(2011) Modularization of Korea's development experience : public investment management reform in Korea: efforts for enhancing efficiency and sustainability of public expenditure

2011 경제발전경험모듈화사업 : 공공지출의 효율성과 지속가능성 제고를 위한 한국의 공공투자관리 개혁

Kim, Jay Hyung(Author)

  • 119 ITEM VIEW

The financial crisis that hit Korea in the last half of 1997 had a devastating impact on the Korean economy, causing the worst recession during the postwar era. In order to address the fundamental causes of the crisis and to revitalize the economy, the Korean government took bold and decisive steps to initiate comprehensive structural reforms. The major focus of reform in the fiscal and public sectors has been to adopt more market-oriented forces and managerial strategies to increase efficiency and transparency. Efforts were made to instill a performance-oriented approach in the system, which implied management of public expenditure, based on the principle of value for money.

The government adopted a series of integrated (ex-ante, intermediate, and ex-post) quality control efforts for the efficient management of its public investment program. A strong and effective project appraisal study, to oversee the project selection process of the line ministries, was established by the budget ministry. A formal review process was introduced to ensure that funds were continually subjected to monitoring and evaluation. In addition, budgeting for public investment was simplified by reducing the number of special accounts and government funds.

The practices of project appraisal in the earlier stage, and total cost management in the intermediate, were found to be more efficient. There was common ground on the intentions and functions of a performance management between the budget ministry and the line ministries. The government introduced the Medium Term Expenditure Framework (MTEF), with a top-down budgeting process in 2004 for fiscal year 2005. The MTEF pointed out a need to enhance the capacity for planning and prioritizing public investment programs in the line ministries. It also emphasized the need to change the role of the Ministry of Strategy and Finance (MOSF) as well.

This paper seeks to explain the institutional arrangement and reform efforts of the Korean government for developing and managing public investment programs in the last decade, and to find lessons learned to further improve value for money. Section 2 presents a long history and tradition of public investment management system in Korea, under the initiative of the Korean Finance Ministry. This section points to a long tradition of sound and sustainable public investment management within the bodies of government planning and finance ministries, before the crisis in 1997. However, Section 3 discusses major reasons why a number of failures were found in Korean public investment management (PIM) before the IMF crisis. Section 4 presents a new institutional framework for PIM, including a reform to introduce the MTEF, and recent new PIM initiatives. Section 5 examines the evolution and performance of Korean PIM reform. Special attention will be paid to explain how public investment projects are selected, prioritized, and managed in the budget process. New initiatives of total project cost management (TPCM), preliminary feasibility study (PFS), re-assessment study of feasibility (RSF), and re-assessment of demand forecast will be presented and analyzed. The section will also evaluate the performance of these initiatives. Section 6 addresses some of the newly-adopted Korean public private partnership (PPP) projects, substituting traditional government investment. Section 7 presents major driving forces for success in Korea PIM reform. Based on the lessons learned from the PIM reform, seven factors that facilitated successful reform will be highlighted. The last section provides a concluding remark with challenges ahead for a better PIM scheme in the future.

Issue Date
KDI School of Public Policy and Management
Economic Policy; Public investments
Chapter 1 Introduction

Chapter 2 Long and Sound Tradition of Public Investment Management

1. Long Tradition

2. Role of the Economic Planning Board (EPB)

3. Project Appraisal Undermined in 1990s

Chapter 3 Troubles with Public Investment Management in Korea

Chapter 4 Institutional Framework for PIM Reform

1. Recent Change from Bottom-Up to Top-Down Budgeting

2. New PIM Initiatives

Chapter 5 PIM Reform Evolution and Performance

1. Effective Project Appraisal through Preliminary Feasibility Study (PFS)

2. Tightened Procurement and Capital Budget Implementation

3. Performance Management and Evaluation of Completed Projects

Chapter 6 Private Involvement through Public Private Partnerships

1. Why Public-Private Partnership (PPP)?

2. Institutional Arrangements

3. Value for Money (VFM) Test on PPPs

4. Trends and Current Status of PPP Projects

Chapter 7 Key Success Factors of Reforms and Lessons Learned

1. Demand for Better PIM after the Economic Crisis

2. Leading Role of the Korean Finance Ministry

3. Making an Independent Review

4. Presenting an Explicit Judgment Model of Analytic Hierarchy Process (AHP)

5. Publicizing the Analysis and Decision Making

6. Providing Standard Guidelines and Manuals for the Analysis

7. An Effective Series of Reforms along with Project Cycles

Chapter 8 Concluding Remarks


117 p.
Series Title
(KSP) Modularization of Korea's Development Experience ; v.2011-2
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