money from future budgets, PPPs are inevitably a challenge for fiscal management. There is also an inherent tension in PPP agendas. The Republic of Korea initially put a high priority on promoting a PPP market, but later shifted its focus to fiscal discipline-and the government is having a hard time reinvigorating the PPP market.
Another challenge has been setting tariffs on PPP infrastructure projects. Tariffs for transport infrastructure, for example, tend to be higher for government-funded transport projects than in other sectors, since there needs to be sufficient incentives for the private sector to get involved. Users may bear a bigger share of a transport project's life-cycle cost than for purely government-funded infrastructure projects.
And at the end of the day, PPPs are not a must-have solution but an option for building and upgrading infrastructure. The reason they are being promoted is because they can mobilize needed resources from the private sector, maximize value for money, bring creativity and efficiency to a project, and be a source of fiscal stimulus. That said, countries should be clear on why they are promoting the PPP modality for infrastructure.