Descriptive Statistics on the Changing Role of Investors

The implementation structure of a PPP in the Republic of Korea is not substantially different from the structure in the theoretical models, though in practice there are differences, especially in the composition and characteristics of investors. The two major types of investors (construction and financial) may have different interests and expectations on a PPP project. This tends to determine their strategic behavior and can result in frequent changes to the composition of investors in a PPP. Table 9.1 shows how BTO-type PPP projects in the Republic Korea have changed in terms of investor composition after the initial PPP contract.

The first section of Table 9.1 shows the composition of the total amount of equity for the projects signed as of June 2016 and decomposed by investor of type. The total equity is W12.5 trillion ($11.6 billion), of which construction investors contributed 58% at the initial agreement stage, which decreased to 43% at the operation stage. Financial investors made up nearly 33% at the initial signing, but this increased to 42% at the operation stage.

Table 9.1: Composition of Investors in Build-Transfer-Operate PPP Projects in the Republic of Korea (won billion)

CI = construction investor, FI = financial investor, O&M = operation and maintenance, PPP = public-private partnership.

Note: $1 = W1,076 in January 2018.

a Nine projects were excluded: Sangju-Yeongchon Highway, Pusan New Port Second Road, Anyang-Seongnam Highway, Bibong-Maesong Highway, Oksan-Ochang Highway, Incheon-Gimpo Highway, Gwangju-Wonju Highway, Guri-Pocheon Highway, and Suwon- Gwangmyung Highway.

Source: Korea Development Institute, Private Infrastructure Investment Management Center.

The table's second section examines the same statistics as the first section, excluding the delayed nine PPP projects that failed to raise capital because of the global recession in 2008. These projects were left out because they could not be considered to be operating normally. Here, the share of construction investors decreased from 65% at the time of initial signing to 43% at the operation stage, while the financial investors increased their share from 24% to 42% between the two project stages.

The table's third section shows the same result as the second section, though calculated only for the projects in operation. The result emphasizes the same trend more dramatically: construction investors contributed up to 70% of total capital, but their share fell to 43% when projects went into operation, whereas financial investors more than doubled their share from an initial 20% to 42% at the operation stage. This tendency-construction investors tend to raise most capital at the time of initial signing, but the major function of raising capital is transferred to financial investors as projects go into operation-is a prevailing characteristic of the Republic of Korea's PPP market and distinguishes it from other major countries with viable PPP markets.3

Two factors may be relevant to the emergence of this trend in the Republic Korea. The first is the more active role of construction investors in the take-off phase of the country's PPP market. After the Asian financial crisis, the government promoted PPPs to complement the limited fiscal room for infrastructure investment. At that time, however, PPPs were little understood, and the country's financial markets were not ready for this type of investment. Large construction companies with sufficient capital initiated PPPs to participate in large government construction contracts, rather than to seek returns from a particular project. In countries with developed PPP markets, these projects are often designed and implemented by developers, but this has never been widely practiced in the Republic of Korea.

The second factor is the conservative investment stance of the country's financial institutions. Because PPP projects often come with considerable risk, financial investors planning on participating in a PPP must conduct a project risk analysis and hedge against perceived risks before they can invest in a project. The country's financial institutions, however, have avoided investing in the early stage of PPP projects, preferring instead to come in at the postconstruction stage, where project risks have been, for the most part, eliminated. Financial institutions also tend to require substantial collateral from SPVs for loan approvals. This has considerably hampered the participation of developers, who have less capital room compared with large construction investors. On the other side, financial institutions have provided SPVs in which they participated as equity holders with subordinated loans with high interest rates. This has made it possible for construction investors to enjoy decent returns, even though they began investing at later stages with substantially less risk.