The Republic of Korea is well known for achieving, in a short time, substantial success in using public-private partnerships (PPPs) as a mode of infrastructure financing. The PPP system was rapidly promoted when the national treasury nearly went bankrupt after the Asian financial crisis. Given big constraints to the country's infrastructure budget, the emphasis on PPPs during the crisis was to push through as many PPP projects as possible. Since then, the government has made a big effort to promote PPPs to relieve the financial burden on social infrastructure funding and to tap the private sector's creativeness and efficiency for these partnerships.
Despite the rapid promotion of the PPP system, there has been no study examining the theoretical basis or empirical evidence on whether and how PPPs in the Republic of Korea are making public investments more efficient than traditional procurement. This chapter aims to help fill that gap by analyzing and comparing the country's experience in financing public infrastructure through PPPs and traditional procurement to examine whether these partnerships have developed as they were originally intended, and whether they are moving in the right direction without causing negative side effects.
This chapter begins with a brief look at the basic structure of a typical PPP project in the Republic of Korea. We then review models of typical PPP structures based on Hart (2003) and Iossa and Martimort (2015), and examine from a social welfare perspective what aspects of PPPs can bring efficiency gains. For this, we use PPP models that have been revised to reflect the Republic of Korea's actual situation and compare them with an ideal PPP system to show the gap between the two. We examine whether the results from our theoretical models can be validated by actual data of 33 PPP road projects in the country. We close with a discussion on the policy implications of this chapter and how the Republic of Korea can overcome the limits of its own PPP system.