By Hyeyoung Kim, Principal Policy Adviser, Global Infrastructure Hub
The risk allocation in a PPP is at the heart of a PPP contract. How to establish a solid basis for a durable PPP contract either by general protective measures for the long-term contract, or by clear declaration of the risk allocation, is a critical issue in setting the institutional framework especially in civil law countries. In the civil law system which maintains the administrative law approach to PPP contracts, the public authority, a party to the PPP contract, is considered to reserve the right to override or cancel the contract in the public interest.
This blog post introduces how policy makers in the Republic of Korea have arranged the risk allocation structure, making use of legislative power and the capacity for administrative discretion, as tools to strengthen PPP contracts. It focuses on some of the main risks such as the land purchase and site risk, demand risk, and early termination risk.
First, legislative measures through the ‘Act for Public-Private Partnerships in Infrastructure’ (‘PPP Act’) have been taken to clearly provide for exceptions to the existing laws, and thereby avoid conflict with those existing rules. These measures help specify the land purchase and acquisition risk, an issue which the public authority is usually considered best able to handle. Special provisions are provided in the PPP Act, which has enabled the public authority or private partner to acquire or use the publicly-owned land or privately-owned land for PPP.
The legislative measures were also taken to reach a greater social and political consensus, relating to the precautions that that government should take so that risk sharing measures would not harm the soundness of a government budget. Through amendments to the PPP Act, the government-pays PPP model, titled ‘BTL’, was introduced after 10 years of PPP experience and later expanded to unsolicited projects after 20 years of experience.
Secondly, the Ministry of Strategy and Finance has used the capacity for administrative discretion through the annual policy announcement of the Master Plans for PPP infrastructure, titled the ‘PPP Basic Plan’. These announcements have formulated or confirmed the risk allocation principles so as to reach agreement on risk allocation where individual contracts are concerned. Adjustments to risk sharing measures with respect to demand risk and early termination risk have been made through the PPP Basic Plan.
These supportive measures, via clear legislation and the flexibility to evolve and incorporate lessons learned using administrative discretion, have been tools to provide the enabling environment for executing and protecting long-term PPP contracts.