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Government Financial Support by Risk Type for Public Private Partnership Projects in Gyeonggi Province

Government Financial Support by Risk Type for Public Private Partnership Projects in Gyeonggi Province

Year2022

Author Han Myung-joo

Original

Abstract

This study categorizes the risks of Public-Private Partnership (PPP) projects and examines the correlation between government financial supports and risk factors.
Considering that PPP projects target social infrastructures with a high publicity, that the relevant facilities belong to the government, and that the private and government projects are cooperating, there is a justification for government support and risk sharing.
It is important for the government and the private sector to share the risks properly. If the private sector bears most of the risks, private will have difficulties of participation and financing on the projects. While if the government bears the risks, it does not secure the feasibility to pursue the project as a PPP projects. Therefore, Proper risk sharing between the government and the private sector is important.
In general, the demand risk sharing entity differs according to business method (eg. BTO, BTL), and generally the private sector shares the most risk. The private sector also bears the risks that may arise during the construction and operation stages. On the other hand, The pubic sector is more responsible for reasons such as government policy or inflation risks. Generally, demand risk has a higher relative importance than other risks, and a number of government financial supports for the risk such as construction subsidies, land compensation expenses, minimum revenue guarantees, and investment risk sharing systems.
Recently, a direct investment by the public sector is under discussion for management and supervision of the entire stage of the PPP projects, rather than a one-time financial supports. The advantages of this method are expected to be the resolution of the information asymmetry, and the effect of reducing the procurement cost financially. However a careful approach for this method should be required because there is a possibility of conflict of interest between both sectors, and conflict due to the two roles of the public sector such as investor and manager.
This study financially reviewed the effect of the government's financial supports in the event of a risk types. In particular, the public investment method, which is recently under discussion, but lacks research on financial effectiveness, is mainly reviewed. Although the construction subsidy was found to be most effective in lowering tolls, it was analyzed that the capital investment method and the loan investment method also had a similar effect to the construction subsidy if dividends or principal were not recovered.
In the case where all risks do not occur, the government's financial burden is smaller than the construction subsidy by the capital investment and the loan investment. However, since the capital investment and loan investment method are in the form of direct or indirect participation of the competent authority in the project, it appears that if a risk occurs, it is directly affected by the financial burden. In addition, this study calculates the risk probability based on real data and examines the financial burden effect of applying it.
The result of this study is expected to help select the government's financial support method when promoting PPP projects. Through this result, government can select and operate a PPP projects in consideration of the characteristics of the project (eg. possibility of securing demand, reliability of forecast, etc.). However, this study is limited in that it only considered the financial effects of government financial supports. Therefore it is necessary for public direct investment in PPP projects to be carefully discussed in consideration of various qualitative effects.

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