General Guidelines For PFS

General Guidelines for Preliminary
Feasibility Studies
(fifth edition)
December 2008
Public and Private Infrastructure

Investment Management Center
(PIMAC)
< Research Team >

General Guidelines for
Preliminary Feasibility Studies (Fifth Edition)
Korea
Development
Institute
(KDI )
Researchers:
External
Researchers:
Sanghoon Ahn, Fellow (Project Manager)

Sangdal Shim, Senior Fellow
Joonkyung Jang, Specialist
Seyong Kim, Specialist
Gyeongran Seo, Senior Researcher
Sukyoung Kim, Associate Specialist
Jaekwang You, Associate Specialist
Hyunjung Lee, Associate Specialist
Jieun Choi, Associate Specialist
Daegeun Kim, Associate Specialist
Sukjin Cho, Associate Specialist
Minyoung Yeo, Assistant Specialist
Yuna Lee, Assistant Researcher
Kiseok Hong, Professor, Ehwa Womens University
Youngsook Eom , Professor, Chonbuk University
Jaeman Lim, Professor, Sejong University
The research team of the 1999 General Guidelines for Preliminary

Feasibility Studies (first edition) included Senior Fellow Jayhyung Kim (lead),
Fellow Kiseok Hong, Senior Researcher Honggi Ahn, and Assistant Researcher
Eunkyoung Park of KDI; Professor Donggeon Kim in Graduate School of Public
Administration at Seoul National University; and Professor Dongseok Ock in
Department of Trade at University of Incheon. The 2000 Revised Edition was
written by Senior Fellow Jayhyung Kim (lead), Fellow Kiseok Hong, and Senior
Researcher Seungtae Lee of KDI; the 2001 Third Edition by Senior Fellow
Jayhyung Kim (lead) and Senior Researcher Seungtae Lee of KDI, and Professor
Kiseok Hong in Department of Economics at Ehwa Womens University; and the
2004 Fourth Edition by Senior Fellow Sangdal Shim (lead), Fellow Hyeon Park,
Visiting Fellow Jaesin Park, and Senior Researcher Yuk Jang; Assistant
Researchers Jungku Gang, Seungyeon Lee, and Huiyoung Ma of KDI; Professor
Dosung Choi of Seoul National University; and Professor Kiseok Hong in
Department of Economics at Ehwa Womens University.
Contents
CHAPTER 1
Outline
. Background and Purpose of Revising the General Guidelines
1. Role of the General Guidelines
2. Background and Purpose of Revising the General Guidelines
. Guiding Directions and Major Contents
1. Composition and Directions of the General Guidelines
2. Major Contents and Methodologies
1
1
1
1
3
3
4
CHAPTER 2
Project Overview and Basic Data Analysis
. Project Overview
1. Background and Purpose of a Project
2. Project Selection Process and Implementation Agency
3. Contents of a Project
4. Guidelines for Writing Project Plans for Candidate Projects
. Basic Data Analysis
1. Analysis of the Natural and Living Environments
2. Analysis of the Social and Economic Environments
. Identification of Issues
13
13
14
14
15
16
17
18
18
20
CHAPTER 3
Economic Analysis
. Demand Estimation
1. Transportation Projects
2. Water Resources Projects
3. Other Projects
4. Standards to Reflect Development Plans
. Benefit Estimation
3. Other Projects
. Cost Estimation
21
22
22
26
32
32
34
35
37
38
40
41

3. Other Projects
4. Calculation Standards for Land Acquisition Costs
5. Calculation Standards for Contingency Reserves
. Economic Feasibility Evaluation
1. Analysis Methods
2. Social Discount Rate
3. Processing of Transfer Payments Including Taxes
4. Base Day of Analysis, Period of Analysis, Etc.
5. Processing of Salvage Value
6. Sensitivity Analysis
. Ways to Attract Private Investment
1. Background and Purpose of Review
2. Review of the Possibility of Private Investment at the Step of
Preliminary Feasibility Study
. Financial Feasibility Analysis
1. Comparison between Economic Feasibility Analysis and Financial
Feasibility Analysis
2. Basic Assumptions
A. Investment Methods of Projects
3. Analysis Methods
4. Cost & Income Estimation and Feasibility Analysis
5. Financial Discount Rate Calculation
6. Calculation of a Minimum Rate of Government Financial Support
51
54
55
57
57
58
60
64
66
67
68
68
68
70
79
79
80
80
83
84
90
95
CHAPTER 4
Policy Analysis
. Policy Analysis System
. Analysis by Evaluation Item
1. Balanced Regional Development
2. Consistency with Policy and Willingness to Pursue Projects
3. Risks in Pursuing Projects
4. Project-Specific Evaluation Items
97
97
99
99
153
155
157
CHAPTER 5
Comprehensive Evaluation: AHP Method
. Multi-Criteria Analysis and AHP
1. Need for Multi-Criteria Analysis
159
159
159
2. Outline of the AHP Method

3. Evaluator Selection
. AHP Analysis Process
1. Conceptualizing
2. Structuring
3. Weighting
4. Scoring
5. Synthesizing
6. Feedback
7. Concluding
. Matrix Tables Summarizing Preliminary Feasibility Study Results
1. Summary Tables to be Included in a Preliminary Feasibility Study
Report
2. Computer Data to Submit to the KDI Preliminary Feasibility Study
Management Team
161
163
165
165
166
169
171
174
175
176
179
179
184
Acronyms
186
References
188
Appendix 1
Appendix 2
Appendix 3
190
194
196
List of Tables
Table 1- 1 Preliminary Feasibility Studies by Project Type

Table 3- 1
Table 3- 2
Table 3- 3
Table 3- 4
Table 3- 5
Table 3- 6
Table 3- 7
Table 3- 8
Table 3- 9
Table 3-10
Table 3-11
Table 3-12
Table 3-13
Table 3-19
Table 3-20
Table 3-21
Table 3-22
Table 3-23
Table 3-24
Table 3-25
Contents of Analysis of Water Supply and Demand

Water Demand for Different Purposes
Comparison of Standards to Reflect Development Plans
Benefits of Road Projects
Benefits of Railroad Projects
Benefits of Road and Railroad Projects
Benefits of Different Water Resources Projects
Details of Total Project Costs (Road Projects)
Details of Total Project Costs (General Railroad Projects: Rough Standards)
Details of Total Project Costs (Regional and Urban Railroad Projects)
Standard Details of Total Project Costs of Dam Construction
Standard Details of Total Project Costs of River Conservation Work
Compensation Ratios Used in Land Acquisition by City and County and
Land Category
Survey Results of Compensation Ratios of Land Categories
Compensation Ratios by City and County and Land Category
Comparison of Economic Analysis Methods
Preliminary Feasibility Study Checklist Items to Evaluate the Possibility
of Private Investment
Infrastructure Types (Article 2, Act on Public-Private Partnerships in
Infrastructure)
PPP Project Implementation Method: BTO and BTL
First-Step Checklist Evaluation of Project A (example)
Second-Step Qualitative Evaluation of Project A (example)
Comparison between Economic and Financial Feasibility Analysis
Interest Rates of Government and Corporate Bonds
Calculation Process of a Nominal Financial Discount Rate
Calculation of a Real Financial Discount Rate
Table 4- 1
Table 4- 2
Table 4- 3
Table 4- 4
Categorization of Policy Analysis Items

Indices Used in the Calculation of the Regional Development Index
Weights for Indices to Calculate the Regional Development Index
Weights in each Evaluation Area in Preliminary Feasibility Studies
Table 3-14
Table 3-15
Table 3-16
Table 3-17
Table 3-18
2
27
29
33
35
36
37
37
44
46
49
52
53
56
56
57
60
73
74
76
76
78
80
91
94
95
98
100
101
102
Table 4- 5
Table 4- 6
Table 4- 7
Table 4- 8
Table 4- 9
Table 4-10
Table 4-11
Table 4-12
Table 4-13
Table 4-14
Table 4-15
Table 4-16
Table 4-17
Table 4-18
Table 5- 1
Table 5- 2
Table 5- 3
Table 5- 4
Table 5- 5
Designation Standards for Less Developed Regions

103
Selection Standards for Development Promotion districts (Less Developed
Region Type)
105
Indices for Designation of Regions for Revitalization (Step 1)
108
Indices and Weights
109
Propriety Evaluation of Preliminary Feasibility Studies and Combined Models 111
Cities and Provinces Regional Development Index and Ranking
112
Cities and Provinces Ranking in Regional Development Index
113
Cities and Counties Regional Development Index and Ranking
114
Cities and Counties Ranking in Regional Development Index
124
Example of an MRIO Structure (Two Regions, Three Industries, &
Competitive Input Type)
138
Regional Classification
139
Comparison between the PCRDPCNACI MRIO Model and National
IO Table
139
Classification of the Construction Industry under the BOK IO table
143
Distribution of Investment Costs by Industry when Investing 100 billion
won in the Road Sector
144
Evaluation Items in a Structure Survey Questionnaire (e.g. Project to
Improve a Railroad in a Mountainous Area)
Scale of Importance used for Pair-Wise Comparison
Scope of Preliminary Weight Calculation
Evaluation Description and Scoring Standards for AHP Evaluation Items
Opinion Consistency among Evaluators and Conclusion According to
AHP Scores
168
169
170
172
178
List of Figures
Figure 1- 1
Basic System of Preliminary Feasibility Studies
Figure 3- 2
Figure 3- 3
Figure 3- 4
Flow to Calculate Total Project Costs for Road Construction

43
Preliminary Feasibility Studys Evaluation Model to Determine Whether
to Pursue a Project as a Public Investment or PPP Project
71
Procedures to Perform a Checklist in Preliminary Feasibility Studies
72
Figure 5- 1
Basic AHP Structure of Preliminary Feasibility Studies
12
167

Preliminary Feasibility
Studies
(fifth edition)
Public and Private Infrastructure

Investment Management Center
(PIMAC)
CHAPTER 1
Outline
. Background and Purpose of Revising the General

Guidelines
1. Role of the General Guidelines

The General Guidelines for Preliminary Feasibility Studies (hereinafter
General Guidelines) has served as a basic manual for conducting all preliminary
feasibility studies. The General Guidelines include the methods and standards for
conducting preliminary feasibility studies. They comprehensively suggest theoretical
and practical ground rules concerning evaluation of public investment projects. They
also serve as a basic manual for standard guidelines in studies on different subjects
such as roads, railroads, ports, culture and tourism, and water resources.
2. Background and Purpose of Revising the General Guidelines

The General Guidelines were first published in 1999 and revised three times
with the Second Edition in 2000, Third Edition in 2001, and Fourth Edition in 2004.
The on-going revision of the General Guidelines is intended to reflect the
cumulative findings of studies; to supplement contents regarding theoretical and
methodological issues; and to renew statistical data and parameter values as needed.
The results of preliminary feasibility studies conducted so far are indicated in
Table 1-1. Based on the reports published until 2008, a total of 382 preliminary
feasibility studies were completed. Of these reports, 165 were on roads and 74 were
on railroads, accounting for the majority.
Table 1-1
Preliminary Feasibility Studies by Project Type

(Unit: Case)
Year
Road
Railroad
Port
Culture &
Tourism
Water
Resources
Others
Total
1999
11
19
2000
11
30
2001
20
14
41
2002
30
2003
11
33
2004
24
13
12
55
2005
11
30
2006
27
11
52
2007
30
45
2008
11
15
37
Total
165
74
23
30
22
58
372
Note: Based on the preliminary feasibility study reports published through August 2008.
Looking at the numbers of preliminary feasibility studies by project type, the

numbers of non-transport projects where project-specific characteristics are of
relatively greater importance, such as those for culture and sports facilities, hospitals,
industrial complexes, and the like, are gradually increasing. This is, in turn,
gradually increasing the need for a more comprehensive manual to cover the various
types of public investment projects while maintaining the consistency of guidelines
used for each type. There is also an increasing need to renew and revise various
indices and parameters for transport projects, where the study methodology is
relatively standardized.
In this light, this report intends to revise and supplement the General Guidelines
as follows:
First, there are various revisions and additions to the guidelines that need to be
made regarding an economic feasibility analysis and financial feasibility analysis.
Namely, the guidelines for an analysis of economic feasibility should be worked out
including the basic methodology of a cost-benefit analysis (e.g. setting of an
appropriate social discount rate) as well as demand estimation, benefit calculation,
General Guidelines for Preliminary Feasibility Studies (fifth edition)
and cost calculation; the guidelines for analysis of financial feasibility need to be
devised; and the possibilities to induce private investment need to be studied.
Changes in the circumstance, the Sectoral Guidelines of each type of project, and
such should be considered, and more credible, current data should be referenced.
Second, primarily with respect to the transport projects, some of the indices used
in the process of demand estimation, benefit calculation, and cost calculation should
be renewed, and the precision in the values of parameters should be reviewed. The
details of this work can be found in the study to revise the Sectoral Guidelines for
Road and Railroad Projects.
Third, there is the need to supplement policy analysis that constitutes the basic
analysis framework of preliminary feasibility studies along with economic
feasibility analysis, and to supplement the Analytic Hierarchy Process (AHP)
analysis that comprehensively evaluates both analyses. Data on relative development
by region needs to be updated for policy analysis. Ways need to be considered to
supplement the basic analysis framework for policy analysis and AHP analysis such
as adding special evaluation items and reorganizing the system of evaluation items.
Due to the aforementioned needs and background to revise the General
Guidelines, this revision report mainly intends to develop a range of analysis
methodologies to be uniformly applied to all types of projects and to work out more
detailed principles and standards for application. Particularly, it includes the contents
from the soon-to-be revised Study to Revise and Supplement the Sectoral
Guidelines for Preliminary Feasibility Studies for Road and Railroad Projects (fifth
edition) as well as the Study to Estimate the Values of Cultural and Scientific
Facilities, Study on the Methodologies of Preliminary Feasibility Studies for
Health and Welfare Projects, and Study on the Sectoral Guidelines for Preliminary
Feasibility Studies for ICT Projects currently underway regarding the guidelines for
non-transport projects, in order to increase the scope covered by the General
Guidelines.
. Guiding Directions and Major Contents
1. Composition and Directions of the General Guidelines

The existing General Guidelines (fourth edition) are largely divided into two
Outline
parts: Part 1: general guidelines for preliminary feasibility studies serves as a

formal manual by suggesting the basic contents and methodologies of study that
should be observed when conducting an actual feasibility study. Part 2: study on
methodologies to establish general guidelines contains a theoretical review and a
methodological study that serve as the background of Part 1. In other words, the
basic structure of the existing general guidelines places contents directly related to
execution of preliminary feasibility studies in Part 1 in keeping with the flow of the
report, and matters that require more in-depth theoretical study and definition of
issues in relation to methodologies and parameter estimation in Part 2.
The General Guidelines (fifth edition) are intended as a revised and
supplemented version of the Fourth Edition. As in the Fourth Edition, the Fifth
Edition has study guidelines in Part 1 and methodology study and parameter
estimation in Part 2. This report includes the core contents of this revision study, e.g.
setting an appropriate social discount rate; ways to attract private investment;
financial feasibility analysis; implementation guidelines for application of
Contingent Valuation Method (a method to calculate benefits for atypical projects);
standards to reflect future development plans; and estimation of the population and
Gross Regional Product of each administrative district, as well as various issues
related to study methodologies. Moreover, sufficient reasons and grounds are
presented about contents that are difficult to codify into guidelines or apply to an
actual study.
2. Major Contents and Methodologies

The General Guidelines (fifth edition) reviews and revises the existing reports as
necessary and focuses on economic feasibility analysis, financial feasibility analysis,
policy analysis, and comprehensive evaluation, the core contents of general guidelines.
Under these directions of revision, the Guidelines focus on the following areas:
A. Analysis of Economic Feasibility

a. Setting the Social Discount Rate
The need to set the social discount rate, a major index used in economic
feasibility analysis, is especially important in light of the recently low interest rates
that have been maintained since 2000 and the expectations for low economic growth
due to the decline in the per-capita GDP growth rate and the rate of savings
occasioned by low fertility and population aging. This report intends to
comprehensively consider the needs, issues, etc. of such adjustment and suggest an
appropriate discount rate. To ascertain whether it is necessary to adjust the current
real social discount rate, 5.5%, it reviews changes in the capital market such as the
downward trend in the interest rate, and recent application of discount rates in
developed countries.
Regarding the differentiation of evaluation methods for different types of
projects, it reviews the practicality as well as pros and cons of applying different
social discount rates for such projects as those for roads, railroads, ports, water
resources, and cultural and sports facilities.1
b. Reflection and Inclusion of other Guidelines
As the General Guidelines serve as comprehensive guidelines for different types
of projects, this revision report intends to build a general system by including the
revisions and additions of standard manuals of preliminary feasibility studies.
Nevertheless, this report only carries the outline of analysis and leaves out specific
analysis methods, parameters, etc. to be carried by the manuals and reports of each
type of project.
It includes the contents from the Study to Revise and Supplement the Sectoral
Guidelines for Preliminary Feasibility Studies for Road and Railroad Projects (fifth
edition) (hereinafter Sectoral Guidelines for Road and Railroad Projects)
currently underway. It is also more closely connected and consistent with the
Handbook of Investment Evaluation of Roads and Railroads published by the
competent authority for each project. Since preliminary feasibility studies became
institutionalized, the government agencies that carry out such studies, like the
Ministry of Land, Transport and Maritime Affairs, have developed and used
handbooks of investment evaluation, similar to the General Guidelines for
preliminary feasibility studies and the sectoral guidelines of each type of project.
Though they bear some difference in terms of the execution steps, scope, and
specific study methods, preliminary feasibility studies and regular feasibility studies
apply the same basic evaluation methods. As there is a need to maintain consistency
1 Current water resource projects (dams) have a longer economic life cycle (50 years) than other SOC
projects and thus benefits occur over a long period. For this reason, the social discount rate for such
projects is 6.5% in the first 30 years of operation and 5.0% in the remaining 20 years.
Outline
in the evaluation of public investment projects, these handbooks were reviewed to

ensure maximum consistency and expertise in the evaluation methodology. The
contents necessary to revise the Sectoral Guidelines for Road and Railroad Projects
are reflected, and the main contents are included in these Guidelines.
For greater consistency in the guidelines for non-transport projects, which
account for an increasingly greater share, the Study to Revise and Supplement the
Sectoral Guidelines for Preliminary Feasibility Studies for Water Resource Projects
(fourth edition), the Study on the Sectoral Guidelines for Preliminary Feasibility
Studies for Research and Development Projects, and others are currently in the
making. The General Guidelines intend to include, if only briefly, basic study
methods and theoretical matters to review these types of projects.
B. Study on Ways to Attract Private Investment

The General Guidelines (fifth edition) report intends to review projects where
the cost-benefit ratio exceeds 0.9 for their potential to attract private investment and
suggest appropriate procedures.
Originally, preliminary feasibility studies entailed financial feasibility analysis to
provide basic information that helps decide whether to conduct a project as a publicprivate partnership (PPP) project by roughly suggesting the potential for profitability
and the minimum rate of government financial support. Nevertheless, the financial
feasibility analysis in preliminary feasibility studies fails to comprehensively
consider qualitative elements such as better quality of service, ease of management,
risk distribution, and ripple effects other than profitability when setting the
minimum rate of government financial support to determine whether or not to
conduct a project as a PPP project. It, therefore, has limits in making a final decision
on whether or not to pursue a PPP project.
From the perspective of the government or nation, a project is financed by the
taxpayer regardless of whether it is a public investment project that is 100 percent
government-financed or a PPP project partially funded by the government. Therefore,
there should be principles to systematically select projects in place in advance without
regard to whether it is a government-financed project or PPP project.
The Basic Plan for PPP Projects (Ministry of Strategy & Finance, January
2008) stipulates that government-financed projects that can be carried out as PPP
projects in consideration of financing conditions, urgency, profitability, and such
and that need to secure profitability with appropriate financial assistance shall
indeed be converted into PPP projects. It also stipulates that the decision as to
whether a project shall be funded by public finances or private investment be made
when conducting a preliminary feasibility study. To implement this regulation, there

should be a way to determine whether to pursue a project with public finances or
with private investment ex ante at the step of preliminary feasibility study.
C. Supplementation of the Guidelines for Financial Feasibility Analysis

To facilitate attraction of private investment, the Ministry of Strategy & Finance
is currently improving the overall private investment system in such ways as
expanding the scope of PPP projects to include infrastructure projects and
conducting Value for Money (VfM) tests for large-scale unsolicited projects. The
importance of private investment involvement to public investment projects is ever
increasing. This highlights the rising need to supplement the guidelines for financial
feasibility analysis to provide more meaningful data for judgment of the possibility
to attract private investment in course of the preliminary feasibility study, the first
step of a public investment project.
Based on the guidelines for financial feasibility analysis presented in the
General Guidelines (fourth edition), the General Guidelines (fifth edition)
suggest revised and supplemented guidelines in detail for analysis such as
appropriate financial discount rates and forms of financial statements. In the case of
the financial discount rates, the Guidelines review the existing methodology to
estimate a discount rate and re-derives the rate that reflects changes in the financial
market and the markets risk premiums. It also defines specific items for the
financial statement of each type of project to devise a prototype of financial
feasibility analysis and provides guidance on the writing method.
D. Policy Analysis and Comprehensive Evaluation

Supplementation of the guidelines for policy analysis and comprehensive
evaluation in preliminary feasibility studies focuses on updating the index of
regional backwardness and supplementing the AHP analysis system.
First, to update the index of regional backwardness, each indicator of the index
must be updated as of 2005, and because North Jeju County and South Jeju County
in Jeju Island were integrated into Jeju City and Seogwipo City, respectively, the
number of cities and counties shall decrease from 170 to 168.
Second, to supplement the AHP analysis method, this report adds some
evaluation items; reorganizes the system of AHP evaluation items; and examines
ways to suggest, along with AHP results, the sensitivity of evaluation results toward
Outline
the weights on economic feasibility analysis and policy analysis and that of
evaluation results toward the weights on basic and special evaluations. It also
intends to delve into the best way to respond when the evaluators come up with
different decisions and ways to expand the scope of evaluators.
E. Prospects for the Population and GRP in each Administrative District

The results of population and GRP estimation by local government organization
in Part 2 of the General Guidelines (fourth edition) are inputted as raw data into
origin/destination (O/D) data, the basic data to estimate the demand when evaluating
transport projects. At present, it is not only out-of-date but is not reported by small
sublevel administrative districts, which renders it less useful.
This revision report intends to revise and supplement the long-term prospects for
the GRP in each small administrative district made in 2004. The revision will be
used to correct O/D data and validate population prospects and plans in target
districts when conducting a preliminary feasibility study.
Part I

Preliminary Feasibility Studies
10
As in the General Guidelines (fourth edition), the basic methodology to

conduct preliminary feasibility studies is to be established as follows: First, the
overview of a project and basic data are reviewed and analyzed to identify issues;
second, economic feasibility analysis is conducted through demand, benefit, and
cost estimation; third, the importance of a project to the national economy is
ascertained based on policy analysis (e.g. consistency with relevant policies,
willingness to pursue the project, risks in pursuing the project, special evaluation
items, etc.) and analysis of balanced regional development (analysis of factors that
affect regional development including job creation, ripple effects on the regional
economy, and regional backwardness in order to prevent even greater imbalance and
to increase equity among regions); and lastly, comprehensive evaluation is
conducted on the results of economic feasibility analysis and policy analysis using
multi-criteria analysis.
Against this background, to establish general guidelines for preliminary
feasibility studies, details should be stipulated including which basic data should be
used in each of the aforementioned four steps and which models or parameters
should be used and how they should be used. Part 1 will stipulate them in order.
It is important to bear in mind that Part 1 focuses on presenting general
guidelines. It, therefore, does not list and compare all possible theoretical
alternatives and finally look for the best alternatives. Instead, it presents general
guidelines for analyzing real issues which can face those conducting preliminary
feasibility studies as well as researchers in this field, and briefly demonstrates the
grounds for selection of analysis methods. Part 2 should be referred to for more indepth methodology for each issue.
Part 1 proceeds as follows: It talks about the project overview and basic data
analysis in Chapter 2; economic feasibility analysis in Chapter 3; policy analysis in
Chapter 4; and the AHP method in Chapter 5.
General Guidelines for Preliminary Feasibility Studies
11
Figure 1-1
Basic System of Preliminary Feasibility Studies

Basic Design Writing a Project Plan

l Background, Goal, and Expected Effects of Project
l Local Conditions (demography, geography, economy,
etc.)
l Case Analysis of Similar Facilities
l Engineering Data Study and Analysis
l Identification of Issues
Economic Feasibility
Analysis
l
l
l
l
l
l
l
Demand Estimation
Technical Review
Benefit Estimation
Cost Calculation
Cost-Benefit Analysis
Sensitivity Analysis
Review of Ways to Attract
Private Investment and
Financial Feasibility
Analysis
Policy
Balanced Regional
Analysis
Development Analysis
l Consistency with Relevant

Policy and Willingness to
Pursue Project
Alignment with Relevant
Plans and Policy
Directions
Willingness to Pursue
Project and Preference
for Project
l Risk in Pursuing Project
Possibility of Financing
Environmental Impact
Analysis
l Special Evaluation Items
Related to Project
Comprehensive Evaluation:
Multi-Criteria Analysis (AHP)
l Feasibility of Project
l Other Policy Suggestions
12
l Regional Backwardness
l Ripple Effects on the
Regional Economy
CHAPTER 2
. Project Overview
A Preliminary Feasibility Study is based on a project plan submitted to the

budget authority by the competent authority requesting execution of such study. The
level of detail of a project plan depends on its nature. For standardized projects like
a national highway network project, only basic information is included like the
origin and destination, route length, and number of lanes. For some projects, the
competent authority has a completed preliminary project plan as detailed as a
feasibility study.
For projects with a concrete project plan, the study team, which conducts the
preliminary feasibility study, can reduce time and costs at the step of preliminary
feasibility study. It is, therefore, best for the competent authority to submit a
preliminary project plan that is as detailed as possible when asking for a preliminary
feasibility study. Nevertheless, if a preliminary feasibility study is urgent, projects
may be selected for preliminary feasibility studies even when they have not been
concretely planned.
For projects for which a preliminary feasibility study is requested without a
concrete plan, the study team should have its competent authority submit a plan that
is as concrete as possible and as soon as possible to comprehend the outline for a
preliminary feasibility study. The contents that should be included in the overview
of a preliminary feasibility study are as follows:
1. Background and Purpose of a Project

Projects targeted for preliminary feasibility studies have different backgrounds
and purposes. For example, in the case of road or railroad construction projects, the
need can be raised in accordance with the Master Plan for Nationwide Transport
Network or with the purpose of ensuring balanced regional development, balanced
development between the nations eastern and western parts, or facilitating SouthNorth Korean exchange. The need for a project can be raised by a civil petition to
improve local transportation or based on a regions natural, industrial, or cultural
background.
The purpose of a project is similar to its need in some respects, but it can still be
defined as an objective. The purpose of a project should be explicitly defined in its
plan. In the case of a project to build a highway, national highway network, or local
road, the transportation problem to be solved by the project, its ripple effects, the
spatial scope of the effects, etc. shall be roughly indicated.
The study team considers all the information from a project plan submitted by
the competent authority, relevant literature, and field visits; identifies the
background and purpose of the project; and states them in a report.
2. Project Selection Process and Implementation Agency

Even when a project subject to a preliminary feasibility study has a background
and a purpose, the process by which the project has been chosen as the subject of a
study should be clarified. Investigating the process of a project selected as the
subject of a preliminary feasibility study and the party or agency that played a
leading role in requesting a budget can hint at issues that should be dealt with in the
analysis of the project.
Interests can differ between projects led by the central government and those by
local government organizations. Though it is not always the case, projects by the
central government often have ripple effects that spread to varying degrees
throughout different regions, not only in a specific region. Projects by local
government organizations tend to have ripple effects that do not spread much
beyond their jurisdictions, if at all. There can also be a political consideration: a
legislator may pursue a project for his/her electorate, or a project may be initiated
after persistent civil petitioning by local residents. It may be difficult to concretize
the details of politically-motivated projects in advance compared to those directly
14
pursued by the central government or local government organizations. This is

because the National Assembly or local residents are not the party that carries out
the projects at any stage.
What is more, the central government does not uniformly pursue all of its
projects with the same zeal. Ministries like the Ministry of Knowledge Economy,
Ministry of Land, Transport and Maritime Affairs, Ministry of Culture, Sports and
Tourism, Ministry for Food, Agriculture, Forestry and Fisheries, and Ministry of
Environment may have conflicting opinions over them.
Also, while it is important to know the process of selecting a project, it is also
important to know which party will actually carry it out. For example, the Korea
Expressway Corporation will carry out an expressway project, while the Korea
Railroad Corporation will lay a double track railroad.
In some cases, which engineering companies are likely to participate in the
project needs to be checked. It should be borne in mind that a party that conducts a
project or is highly likely to do so tends to have subjective opinions about the
project.
This points to the need for the preliminary feasibility study team to be fully
aware of interests according to the aforementioned selection process and the
different involved parties and to ensure that the most objective study can be done.
3. Contents of a Project
Among the details that go into a project plan to be written by the competent
authority, the most important is contents of the project other than its background and
purpose, selection process, and the implementation agency. Knowing in advance the
location of a project, its construction scale, and costs are important clues in roughly
determining its economic feasibility. A project plan needs to state the spatial
location, construction details, and total project costs based on data and past
experience.
Although the spatial location of a project is the element first considered when
considering whether to pursue it, it requires extensive investigation to determine a
specific location and detailed routes. Also, a bit of preliminary investigation is
required to estimate construction details and total project costs. Arguably, a
preliminary investigation should be conducted to select a specific location and route,
and to estimate construction details and total project costs. Nevertheless, there
should be no request for a preliminary feasibility study without an estimated spatial
15
location, rough route, or total project costs. To this end, it should be mandatory to
include a rough spatial location, construction details, and total project costs in a
project plan submitted to the budget authorities.2
4. Guidelines for Writing Project Plans for Candidate Projects

Based on the above discussion, the competent authorities of projects should
write a project plan about candidate projects applying for preliminary feasibility
studies as follows and submit it to the budget authorities:
First, the project plan (draft) of a candidate project should explicitly mention its
background and purpose. A vague description of the background or purpose like
promotion of regional development or resolution of regional transportation
problems is inadequate and unacceptable. The industry or sector that stands to
benefit from the project, the specific transportation problem, the region(s) affected,
and the way in which the problem will be solved should all be clearly stated.
Second, the project plan (draft) should state the specific location of the project,
namely the region where it will be conducted or the route it will cover to the
possible maximum extent. Merely mentioning the jurisdiction names of the origin
and destination or listing candidate cities is inappropriate. For a building
construction project, a site where the building will be built should be properly
selected in the plan.
Third, the implementation agency should be specified. Even for a project where
it will likely be determined automatically according to standard procedures, the plan
should explicitly state the implementation agency. In this regard, well-defined role
sharing between the central government and local government organizations should
be clarified as well.
Fourth, the contents of a project should be rendered explicitly and the total
project costs should be estimated and offered. As the project costs depend on the
details of a project, only when the project plan can settle which facilities or
structures will be included can total project costs be properly estimated. Estimation
of total project costs can only be derived at first from the cost data of similar
projects, but such estimation is critical to determining the need for investigation into
the project.
2
16
If a preliminary feasibility study is launched without concrete project details, the competent authority
should be requested to submit a project plan (draft) of specific details as soon as possible.
Fifth, the plan should also stipulate the expected effects of a project. Such effects
as increased production, employment, added value, and the like once it is completed
may not be definitely known at this step, but other expected effects need to be
roughly presented like, in the case of a transport project, how much travel time can
be reduced, how many commuters or travelers can be accommodated, and how
much congestion costs can be reduced.
. Basic Data Analysis
The first thing to do when pursuing a public investment project or evaluating

feasibility is to fully analyze basic data about the region subject to the project. For a
preliminary feasibility study, therefore, the study team starts by visiting the target
region and gathering basic data about it. The basic data of a region can be largely
divided into data on the natural environment and that on the social and economic
environment.
Data on the natural environment refers to that about climate, geological features,
altitudes, slopes, etc. A more full-blown investigation like a geological survey and
local due diligence is for regular feasibility studies rather than for preliminary
feasibility studies. Preliminary feasibility studies entail basic investigation through
existing literature like the statistics and higher-level plans about the region in
question. Data on the social and economic environment includes demographics, each
industrys employment structure, gross regional domestic product (GRDP), land use,
and so on. In the case of transport projects, particularly, the status of main roads in
the target region should be delineated. For access roads into industrial complexes,
and roads or railroads into ports, the status of traffic-generating facilities like
industrial complexes, ports, and such in relation to the target project should be
analyzed intensively.
Rather than simply enumerating standardized data about the target region, basic
data analysis should state the conditions of the region in relation to the project
subject to a preliminary feasibility study. Analysis of the transportation situation
should be done to ascertain what the project can do for the transportation system of
the target region so that the need for the project can be determined before
transportation analysis is conducted in full swing.
17
1. Analysis of the Natural and Living Environments

Depending on their characteristics, some projects are more strongly impacted by
the natural environments than others. Projects to build expressways or railroads can
be very different in nature and vary greatly in cost depending on topography. On the
other hand, projects to build industrial complexes are influenced more by the social
and economic environment than the natural one. Their success or failure depends on
the population, industrial structure, regional income level, and such.
It is also important to look into living environment conditions like water and/or
soil pollution, sanitation, and construction noise that have direct impact on daily life.
Preliminary feasibility studies should conduct a rough investigation in any form
about daily life pollution, etc. that can happen when the concerned project goes
ahead. For example, for water resource development and other such projects that
greatly impact the environment, the environmental impact should be checked when
the decision is made as to whether to push ahead with the projects. A multipurpose
dam project in Yeongwol and a comprehensive water management plan for the
Nakdong River were stymied by stiff opposition by local residents or concerns about
environmental destruction. If a water resource development project proceeded
without looking into environmental impact, much difficulty would be expected in
executing the project. Daily life pollution like soil pollution, sanitation, noise, and
air pollution can become daunting problems, which means that all forms of daily life
pollution should be checked as necessary depending on the types of projects.
2. Analysis of the Social and Economic Environments

Already pointed out was the need to check the population demographics and
industrial structure, GRDP, use of land, transportation conditions, etc., namely the
socio-economic environment of the target region. The most basic data is that on
demographics, industrial structure, and GRDP. This is true regardless of the type of
project at issue, and these are important determinants of the projects ripple effects.
Demand is higher in densely populated regions, so the project is likely to be more
economically feasible. The industrial structure serves as a definite clue as to whether
the project is appropriate for the region. GRDP data are important in determining
economic feasibility and balanced regional development.
Provincial and metropolitan city government organizations can easily acquire
basic data on demographics, industrial structure and GRDP, but this is difficult for
18
lower-level local government organizations such as those of cities, counties, and gu

districts. This is particularly true for forecasts. A local project should secure such
data at the level of at least city, county, and gu-district government organizations or
even at a lower level. Also, several strong assumptions should be made for assessing
prospects.
To conduct more refined preliminary feasibility studies, the aforementioned data
and prospects should be developed in a way that they are readily accessible and
usable by both provincial and metropolitan city government, and lower-level local
government organizations.
In the case of transport projects like those for roads and railroads, the most
important part of basic investigations for preliminary feasibility studies is to know
the transportation conditions of the target region. For example, the number of roads
of different types, their lengths, traffic volume, etc. in the target region are to be
presented. Detailed description of transportation facilities closely related to the
concerned project can shed light on its importance and/or necessity for the region.
Preliminary feasibility studies on access roads into industrial complexes, access
roads and railroads into ports, and such should include details on the facilities of
industrial complexes and ports to ascertain not only the status of transportation
facilities but also that of industrial complex and port facilities and generated traffic
volume so that the importance of the concerned project can be understood.
It is also important to review upper-level and relevant plans of the concerned
project as a sort of socio-economic environment analysis. Few SOC projects are
handled by a single implementation agency alone. Instead, a project is more likely to
impact other plans by the central or local government, in turn involving more than
one party. Review of higher-level plans can indicate whether the concerned project
has been well coordinated and check the order of priority for investment determined
in higher-level plans.
Each type of project has higher-level sectoral plans that have to be first checked,
and there are various relevant plans that need to be reviewed depending on the
nature of the concerned project. Under Koreas planning system, national land plans,
plans under individual laws, plans by local governments, and such are often
intertwined in a morass of complexity. Therefore, whether higher-level and relevant
plans have actual impact on the concerned project and the project is in alignment
with the overall direction of national development, etc. should be determined.
19
. Identification of Issues
Once the outline and basic data on the natural, living, and social and economic
environments of a project are analyzed in detail, the main issues to be dealt with in
its preliminary feasibility study are identified. Such issues depend not only on the
nature and background of the project but also on the natural and socio-economic
environments of the concerned region.
The most important issue in any preliminary feasibility study is the review of
alternatives. Looking into alternatives is as important as estimating the costs and
benefits of a suggested project plan. In the case of highway construction projects, the
question of whether alternatives like expanding other national and/or local roads or
building a railroad instead of building the planned highway are more desirable
should be addressed. There is one restriction in reviewing alternatives: considerable
time and effort are required to compare alternatives at a level playing field as doing
so entails at the very least roughly calculating the costs and benefits of as many
alternatives as possible. Consequently, a detailed and accurate cost-benefit analysis
should be conducted for a project plan while the costs and benefits of alternatives
are estimated using the existing data and such.
One point to bear in mind is that doing something is not the only alternative:
doing nothing is also in many cases an entirely legitimate alternative and should,
therefore, be carefully considered. For example, in addition to considering expansion
of a national highway network or laying a railroad instead of laying an expressway,
doing nothing should be seriously considered as well. The opportunity costs should
be considered in all cases to determine a projects feasibility, and doing nothing may
be found to be in fact the best alternative.
Moreover, preliminary feasibility studies can identify other issues like technical
feasibility, possibility of financing, inter-regional conflicts, national defense
consideration, and possibility of attracting private investment.
Whatever they are, the final report of a preliminary feasibility study must
highlight important issues in analysis and suggest their solutions.
20
CHAPTER 3
Economic Analysis
The primary scope of analysis of preliminary feasibility studies can be largely

divided into two parts: analysis of economic feasibility of the concerned projects
and what could be termed policy analysis. Economic analysis helps understand
the economic value of a project to better understand it. Furthermore, information on
a projects economic feasibility is used as the most basic and indispensible data in
policy analysis. As such, economic analysis is the most essential part of preliminary
feasibility studies.
The details of economic analysis in preliminary feasibility studies differ
depending on the types of projects. The benefits of a highway construction project
can be estimated by travel time savings, vehicle operating cost savings like cuts in
fuel expenses, accident cost savings, etc. The benefits of a cultural facility
construction project can be estimated by non-use value like the value of its existence
and use value.
Economic analysis starts from the estimation of demand for a project. Demand
estimation requires various statistical methods. Estimated demand should be
validated with past experience and similar domestic and foreign projects. It is also
used to estimate benefits. To estimate total project costs, it should be possible to
estimate initial investment costs like construction and land acquisition costs as well
as Operating and Maintenance costs (O&M costs).
Economic analysis is a process of ascertaining a projects economic and
financial feasibility through calculation of the Benefit-Cost Ratio (BCR), Net
Present Value (NPV), Internal Return Rate (IRR), etc. When necessary to address
the errors of various estimates used in economic analysis, sensitivity analysis is
conducted with respect to changes in primary variables like demand, unit price, and
the discount rate to determine their impact on economic feasibility.
The following describes the specific methods of economic analysis in the order
of demand estimation, benefit estimation, cost estimation, economic feasibility
evaluation, and ways to attract private investment.
. Demand Estimation
1. Transportation Projects3
A. Process to Estimate Transportation Demand
The feasibility of a project that invests in transportation facilities can be
analyzed by comparing the associated costs and resulting benefits. Transportation
demand is one of the elements that have the greatest impact on the estimation of
costs and benefits in feasibility evaluation. The decision on whether to go ahead
with the concerned project, priority for investment, etc. is evaluated through the
estimation of transportation demand, and such estimation is used to derive an
appropriate size of transportation facilities to provide and analyze the impact on the
surrounding areas of such facilities. In the case of a PPP project, the estimated
transportation demand serves as important background data to determine the
projects feasibility as well as usage fees and construction subsidies.
Demand for transportation can be estimated by various methods. A model based
on the data of individual travelers or households or a model based on the data of
each zone subject to analysis can be used. In Korea, a four-step model is most
commonly used to estimate transportation demand not only in large cities but also
between regions. It is not so much that the model is appropriate for any case but that
the consistent steps to estimate transportation demand used by the model are easy to
understand, even for laymen.
To estimate transportation demand, each of the four steps of trip generation, trip
distribution, mode choice, and traffic assignment is successively applied based on
Traffic Analysis Zones (TAZ). Each step has different techniques and models to
apply as follows:
First, trip generation estimates trips that are either produced by a TAZ or
attracted to a TAZ and uses the rate of change model, trip rate model, crossclassification, regression analysis, etc. This step discovers the generated and
attracted traffic volume of passengers and cargo in each TAZ.
3
22
In fact, demand estimation methods used only in road, railroad, or bridge construction projects, out of all
transportation projects, can be used as they are, and slightly different methods should be used for projects
to build ports or airports. For demand estimation methods for transportation projects of each type, refer to
the Study to Revise and Supplement the Sectoral Guidelines for Preliminary Feasibility Studies for Road
and Railroad Projects (fifth edition) (KDI, 2008), Study on the Sectoral Guidelines for Preliminary
Feasibility Studies for Port Projects (KDI, 2000), and Study on the Sectoral Guidelines for Preliminary
Feasibility Studies for Airport Projects (KDI, 2000), respectively.
Second, trip distribution allocates the generated and attracted traffic volume
estimated above among TAZ and often uses models like those for growth factor,
gravity, entropy maximization, and intervening opportunity. This step generates
passenger O/D (Origin/Destination)4 and cargo O/D data among TAZ.
Third, mode choice divides the O/D data among traffic zones from the previous
step into the modes of transportation available for choice by users and often uses
trip end models, trip interchange models, disaggregate behavioral models, etc. This
step produces O/D data for different passenger modes like passenger cars, buses,
and railroads and O/D data for cargo like truck and railroad cargo.
Lastly, traffic assignment assigns the O/D data of each transportation mode to
the transportation network in the TAZ, and often uses static assignment techniques
like all-or-nothing assignment, capacity restraint assignment, stochastic assignment,
and equilibrium assignment.5
Figure 3-1 shows the process of transportation demand estimation under the
conventional four-step model. In the preliminary feasibility studies of most road
projects, transportation demand at the origin and destination of each future mode of
transportation estimated by the governments transportation database center is used
so that the three steps out of fourtrip generation, trip distribution, and mode
choiceare omitted. The first thing to do in the process of estimating transportation
demand in a road project is calibration of data from the base year based on given
O/D and network data. This work refers to building a model of current
transportation patterns within the margin of error, and the calibration is considered
well done if the deviation is small between the results of network traffic assignment
within the TAZ and the actual observed traffic volume. Once data calibration of the
base year is completed, future transportation patterns are forecast in accordance with
O/D and network changes based on the assumption that the traffic assignment
pattern of the base year continues. This forecast is compared with the transportation
patterns of a year when the project is implemented to predict any change in
transportation patterns resulting from project implementation such as changes in
traffic volume and speed. Preliminary feasibility studies use commercial
transportation planning software to analyze transportation demand. Recently widely
used are EMME/2, TransCAD, and others developed overseas as well as Koreas
4
In Korea, institutions that have public confidence distribute passenger O/D data, and estimation of
transportation demand often uses relevant O/D data. Some foreign cases use P/A (ProductionAttraction) data for urban transportation analysis.
Recently, there has been substantial research based on real-time dynamic traffic assignment
techniques using ITSs (intelligent transportation systems) to estimate the traffic volume of cars and
passengers for each section of roads and railroads.
Economic Analysis
23
Satongpaldal. Preliminary feasibility studies do not force use of specific software,

but there is a need to use software to ensure analysis at a level required for studies.
Figure
3-1 Transportation Demand Estimation Process under the Conventional

Four-Step Model
Trip Generation
(Rate of Change Model, Trip Rate Model,
Regression Analysis, etc)
Trip Distribution
(Fratar Method, Gravity Model, etc)
Cargo
O/D
Passenger
O/D
Correction and Change

(Number of lanes,
capacity, each model
Parameter, etc.)
Modal Share
(Trip End Model, Logit Model, etc.)
Construction of
Current
Transportation
Network
Traffic Assignment
(User Equilibrium Model)
Traffic Volume per

Road Link
Traffic Volume per

Railroad Link
(Passenger, cargo, etc.)
(Passenger, cargo, etc.)
Comparison of
Assumed and Observed
Traffic Volume
(Big Margin of Error)
(Small Margin of Error)
Establishment of
Four-Step Model
Table of Future
Total O/D Traffic and Each
Modes Traffic
Future Social and

Economic Indices and
Transportation Network
Construction
Future Traffic
Assignment
Estimation of Future Road

and Railroad Traffic
(by Transportation Mode and Section)
24
Unlike road projects that use the already-established O/D data of each
transportation mode, the mode choice step is very important in railroad projects.
Accordingly, in addition to transportation demand estimation for roads, calibration
in relation to mode choice and transportation demand estimation for each future
transportation mode should be conducted. The calibration is considered well done if
the deviation is small between the demand estimated for each transportation mode in
the base year within the TAZ and the actual demand observed.
B. Use of Data that have Public Confidence

To estimate transportation demand for projects in the Seoul metropolitan area,
preliminary feasibility studies in principle use as raw data present and future O/D
and network data of the Seoul Development Institute, Gyeonggi Research Institute,
and Incheon Development Institute at the request of the Metropolitan Transportation
Authority. For projects in other regions and to build transportation facilities
connecting regions across the country, they are to use the Korea Transport Database
(KTDB) of the Korea Transport Institute (KOTI). The Korea Transport Database
Center provides present and future O/D and network data about transportation
between regions and about transportation in regional zones across the nation.
In principle, major parameters used to estimate transportation demand use data
corresponding to adopted O/D and network data, and if such data is not available,
data from institutions that have strong public confidence should be used.
C. Constancy of Total Traffic Volume

The total traffic volume of the TAZ of a transportation facility project does not
change without a reason. This is based on the assumption that future O/D data used
as raw data already reflects the impact brought about by changes in social and
economic indices like population, number of cars, and income level. As such, the
total traffic volume is generally in principle unchanged before and after project
implementation.
If the future development plan of some of the areas in the TAZ that can cause
change to the O/D data of each analysis zone is omitted from the existing database,
the plan can be added to change the O/D data of each analysis zone, but the total
traffic volume must remain constant. In other words, while additional traffic occurs
in an analysis zone due to the development plan, the traffic in other analysis zones
declines. However, in case of projects that can cause marked change in total traffic
Economic Analysis
25
volume like those to build bridges between islands and between islands and the
mainland, the total traffic volume can change to reflect the induced traffic.6
This condition of constant total traffic volume applies only within the zone
system indicated in provided data. If the zone system changes through segmentation,
aggregation, etc., the total traffic volume before and after the change is naturally
different. Under the assumption of constant total traffic volume, the O/D data of
traffic volume by modes can change. In a railroad project, the modal share rate
increases as a result, and the O/D traffic pattern of another transportation mode (i.e.
roads) changes, inevitably leading to change in the O/D data of traffic volume by
modes for both roads and railroads.
D. Omission of the Mode Choice Step for Road Projects

As preliminary feasibility studies provide the already-built O/D data of present
and future modes, there is not always a need to conduct the four-step analysis for all
projects. As the traffic volume converted from railroads is insignificant in almost
any road project, the feasibility of such a project is mostly affected by changed
routes at the traffic assignment step. In this case, it is important to calculate shifts in
traffic volume to other routes due to change in traffic costs, so the mode choice-step
analysis can be omitted. Analysis mainly uses network properties, volume delay
function, and traffic assignment.
In the case of large-scale expressway projects, etc., the impact on demand for
railroad transportation can be substantial, so mode choice analysis can be included
when necessary.

Water resources projects including those for multipurpose dams have significant
impact on the public and the nations economy and create a financial burden if they
overestimate or underestimate the future demand for water in the impact areas.
Water supply and demand analysis in preliminary feasibility studies is essential to
ascertaining the feasibility of projects and deciding on their optimal scale. Therefore,
6
26
The Preliminary Feasibility Study on Projects to Build Three Bridges between Islands and between
Islands and the Mainland in Sinan County (KDI, 2003) used the assumption that the construction of
island-connecting bridges causes additional traffic.
more rational and objective methods should be used for such analysis, and much
focus should be placed on it at the step of preliminary feasibility study to ensure
precise estimation.
A. Scope and Procedures of Analysis

Details that should go into the analysis of water supply and demand are as indicated
in Table 3-1: estimation of water demand7 that considers future uncertainties;
estimation of water supply that considers the conditions of water resource supply; and
analysis of water supply and demand that considers all these mentioned above.
Table 3-1
Contents of Analysis of Water Supply and Demand
Analysis Items
Description
n
Estimate demand for water for residential purposes considering population,

penetration rate, and per-unit water supply (including water for other purposes)
Water Demand
Estimation
Water Supply
complexes in the impact area

n
Estimate demand for irrigation water
Estimate demand for water to preserve rivers and improve the environment
Investigate supply facilities and plans to expand them in the impact area and estimate
Estimation
Analysis of Water
Supply and Demand
Estimate demand for industrial water in national, regional, and agricultural industrial
possible future supply volume

n
Predict future water supply and demand and compare excess or deficiency before and
after development
The demand estimation step in preliminary feasibility studies should refer to the
population plans, penetration rates, various units, and other such prospects
suggested in several higher-level plans. Nevertheless, these higher-level plans make
some of the forecasts only every five years, and these need to be interpolated for
analysis items in annual units. Considering that all sorts of water resource plans
abide by the highest-level plan, the Long-Term Comprehensive Plan on Water
Resources (Water Vision 2020), preliminary feasibility studies should use the same
base period to propose forecasts as that used in the long-term plan. If the time of the
concerned project completed does not coincide with the base year, the supply and
demand status at the time of completion should additionally be suggested.
7
Demand for water consists of water for residential purposes, industrial water, agricultural water,
water to preserve rivers, and water to improve the environment.
Economic Analysis
27
If the estimated demand for water exceeds the actual demand, and the newly
developed water resources and supply facilities are not efficient, the economic
feasibility of the concerned project drops. Similarly, if the estimation falls short of
the actual demand, a new water resource should be developed and its supply
facilities should be planned in the near future, also resulting in lower economic
feasibility. Extorted estimation of future water supply capacity can have similar
results. Preliminary feasibility studies should accurately estimate actual future
supply and demand to determine a point of time when supply exceeds demand as
that of the concerned project completed. Supply and demand should coincide in the
planned year, and the scale of development should be set to ensure smooth
reconciliation of supply and demand. Nevertheless, some degree of flexibility
should be exercised to determine the volume of supply and time of development as
there are many uncertainties in demand estimation.
B. Water Demand Estimation

Demand for water changes over time with economic development,
environmental change, and other such factors. To properly distribute limited water
resources, the present and future demand for water for different purposes should be
precisely calculated. The water demand in the previous preliminary feasibility
studies as well as general water resources projects is for residence, industry,
agriculture, and minimum instream flow requirements, and the wholly-amended
River Act proclaimed in April 2007 added a new purpose: improvement of the
environment. These Guidelines use these five purposes of demand estimation as
shown in Table 3-2.
The methods to estimate demand for different purposes are as follows:
First, the residential demand for water can be estimated by an econometric
technique using functional formulas for water demand8 and extrapolation using
units. Preliminary feasibility studies employ in principle extrapolation using units
that can easily reflect the characteristics of individual local governments, and
bottom-up estimation based on eup and myeon district units. The residential demand
for water targets the population that receives water supply and is calculated by
estimating future population; penetration rate of water supply; per-capita, daily
average water consumption (pcd); and demand for water for other purposes
8
28
The Long-Term Comprehensive Plan on Water Resources (Water Vision 2020) (Ministry of Land,
Transport and Maritime Affairs, 2006) estimated water demand for residence by an econometric
technique.
(tourism, port maintenance, military, airports, etc.) in the impact area.

Table 3-2
Water Demand for Different Purposes
Purposes
Description
n Water for household uses, commercial uses (including small-volume industrial uses),
Residential
bathhouse uses, specific industrial uses, public uses, temporary uses, and other uses
(tourism, port maintenance, military, etc.)
Industrial
Agricultural
Preservation of
rivers
Improvement of the
environment
n Water for industrial uses for raw materials, product processing, boilers, and other
purposes
n Water for rice paddies, dry fields, stockbreeding, and other such uses
n Water to discharge to maintain the three functions of rivers: irrigation, water control, and
environmental function.
n Water needed for some sections of rivers to improve the living environment. The water is
provided when requested by a beneficiary group.
Second, the actual demand for water for industrial purposes is divided into that
from industrial complexes in planned locations 9 and that from freely-located
plants10. Preliminary feasibility studies only investigate the demand from industrial
complexes in planned locations by extrapolation and unit load methods.
Extrapolation entails regression analysis of fluctuations in the past use of water to
estimate future demand, and therefore, the past data of each complex needs to be
fully studied. It is impossible to apply this method in Korea because the available
data is inadequate. The unit load method is used to estimate the demand from
industrial complexes. The unit load method applies units, derived from elements
closely related to the amount of industrial water used, to these elements in order to
ascertain the amount of industrial water used. To use this method, the most
appropriate unit should be selected for each industry type, and these units include
the area of a plant site, number of employees, production volume, etc. The per-unit
method is used as the unit for the existing industry complexes. Its applicability was
reviewed in the 2006 Long-Term Comprehensive Plan on Water Resources. The
area of a plant site is used for new complexes as such data is easy to acquire.
Third, water for agricultural purposes is divided into water for rice paddies
(well-irrigated paddies/partially-irrigated paddies), dry fields (irrigated fields/nonirrigated fields), and stockbreeding (livestock/processing). Preliminary feasibility
9
10
Industrial complexes in planned locations are national, regional, and agricultural industrial
complexes that are planned for specific locations and accommodate a large number of plants.
Freely-located plants are small individual plants scattered across the nation.
Economic Analysis
29
studies only consider rice paddies (well-irrigated paddies/partially-irrigated paddies)

and dry fields (irrigated fields) for demand estimation. The demand for water for
agricultural purposes can be estimated by various methods. In previous estimates, it
was practically impossible to add up actually-measured amounts used or employ the
per-unit water demand of a sample zone due to a lack of observational data. Instead,
the demand was calculated and amount used summed up through established
theories. In consideration of the characteristics of preliminary feasibility studies and
the limited data, the amount of evapotranspiration is estimated using established
theories and formulas, but the per-unit water demand suggested in the upper level
plans of the impact area is multiplied by the forecast irrigation area of each of three
different types of farmland.
Fourth, the water volume to preserve rivers is an important component of the
required water volume to manage rivers along with irrigation water. It is set by river
management to preserve natural functions in sections or representative points of
rivers. The River Act (amended on March 21, 2008) defines water volume to
preserve rivers as the minimum flow requirement to maintain rivers normal
functions and status in consideration of uses of river water for daily living, industrial,
agricultural, environment improvement, electric power generation, maritime
transportation, and other purposes. It is believed to be difficult to directly calculate
the flux to preserve rivers at the step of preliminary feasibility study. It is to be
estimated using the flux to preserve rivers announced by the Ministry of Land,
Transport and Maritime Affairs (MLTM).
Lastly, water to improve the environment is the water quantity required by some
river sections or regions to improve the daily life environment, which involves water
fronts, water activities, tourism, recreation, cultural events held by rivers, and
improvement of the water quality of unprocessed natural water. It is generated at the
request of beneficiary groups (local governments, specific institutions, or
individuals). Unlike the flux to preserve rivers calculated by the government, the
amount of water to improve the environment should be calculated by beneficiaries
themselves, and the calculated amount should be permitted by river management
(government). Preliminary feasibility studies should look into data used by
beneficiaries to calculate demand for water for this purpose.
C. Water Supply Estimation

The procedures to estimate water supply capacity are ascertaining the supply
capacity of existing water resource facilities; ascertaining how much supply will
change as a result of development plans of water supply and industrial water supply and
adjustment of regional distribution worked out until the project is planned; and
30
calculating the supply capacity of a new dam to secure additional water resources.
To ascertain the water supply volume for residential purposes at the water supply
facilities of each administrative district, the data of the Korea Water Resources
Corporation and local governments is to be referred to, and distinction should be
made among regional waterworks, special-purpose waterworks, and such. To
ascertain the volume of water supply facilities for industrial purposes, data should
be gathered on regional and industrial water supply as well as water supply facilities
exclusively for industrial purposes allowed by regional MLTM offices and local
governments to supply water. Underground water facilities used by industrial
complexes and freely-located plants are excluded. The capacity of regional and
industrial water supply facilities for industrial purposes should be calculated
excluding volume used for residential demand under the Water Service Statistics.
Irrigation facilities of agricultural water include reservoirs, pumping and drainage
stations, dammed pools for irrigation, collecting conduits, tube wells, etc. Data kept
by local governments and farmland improvement associations is to be used.
To ascertain the supply capacity of existing water resource supply facilities, that
of water service facilities like distributing reservoirs and clean water reservoirs is to
be calculated by dividing the facility capacity of each district (city, county, and gu)
in the Water Service Statistics by the peak load factor (1.2%~1.35%). The capacity
of water resource facilities like multi-purpose dams to secure unprocessed water is
to be calculated using their facility capacity as reported.
D. Analysis of Water Supply and Demand

Water budget analysis until the project is planned is necessary for water
resources to be developed, but the potential scale of water resource development is
to be identified by referencing the results of existing plans without water budget
analysis. The supply capacity of new dams to secure additional water resources is
the total water supply derived through engineering analysis minus the supplies of
agricultural water and water to preserve rivers. In this case, not total demand for
agricultural water of the impact area, but the required amount to be supplied by a
new dam with guaranteed water rights is considered for agricultural water. At the
time of completion, supply should exceed estimated demand to ensure reliable
supply, and at the time of planning, supply and demand capacity estimates should
strike a balance.
Economic Analysis
31
3. Other Projects
Projects to build industrial, cultural, tourism, sports, and science complexes
generate effects that are direct but not so great. They mostly have indirect effects.11
As such, demand arising from indirect effects must be higher than direct demand for
projects. If the main purpose of a project to form an industrial complex is to raise
the competitiveness of the appropriate industry, the most important is to accurately
estimate the demand to be created by the project in the industry. As demand
estimation can be extremely difficult in some cases, it is recommendable to estimate
demand for both the best-case and worst-case scenarios.
4. Standards to Reflect Development Plans

Development plans go through several steps of review by the central
government or local governments from project conception to implementation.
Projects can be cancelled midway, or even when implemented, and the scale and
other aspects can be altered as necessary. Their implementation depends on how
systematically the execution agency executes them. Development plans are an
important factor in the analysis of projects feasibility and should be included in
project plans (drafts).
Preliminary feasibility studies have mostly targeted national plans or concrete
development plans that will certainly be implemented, even when they are largescale plans pursued by local governments. Development plans of which
implementation is certain are those for which implementation plans are established,
and preliminary feasibility studies do not reflect those of which implementation is
uncertain, where the year of implementation is not determined, or the
implementation plan is so unclear that calculating demand is difficult. If
development plans are not concrete and thereby not proper for preliminary
feasibility studies but are highly likely to be pursued and can greatly influence
feasibility, preliminary feasibility studies analyze their effects through scenario
analysis.
11
32
Of course, indirect effects mentioned here are not entirely the same as those in the next chapter:
policy analysis. Indirect effects here refer to direct and indirect effects of a project, but not
economic ripple effects directly given to its principal agent. They are also not very general indirect
effects like ripple effects to the local economy to be dealt with in policy analysis.
Details on how to reflect development plans will be dealt with in the guidelines
for different types of projects. In the case of transportation projects, for instance,
they can include how much more traffic should be additionally reflected and how
increased traffic should be distributed. To increase consistency in all studies, these
General Guidelines intend to define clear standards for the step at which
development plans should be reflected in preliminary feasibility studies and suggest
their basis.
In general, the standards to reflect development plans are largely divided into
those of cities and provinces and of the central government. Development plans
include those for housing site development, industrial complex development, and
tourist resort and resort complex development. As the reflection of development
plans can greatly influence the feasibility of projects, the reflection standards should
be carefully approached.
Preliminary feasibility studies have so far reflected development plans when
their detailed implementation plans are approved in order to exclude uncertain plans
from analysis, ensure precise demand estimation, and prevent excessive and
overlapping investment.
To suggest clearer standards about when to reflect development plans, these
General Guidelines studied the rate of project implementation, mainly for the
development plans of housing sites and industrial complexes, according to the
development plan procedures suggested in the Evaluation Guidelines for
Transportation Infrastructure by MLTM (2007), Land Business Handbook (2007),
and Housing Business Handbook (2008) of the Ministry of Land, Transport and
Maritime Affairs that are used as the standards in feasibility studies. As a result, the
times of reflection are indicated in Table 3-3 as follows:
Table 3-3
Comparison of Standards to Reflect Development Plans
Classification
Current Guidelines
(fourth edition)
Changed Guidelines
Housing site development plan
Detailed implementation plan approved
Industrial complex development plan
Development and detailed implementation

plans approved
Tourist resort and resort complex

development project
Other development plans
Projects which are certain

to be implemented
Formation plan approved

Step corresponding to the detailed
implementation plan being approved
Note: The standard for reflecting any type of development plan is when the development plan is approved in the case of water
resources projects.
Economic Analysis
33
Not many housing site and industrial complex projects in the past were
cancelled after sites were designated. Nevertheless, as the O/D data distributed by
the Korea Transport Institutes Korea Transport Database Center already reflect
most development plans, reflecting those plans of which detailed implementation
plans are approved would improve the accuracy of analysis.
Plans for multi-functional administrative cities, innovation cities, transfers of
provincial governments, and such led by the central government, which are more
likely to be implemented than other development plans, need to be reflected before
approval of detailed implementation plans. When development plans have a great
influence on project feasibility, scenario analysis can also be carried out, and clear
description needs to be made in reports. However, any reflection of development
plans should be carefully done taking into account actual conditions. These General
Guidelines focused on development plans for housing sites and industrial complexes,
but it would be appropriate to reflect plans of other kinds like those for tourist
resorts and resort complexes at a step corresponding to approval of detailed
implementation plans.
. Benefit Estimation
Benefit estimation starts with the identification of benefit items. Benefit items
vary greatly according to the characteristics and contents of projects, and they need
to be subdivided according to project plans submitted by the competent ministry.
Once they are identified, opportunity cost or value per unit is calculated by item to
estimate benefits. For instance, the estimated benefit Bit is expressed as follows:
Bit = Pi Dit ,
Bt =
it
where value per unit of benefit item i is Pi and estimated demand is Dit at the
point of time t .
The following is divided into transportation, water resource, and other projects.
As in Section 1, demand estimation, the individual guidelines should be referred to
for more specific estimation methods, and these General Guidelines only deal with
34
overall estimation.
Investment projects of transportation facilities generate direct benefits for
transportation and indirect social benefits. The benefit items of road and railroad
projects are indicated in Table 3-4 and Table 3-5.
Direct benefits generated by transportation projects for users of transportation
facilities include savings in vehicle operating costs, travel time, and accident costs
as well as increased pleasure, improvements in punctuality, greater safety, and such.
It is relatively easy to put a monetary value on the first three items, but it is difficult
to do so for the others as their value can vary according to individuals subjective
levels of satisfaction. For railroad projects, the benefits resulting from shifts in
demand from aviation and shipping and benefits from reductions in accidents and
delays thanks to improved crosswalks need to be reflected, but quantifying these
benefits is difficult.
The indirect benefits are ripple effects for all people regardless of their use of
transportation facilities and include pollution cost savings and noise cost savings,
regional development, expansion of markets, and improvement in industrial
structures. For railroad projects, also considered are savings in expressway O&M
costs thanks to shifts in demand, lower opportunity costs of parking spaces thanks to
lower demand for parking, and negative benefits in the form of increased congestion
and reduced road space during construction.
Table 3-4
Benefits of Road Projects
Classification
Direct Benefits
Indirect Benefits
Benefits
n
Vehicle operating cost savings
Travel time savings
Accident cost savings
Increased pleasure, improvements in punctuality, greater safety, etc.*
Pollution Cost Savings and Noise Cost Savings
Regional development
Expansion of markets*
Improvement in regional industrial structures*
Note: * refers to items not quantified and reflected in benefit calculation.
Economic Analysis
35
Table 3-5
Benefits of Railroad Projects
Classification
Benefits
Railroad User
Reduced travel time for people and cargo using railroads (both existing and new)
Benefits
Increased pleasure, improvements in punctuality, and greater safety, etc.*
Benefits for
Travel time savings due to shift in demand from roads to railroads
Users of
Shift in demand from aviation and shipping*
Other Modes
Accident cost savings
Reductions in accidents and delays due to improved crosswalks
Pollution Cost Savings and Noise Cost Savings
Regional development*
Expansion of markets*
Indirect Benefits
Improved regional industrial structures*
(Non-User Benefits)
Lower expressway maintenance costs*
Lower opportunity costs of parking spaces due to lower demand for parking
Negative benefit of increased congestion during construction
Negative benefit of reduced road space during railroad projects
Direct
Benefits
(User
Benefits)
Note: * refers to items not quantified and reflected in benefit calculation.
Studies have been conducted to quantify pollution cost savings and noise cost
savings, and they can now be reflected in cost-benefit analysis. However, to realize
the benefits of regional development, expansion of markets, and reorganization of
industrial structures, investment should be made in other areas in tandem with
transportation facilities, which means difficulty in quantification. There is also
controversy regarding directly classifying them as benefits in cost-benefit analysis
due to crowding-out effects, etc. As such, they are not included as benefits. Savings
in expressway O&M costs need to be reflected, but they are still not easy to quantify.
Putting together the above discussion, these General Guidelines divide the scope of
benefit calculation into common benefits and benefits specific to projects as follows.
Common benefits are common to both road and railroad projects, and benefits specific
to projects are those to be calculated only for evaluation of specific projects.
36
Table 3-6
Benefits of Road and Railroad Projects
Classification
Benefits
Common Benefits
Benefits Specific to
Projects
Travel time savings
Fewer traffic accidents
Pollution cost savings and noise cost savings
Parking cost savings
Negative benefit of increased congestion during construction
Negative benefit of reduced road space due to railroad projects

It is not easy to classify the benefits of water resources projects as direct or
indirect or as tangible or intangible and to suggest calculation methods for each
project. The benefits of water resources projects are identified to represent irrigation,
water control, and the environment, and the benefits of major water resources
projects are indicated in Table 3-7. The classification in Table 3-7 only considers
general things, and actual feasibility analysis should consider the nature of
individual projects and make careful choices. Items marked in the table can be
included or not in such analysis depending on the development purpose and
direction of the concerned project.
Table 3-7
Benefits of Different Water Resources Projects
Project
Type
Dam
(reservoir)
Waterworks
Underground
water
Agricultural
water
supply
Canal
Drain
River
restoration
River
park
River
repair
Retention
ponds for
flood
control
Benefits
Residential
water
Industrial
water
Agricultural
water
Underground
water
retention
facility
Small
hydropower
plants
Reduced
flood
damage
Economic Analysis
37
Table 3-7
Project
Type
Continued
Dam
(reservoir)
Waterworks
Underground
water
Benefits
Electric power
production
Environmental
cost savings
Agricultural
water
supply
Canal
Drain
River
restoration
Riv
er
park
River
repair
Retention
ponds for
flood
control
Underground
water
retention
facility
Small
hydropower
plants
Improved quality
of unprocessed
water
Improved natural
resources
Recreation
Emergency
water
Inland
transportation by
ship
Asset
advancement
Land formation
Transportation
facilitation/dama
ge prevention
Improved public
health
3. Other Projects
As in demand estimation, the benefit estimation method differs slightly for
different projects of building industrial, cultural, tourism, sports and science
complexes as they are each of somewhat different character.
The benefits of industrial complexes can be derived from the revenue of
additional added value or industrial production that will occur as a result of their
formation. When calculating expected added value, simple transfer income, namely,
revenue expected to be transferred from other regions or projects should be
excluded.
38
The benefits of cultural and tourism facilities are divided into their admission
and sales from their supplementary facilities. The admission revenue includes
admission fees, usage fees arising inside the facilities, and viewing fees, and also
items closely related to their establishment goals. The sales from their amenities
include those of shops (food and beverages, souvenirs, etc.), and sales and extra
income of lodgings (hotels, youth hostels, condominiums, etc.). Admission revenue
or sales should be determined thoroughly based on users willingness to pay, not
just on prices.
The main benefits of sports facilities are profits from various programs offered
within the facilities like training, screening, and competitions; extra income derived
from them; usage fees of facilities, etc. Training revenue should be divided
according to the characteristics of programs and target groups to make estimation
easier. Extra income should be estimated in the same way, and it includes income
from lodgings, sales of food and beverages, sales of souvenirs, and the like. If the
main purpose of a project is to provide sports facilities and tools, facility usage fees
like venue rental fees will be the main benefit.
The next step in benefit estimation is estimating the per-unit prices of specific
benefits. Unit prices are amounts assigned to a unit of services provided at facilities.
Examples are per-capita admissions to theme parks, lodging charges per capita and
room at lodgings, and per-capita training fees of training programs. Unit prices
should be estimated as necessary depending on the benefits and such estimation
should consider the following:
First, the characteristics and purposes of facilities should be considered.
Minimum unit prices necessary for facility operation should be applied if the
facilities are more like public properties or established for policy purposes like the
restoration and preservation of traditional culture and improvement in public health.
Examples are museums, restored historic sites, and public sports facilities. If they
are less like public properties and likely to be operated by a private party, unit prices
are in principle set at levels that maximize profit in reference to the size and unit
prices of similar facilities at home and abroad.
Second, when referencing the unit prices of similar facilities at home and abroad,
the data of facilities similar to those targeted for preliminary feasibility studies in
terms of the purpose, size, and characteristics should be chosen.
Third, the locational conditions of facilities should also be considered, which
include the natural environment, tourism resources, and transportation from inland
cities.
Economic Analysis
39
It should also be noted that there are limitations to the value estimation of
cultural and science facilities, as follows:
First, admission fees reflected as a benefit are not determined based on market
prices but by law, which means that the amounts users willingly pay, the result of
true value judgment by users, are not properly reflected.
Second, reference to overseas data due to the absence of similar domestic
facilities can be problematic as the value of benefits varies with differences in
nations income levels, the publics preferences, and cultural and social conditions.
Third, preliminary feasibility studies define benefits from an economic
viewpoint as the highest amounts users willingly pay by reducing spending on other
goods. Benefit calculation based on unit prices does not properly reflect this, and its
theoretical basis is weak.
Fourth, including user spending at cultural and science facilities as part of
benefits does not reflect value judgments by people who do not use the concerned
facilities but still grants significant value to them. It disregards value held by nonusers. This is very problematic in that the true value of cultural and science facilities
for public interest should be estimated.
Fifth, there is always a possibility of underestimation when calculating admission
revenue, extra income, etc. as benefits. Time and travel expenses and the like to come
and go between home and cultural and science facilities are willingly paid to receive
value from the facilities, so they should be included as part of benefits.
In this light, to overcome the limits of unit price-based value estimation, preliminary
feasibility studies have since 2004 used the contingent valuation method (CVM) and the
conjoint analysis method (CAM) to estimate the value of non-market goods. 12
Preliminary feasibility studies of cultural and science facilities should, therefore, use unit
price estimation or CVM and CAM that is appropriate for the concerned projects.
. Cost Estimation
Cost estimation also differs depending on the nature and specifics of projects.
Project costs can be largely divided into construction costs, land acquisition costs,
12
40
For more details, refer to Park, Hyeon, Gyeongjun Yu, and Seungjun Gwak, Study on the Value
Estimation of Cultural Facilities (2004).
Operating and Maintenance costs (O&M costs), etc. Construction costs refer to the
entirety of project costs minus lot purchase costs and additional facility costs, and,
land acquisition costs are the costs of buying lots in the project area and
compensation costs. O&M costs include not only initial investment costs but also
ordinary operating costs that even consider life cycle costs to maintain the functions
of fixed assets like land, buildings, and facilities.
The following reviews and suggests cost estimation methods for transportation,
water resources, and other projects:
Cost analysis should be done differently for different transportation projects to
build expressways, roads, bridges, railroads, ports, and airports.
Demand and benefit analysis for railroad and bridge construction has a similar
analysis framework to that of road construction, but they require different criteria
for cost analysis. Also, not only demand and benefit analysis but also cost analysis
for port and airport construction differ from that of road construction.13
A. Road Projects
The costs of road projects should be clearly stated in the process of reviewing
project feasibility. When calculating project costs, both the number or scale of
structures in concerned projects and average construction costs should be considered.
Though figures that are as realistic as possible should be suggested, routes are not
yet finalized at the stage of preliminary feasibility study, so cost items, quantities,
unit prices, and other figures will need to be adjusted at the actual step of project
implementation.
The following are some basic assumptions for cost estimation in road projects
defined in the Sectoral Guidelines for Road and Railroad Projects:
13
As in demand and benefit estimation, these General Guidelines only deal with the basic assumptions
and directions about cost estimation in the Sectoral Guidelines for Road and Railroad Projects.
Refer to the appropriate guidelines for specific analysis methods and relevant parameters like unit
prices to apply.
Economic Analysis
41
The past data of the Korea Expressway Corporation about expressways

was used to determine estimation methods and to estimate important
figures such as cost items and average unit prices in road projects. Though
the same data can be applied to national highway networks and the like in
proportion of road width, the data of the Road Business Handbook from
the Ministry of Land, Transport and Maritime Affairs (MLTM) and other
recent official data should be used. A separate review can be made for subnational highway networks, local roads, and other roads of which design
work is very slow.
Suggested values are averages, but if there are reasons and grounds,
appropriate unit prices can be calculated that reflect the characteristics of
project area.
Construction cost items, specific figures for construction costs, application

methods, etc. not indicated in this study can be determined for different
projects based on rational grounds.
For road design standards, the Rule on Road Facilities and Standards and
Road Design Handbook of the MLTM and Road Design Guidelines of
the Korea Expressway Corporation, and other latest standards should in
principle be applied.
Construction costs and lot purchase costs account for the vast bulk of road
project costs. Construction costs are divided into main route earthwork, bridges and
tunnels, and affiliated facilities like access facilities (interchanges & junctions),
tollgates (including buildings), and rest areas.
Road project costs are calculated as indicated in the following Figure 3-2.
42
Figure 3-2
Flow to Calculate Total Project Costs for Road Construction

Conduct as-is analysis and set standards for different types
Select place to go through
Establish a route plan
Draw a standard cross section by type

l
l
Calculation of quantity of structures

(Earthwork, bridge, tunnel, entrance facility, etc.)
Unit construction cost calculation

(Earthwork, bridge, tunnel, entrance facility, etc.)
Construction cost calculation
Type 1(Flat land: fill-in ground)

Type 2(Mountainous land: cut slopes)
Site area calculation
Land value calculation by district
Lot purchase cost calculation
Incidental cost calculation

(Design, supervision, etc.)
Total project cost calculation
The Sectoral Guidelines for Road and Railroad Projects (fifth edition) stipulate
that cost estimation results by type of construction or work be suggested in certain
forms. The following form shown in Table 3-8 is to be used to indicate the details of
the Total Project Costs (TPC) of road projects.
Economic Analysis
43
Table 3-8
Details of Total Project Costs (Road Projects)
Total length:
km (existing:
km, extension:
IC
ea, JC
ea, tollgates at main route ea
Structures: Bridge
ea ( m), tunnel ea ( m)
Others:
Construction type
Standard
Unit
km, newly laid:
Unit price
Quantity (1 million won)
A. Construction costs
A-1. Earthwork
Slab
RC
PC
PSC-Beam
A-2. Bridge
A-3. Tunnel
A-4. Entrance facility
A-5. Tollgate
PC-Box
ILM
FCM
MSS
FSM
ST.Box
ST.Plate
RC Rahmen
Two lanes
Three lanes
IC
ea
JC
ea
Main route
ea
IC
ea
ea
A-6. Rest area

A-7. VAT
B. Incidental costs
B-1. Basic design
(A1~A6)rate(%)
formula
B-2. Detailed design
(A1~A6)rate(%)
formula
B-3. Supervision
(A1~A6)rate(%)
formula
B-4. Research & survey
(A1~A6)rate(%)
formula
B-5. VAT
(B-1~B-4)10%
formula
C. Lot purchase costs

C-1. Main route
formula
C-2. IC, JC
formula
formula
C-3. Rest area

D. Contingencies
E. Total project costs
44
(A+B+C)10%
km)
formula
(A+B+C+D)
Amount
(100 million
won)
B. Railroad Projects
There are many more things to consider in railroad projects than in road projects,
and they require very complex approaches to cost estimation. The bulk of road project
costs arise from civil engineering structures (roadbed and entrance facilities) and land
acquisition, and when necessary, can be divided into the cost of supplementary facilities
like rest areas, incidental costs, and O&M costs to allow relatively easy cost estimation.
Railroad projects, however, should separately calculate system construction costs as
well as roadbed facility costs and add costs for train car rail yards and train car
purchases. They also have a relatively high ratio of operating costs.
Cost estimation at the step of preliminary feasibility study is for generating costs
associated with railroad facility construction and maintenance to allow rational
policy making and provide standards for budget execution.
Most railroad facilities are greatly affected by natural topography and social
conditions, which leads to a great deviation among projects. Accurate calculation of
project costs requires a great deal of time and effort. Accurate cost estimation is
inevitably extremely difficult at a project design step like preliminary feasibility
study. Cost estimation at this step inevitably involves errors compared to actual
input costs, and to minimize such errors, the general guidelines for preliminary
feasibility studies, handbook of investment evaluation of roads, and the like have
continually been revised. These General Guidelines also conducted analysis keeping
this in mind and strived to ensure realistic cost estimation. The previous General
Guidelines (fourth edition) dealt with cost estimation only for general railroads, but
this Fifth Edition also includes cost estimation for regional railroad networks, which
are now becoming operational.
a. General Railroad Projects
The total project costs of general railroad projects are divided into construction
costs (roadbed, tracks, buildings, electricity, systems, etc.), incidental costs, lot
purchase costs, and initial car purchase costs. In consideration of errors in cost
estimation, preliminary feasibility studies add contingencies of some ratio to the
construction, incidental, and lot purchase costs.
The details of the Total Project Costs (TPC) of railroad projects suggested in the
Sectoral Guidelines for Road and Railroad Projects (fifth edition) are indicated in
Table 3-9 as follows:
Economic Analysis
45
Table 3-9
Details of Total Project Costs (General Railroad Projects: Rough Standards)
Total length: km (existing:

km, newly laid
km)
Stops:
ea
Structures: Bridge
ea ( m), tunnel
ea ( m)
Others:
Construction type
Standard
Unit price Amount

Unit Quantity (1 million (1 million Remarks
won)
won)
A-1. Roadbed(main route)
General section
km
A-1-1. Earthwork
Others
A-1-2. Bridge
Direct foundation
km
Pile foundation
km
Others
NATM
km
A-1-3. Tunnel
Others
Overbridge
Underground road
Overhead walkway
ea
A-1-4. Interchange
Others
A-2. Roadbed (stop)
A-2-1. Earthwork
2 homes, 2 lanes
ea
2 homes, 4 lanes
ea
Others
A-2-2. Bridge
2 homes, 2 lanes
ea
2 homes, 4 lanes
ea
Others
A-2-3. Underground
2-level excavation
ea
3-level excavation
ea
Others
A-3. Track
46
km
Table 3-9
Continued
Construction type
Standard
Above
rail
A-4. Building
On
ground
Below
rail
Unit price Amount

Unit Quantity (1 million (1 million Remarks
won)
won)
Way station
ea
Junction
ea
Start/terminal
ea
Way station
ea
Junction
ea
Start/terminal
ea
Way station
ea
Junction
Underground
Others
A-5. System
km
A-5-1. Electricity facility
km
A-5-2. Power line
km
A-5-3. Substation facility
km
A-5-4. Electrified line
km
A-5-5. Signal facility
km
A-5-6. Communication facility
ea
A-6. Train car rail yard

A-7. VAT
B. Incidental costs
(A1A6)rate (%)
formula
B-1. Basic design
(A1A6)rate (%)
formula
(A1A6)rate (%)
formula
B-3. Supervision
(A1A6)rate (%)
formula
(B1B4)10%
formula

B-5. VAT
D. Contingencies
formula
(A+B+C)10%
Initial year
E. Car purchase costs
(A+B+C+D+E)
F. Total project costs
Replacement
investment costs
Note: E. Car purchase costs need to be reflected after confirming whether they are included as part of the total project costs to
manage.
Economic Analysis
47
B. Regional Railroad Network Projects

In general, the costs of regional and urban railroad projects can greatly vary, as
do the benefits of investment depending on their characteristics. These differences
arise from the numerous different constituents of railroads, and project costs show
significant differences depending on the selection of such constituents. For
estimation of construction costs, regional railroad networks are defined as either
heavy, middle, or light rail transit systems, and the case of general railroads is used
for the estimation of incidental costs, etc. With regard to regional railroad networks,
there is no limit to the roadbed forms due to systems, but most are constructed as
underground or overhead structures as locational conditions require. If they are built
underground, project costs should be calculated in consideration of construction
workability, safety of train operation, etc.
The details of the total project costs (TPC) of regional railroad network projects
suggested in the Sectoral Guidelines for Road and Railroad Projects (fifth edition)
are indicated in Table 3-10 as follows:
48
Table 3-10
Details of Total Project Costs (Regional and Urban Railroad Projects)
Total length: km (existing:

km, newly laid
km)
Stops:
ea
Structures: Bridge
ea ( m), tunnel
ea ( m)
Others:
Construction Type
Standard
Unit
Earthwork
km
Bridge
km
U-type
km
Unit price Amount

Quantity (1 million (100 million Remarks
won)
won)
A-1. Civil engineering
A-1-1. Main route
Excavation
10m or less
at depth
km
20m or less
km
30m or less
km
NATM
km
Tunnel
A-1-2. Stop
A-1-3. Ventilation
hole
A-1-4. Hold track
Others
km
On ground
m or ea
Elevated
m or ea
Underground
(excavation)
2 levels
m or ea
3 levels
m or ea
Others
m or ea
Ventilation holes on main

route
ea
Excavation
km
NATM
km
Others
A-2. Track
A-2-1. Main route
Steel wheels
km
Rubber wheels
km
On ground
A-3. Building
A-3-1. Stop
Elevated
Underground
2 levels
3 levels
Economic Analysis
49
Table 3-10
Continued
Construction Type
Standard
Unit
On ground
Elevated
Unit price Amount

Quantity (1 million (100 million Remarks
won)
won)
A-3. Building
A-3-1. Stop
Underground
2 levels
3 levels
A-4. System
A-4-1. Electricity
Electricity facility
Power line
km
km
Substation facility
Electrified line
km
km
km
A-4-2. Signal
A-4-3. Communication
A-5. Train car rail yard
A-5-1. Train car rail yard
A-5-2. Inspection facility
A-6. VAT
B. Incidental costs
B-1. Basic design
km
car
(A1~A5)rate (%)
(A1~A5)rate (%)
formula

B-3. Supervision
(by government agency)
(A1~A5)rate (%)
formula
(A1~A5)rate (%)
formula

B-5. SE costs
(A1~A5)rate (%)
A4rate (%)
formula
formula
Initial operating costs

rate (%)
formula
(B1~B6)rate (%)
formula
B-6. Test run

B-7. VAT
D. Contingencies
formula
(A+B+C)10%
E. Initial car purchase costs

G. Additional car purchase
costs
(A+B+C+D+E)
Replacement
investment costs
Note: E. Car purchase costs under F. Total project costs should be reflected only when they are included as part of total
project costs to manage, unlike costs for economic analysis.
50

Cost estimation for water resources projects should be divided for dam
construction, river conservation work, etc. With regard to cost estimation, different
types of construction comprise dam and river projects. For more details on cost
estimation by construction type, refer to the Study on the Sectoral Guidelines for
Preliminary feasibility Studies for Water Resources Projects (fourth edition)
(hereinafter Sectoral Guidelines for Water Resources Projects (fourth edition)).
A. Dam Projects
For the estimation of dam construction costs, flood volume is calculated through
hydraulic analysis, and design flood discharge is determined for each structure to
determine the form and size. Hydraulic calculation, etc. is conducted for each
structure, structures are planned using standards determined by dam design
standards, and details of construction works should be produced for each structure
as much as possible.
Estimating costs for each structure is difficult at the step of preliminary
feasibility study, but it should be done in as much detail as possible in consideration
of its impact on future feasibility studies and changes in the construction costs of
basic and detailed designs.
To help address difficulties in the estimation of construction costs, the Sectoral
Guidelines for Water Resources Projects (fourth edition) suggested unit
construction costs and construction cost calculation methods for several types of
structures for reference. Cost estimation results for each type of structure are to be
suggested in a certain form, and the standard details of total project costs of dam
construction are to be listed in the table of details of total project costs as in the
following Table 3-11:
Economic Analysis
51
Table 3-11
Standard Details of Total Project Costs of Dam Construction

(Unit: 1 million won)
Construction type
Standard
Unit
Quantity
A-3 39%
sum
sum
Water supply amount
1 million
Power generation amount
sum
sum
Unit
Amount Remarks
price
A-1. Temporary facility
A-2. Diversion of waterway
A-3. Main construction
A-4. Spillway
A-5. Discharge facility
A-6. Power plant
A-7. Access road
A-8. Appurtenant work
A-1~A-7 33%
B. Incidental costs
B-1. Research and survey
Rate
B-2. Design
Rate
B-3. Construction management
Rate

D. Contingencies
A~C 10%
E. Maintenance costs
A+B+C+D+E
Note: The amounts include miscellaneous expenses and VAT.
B. River Projects
When calculating the costs of river work, both the specific quantity of structures
to build and average construction costs should be considered. The location of a spoil
bank, distance to carry revetment materials, and the characteristics of the river, etc.
are very important. Since no standard unit price or the like has been defined, it is
difficult to use the standard construction cost per unit length or area. Furthermore, at
the step of preliminary feasibility study, routes on river banks, length of the
embankment, locations and standards of structures, whether to establish cutoff walls,
etc. are not determined. For this reason, cost items, quantities, unit prices, and other
figures will need to be partially adjusted in the actual implementation step.
River conservation work involves the construction of five major components:
52
embankments, revetments, structures, cutoffs, and appurtenant construction. The

quantity estimation method of each type varies depending on whether or not there is
a basic plan. For rivers with a basic plan, the numbers of banks and revetments are
estimated using the ground plan and cross section drawing. For rivers without a
basic plan, the data of a similar district in terms of the shape and size of the basin,
river characteristics, etc. is used, or a location on a 1/5,000 topographical map is
chosen that can meet the planned river width and design flood discharge suggested
in river design standards, etc. to assume a cross section that represents each section
and estimate the numbers of revetments and banks.
The Sectoral Guidelines for Water Resources Projects (fourth edition) require
that cost estimation results for each structure be suggested in a certain form, and the
standard details of total project costs of river conservation work are to be suggested
in the table of details of total project costs as in the following Table 3-12.
Table 3-12
Standard Details of Total Project Costs of River Conservation Work

(Unit: mil won)
Unit
Price
Quantity
A-1. Embanking
Sum
A-2. Revetment
Sum
Sum
Sum
Construction Type
Standard
Unit
Price
Amount
Remarks
A. Construction Costs
A-3. Structure
A-4. Cutoff
A-5. Appurtenant Work
A-1A-2 20%
B. Incidental Costs
B-1. Research & Survey
Rate
B-2. Design
Rate
B-3. Construction Management
Rate
C. Lot Purchase Costs

D. Contingencies
E. Total Project Costs
AC 10%
A+B+C+D
Note: The amounts include VAT.
Economic Analysis
53
3. Other Projects
Initial investment in forming cultural, tourism, sports, and science complexes
includes construction costs, land acquisition costs, and other costs. The costs are to
be estimated based on the size and characteristics of facilities, but unit prices need to
be separately determined by the preliminary feasibility study team.
Construction costs include those to build the components of infrastructure like
civil engineering, landscaping, electricity and communication, and roads, and those
to build facilities. It is easier to separately estimate the number or scale of each cost
item required and unit prices. The unit prices are estimated by referring to the Unit
Price Table for Building Construction of the Korea Appraisal Board and consulting
with construction companies. To estimate the number or scale of each item required,
the scale of construction indicated in the basic project design should be referred to,
but if it is unrealistic or not suggested, similar cases should be referenced or
construction companies consulted.
Land acquisition costs are estimated using the exact location of a complex in the
project design and a map that indicates its lot number and area. If such is not
indicated in the project design, the average land prices and relevant data of the
project area should be used. It is still not easy to acquire such data, and even when
acquired, the estimates may not be reliable.
Land acquisition costs are purchase costs of land and compensation for
obstructions that must be demolished when exercising eminent domain, indirect
compensation, and other incidental costs. First, market prices for different
possession types and uses in the project area are estimated, and the prices are
multiplied by the areas of different uses to estimate the land purchase costs.
Compensation for obstructions and indirect compensation are estimated based on
the past cases of compensation and the Enforcement Rule of the Act on Special
Cases Concerning Acquisition and Loss Compensation of Public Lots. In this
light, due diligence should be conducted for the target district, and various
obstructions and economic actions be confirmed. However, precise estimation is
difficult at the step of preliminary feasibility study, and compensation costs may
increase. This requires, in principle, that on-site investigation based on an
arrangement map of facilities be conducted, but if the amount at issue is
insignificant or cannot be confirmed at the time of study, precise estimation
should be made at the full-scale feasibility study step.
To report total project costs, etc., forms used for road and transportation projects
should be used as much as possible.
54
4. Calculation Standards for Land Acquisition Costs

Land acquisition costs in preliminary feasibility studies are purchase costs of
land and compensation for obstructions when eminent domain is exercised.
Purchase costs of land are those to buy lots required for public interest projects
targeted by preliminary feasibility studies. Compensation for obstructions refers to
money paid to remove things like buildings, structures, crops, trees and plants, and
such on the concerned lots, being obstacles to their use.
The current guidelines for review of preliminary feasibility studies explicitly suggest
methods to calculate land acquisition costs to offer reference prices that can be used at
the implementation step. With the ratio of land acquisition costs continuing to increase
in public projects like those for roads and railroads, such costs must be estimated as part
of cost estimation for the financial feasibility analysis of projects
The current guidelines calculate purchase costs of land by applying a
compensation ratio that is 1.766 times the official land value, and compensation for
obstructions as 30% of purchase costs of land. As a result, the compensation ratio of
total land acquisition costs is 2.296 times the official land value. Nevertheless,
analysis of statistics on land acquisition results and average land prices reveals that
the unit prices of land acquisition of different regions and projects in fact vary
greatly, and there is also a significant difference between the rates of the unit prices
of land acquisition in public projects and average individual official land values of
different regions. The rate of compensation for obstructions to land acquisition costs
has recently dropped to around 10%. As a result, the compensation ratio should
reflect the differences among different regions and land categories. Compensation
for obstructions also needs to be made realistic.14
To revise the current compensation ratios, new ratios were derived from the
land acquisition results of the recent road and railroad projects. The data was
mostly about non-Seoul metropolitan areas, and as such, it was impossible to
divide the data into Seoul metropolitan, non-Seoul metropolitan, or regional
economic zones. As a result, it was divided into cities and counties. The
compensation ratios by city and county, and land category were mostly higher
than those of the current guidelines.
14
For details, refer to Chapter 12 of Part 2.
Economic Analysis
55
Table
3-13 Compensation Ratios Used in Land Acquisition by City and County and Land
Category
Classification
Cities
Counties
Average
Lots
2.37
3.61
3.40
Rice paddies
2.45
3.21
3.12
Dry fields
2.50
2.94
2.89
Forest land
6.52
6.02
6.11
Others
3.38
4.49
4.28
Average
3.84
3.86
3.85
Next, in consideration of the fact that the official land value has increased four times
on average in response to the recent rise in market prices for land, a survey on
compensation ratios was conducted of appraisers who are responsible for land appraisal
for compensation in the field. The survey divided regions into the Seoul metropolitan
area, non-metropolitan area, and cities and counties, and asked about average
compensation ratios for different land categories across the nation. The current
compensation ratios applied by appraisers are some 1.5 to 2.7 times for regions and 1.5
to 2.0 times for land categories, a bit higher or lower than the current guidelines.
Table 3-14
Survey Results of Compensation Ratios of Land Categories
Region
Seoul Metropolitan Area
Non-Seoul Metropolitan
Area
Rice Paddies
Dry Fields
Lots
Forest Land
City
1.51
1.52
1.37
1.98
County
1.74
1.72
1.50
2.53
City
1.76
1.72
1.65
2.25
County
1.81
1.81
1.65
2.49
City
1.58
1.57
1.41
2.09
County
1.86
1.90
1.57
2.69
Seoul Metropolitan Area
1.56
1.54
1.44
1.87
Non-Seoul Metropolitan Area
1.77
1.79
1.52
2.40
All
1.56
1.50
1.40
1.94
The following three alternative ways to estimate purchase costs of land can be
suggested based on the compensation ratios of the above land acquisition cases and
survey results. The first is to choose as samples some 5% of land within the project
area in consideration of the land characteristics and ask the Korea Association of
Property Appraisers or Korea Appraisal Board to perform a summary appraisal on
56
them. The second is to receive existing land acquisition data about areas
surrounding the project area from the execution agency of a project that requested a
preliminary feasibility study to drive a compensation ratio and calculate the land
acquisition costs. The third is to apply standard compensation ratios below. Table 315 below has standard compensation ratios to use when calculating purchase costs
of land based on compensation ratios. Compensation for obstructions is to be set at
10 to 15% as the conditions of each project site require.
Table 3-15
Compensation Ratios by City and County and Land Category
Region
Rice Paddies
Dry Fields
Lots
Forest Land
Seoul Metropolitan
City
1.50
1.50
1.40
2.00
Area
County
1.75
1.75
1.50
2.50
Non-Seoul
City
1.75
1.75
1.65
2.30
Metropolitan Area
County
1.80
1.80
1.65
2.50
5. Calculation Standards for Contingency Reserves

To review the feasibility of investment projects, contingency reserves must be
included as a cost item. The process of pushing ahead with a project inevitably
entails numerous unexpected events and contingency reserves should be set aside
against them. Contingency reserves are to be set at 10% of the total project costs
including VAT.
. Economic Feasibility Evaluation
Economic Feasibility is evaluated using the benefit and cost numbers from the
above estimation of demand, benefits, and costs. Evaluation of economic feasibility
basically depends on cost-benefit analysis.
Economic Analysis
57
1. Analysis Methods
A Benefit-Cost Ratio (BCR) is first calculated to evaluate economic feasibility.
A BCR is the ratio of benefits to costs where both benefits and costs are expressed
as discounted present values. In other words, costs and benefits to occur in the
future are converted into present values, and the present value of benefits is divided
by that of costs. A project is generally economically feasible if the BCR is at least
1.0.
Of course, it is inappropriate to simply determine that a government-financed
project is economically feasible merely because the BCR is no less than 1.0. This does
not apply, for example, in the U.S. The special standards for public investment
analysis suggested by the U.S. Office of Management and Budget (OMB) explain that
the BCR should be at least 1.25 for a project to be economically feasible in
consideration of the excess burden resulting from tax distortion and the like15. Also, in
Korea, the theoretical minimum BCR should be 1.10 to 1.15 for economic feasibility
to be recognized in consideration of the marginal costs of public capital due to the
difficult financial situation and tax distortion, etc. Nevertheless, it cannot be said that
there is sufficient social overhead capital as Korea is still a developing country.
Furthermore, it can cause unnecessary confusion to apply the minimum BCR of 1.10
to 1.15 at the step of preliminary feasibility study as other studies use a ratio of 1.0. In
comprehensive consideration of the above, the figure of 1.0 will be used as the
minimum BCR instead of the theoretically estimated BCR for the time being:
n
BCR =
t =0
Bt
/
(1 + r ) t
Ct
(1 + r )
t =0
Where Bt : Benefit at the time t , Ct : Cost at the time t , r : discount rate, and
n : Duration of the concerned facility (period subject to analysis) .
Secondly, it is important to calculate the Net Present Value (NPV). The NPV is
the total benefits minus total costs incurred by a project (both benefits and costs
expressed in discounted present values of the base year). An NPV of at least zero
means the project is economically feasible:
15
58
The special standards for public investment analysis under Section 11 of Circular No. A-94 of the U.S. OMB
explains that estimation of the marginal costs of public capital in consideration of the excess burden of taxation
reveals that a public investment with the minimum BCR of 1.25 can be recognized for economic feasibility.
NPV =
t =0
Bt
(1 + r )t
Ct
(1 + r )
t =0
The Internal Rate of Return (IRR) should be calculated, too. It is to calculate a

discount rate R where the values of benefits and costs converted into present values
become equivalent. It is the discount rate that reduces the NPV of the project to zero. It
is believed there is economic feasibility if the IRR is higher than the social discount rate:
IRR : R such that
t =0
Bt
=
(1 + R)t
Ct
(1 + R)
t =0
Determination of feasibility is not always the same in BCR, NPV, and IRR
calculation. First, NPV calculation evaluates the flow of net benefits with the value
in the start year of a project, but it is not normalized with respect to the scale of
projects, making it inappropriate for comparison among projects. For instance, when
doubling both benefits and costs, the NPV automatically doubles. It is, therefore,
inappropriate to compare the profitability of two different projects with the same
characteristics only based on their NPV. Second, IRR calculation does not consider
the scale of projects, but it has a shortcoming in that an IRR is not calculated
according to the profit generation structure. Third, a BCR value differs according to
which items are classified as benefits or costs, but this is the one that is generally
used as an investment evaluation standard.
Preliminary feasibility studies are to calculate the BCR, NPV, and IRR without
exception to evaluate economic feasibility, compare priority among projects, and for
other such purposes.16
16
In some cases, the BCR, NPV and IRR come up with different conclusions about feasibility. For
details, refer to Kim (2008) Cost-Benefit Analysis.
Economic Analysis
59
Table 3-16
Comparison of Economic Analysis Methods
Analysis
method
Critical
value
BCR
B/C1
n Easy to understand, can consider the

scale of a project
n An error of choosing mutually exclusive

alternatives may occur
NPV0
n Suggests clear standards when

selecting an alternative
n Suggests the present values of benefits
to occur in the future
n Considers marginal NPV
n Can be used in other analyses
n Difficult to understand
n An error may occur when determining
the order of priority among alternatives
IRRr
n Can measure project profitability

n Allows for easy comparison with other
alternatives
n Allows for easy understanding of the
process and results of evaluation
NPV
IRR
Merits
Demerits
n Does not consider the absolute scale of

a project
n Multiple IRRs may simultaneously be
deducted
2. Social Discount Rate

One of the most important parameters used in the economic feasibility
evaluation of government-financed projects is the social discount rate. Discounted
benefit and cost values are determined by the social discount rate, and as a result,
the BCR. Determination of the social discount rate is an absolute determinant of
economic feasibility.
The General Guidelines until the Third Edition determined the social discount
rate based on the shadow price of capital. A real rate of 7.5% was applied to all
projects except water resources projects, and a 6.0% real rate was applied to water
resources projects as they should be considered for a longer term than other projects.
The General Guidelines (fourth edition) recognized the need to adjust the social
discount rate due to the prolonged period of low interest rates and low growth and
reestimate an appropriate discount rate to apply a social discount rate of 6.5%. For water
resources projects, where a period under analysis is relatively long, a real rate of 6.5%
was applied for the first 30 years of operation and 5.0% for 20 years afterwards.
The General Guidelines (fifth edition) takes into account change in the capital
market due to the prolonged period of low interest rates and low growth to adjust the
social discount rate. Instead of discussing the estimation process of the social
60
discount rate in depth,17 this section looks at the value of the finally-set discount
rate and several issues related to application of this value.
A. Need to Adjust the Social Discount Rate

In January 2007, the Ministry of Planning and Budget and the KDI began to study
ways to improve the systems and execution of preliminary feasibility studies and RSF,
relevant study, and analysis methods, etc. The need has risen to review the systems and
devise ways to improve them in consideration of the changed conditions like the
expanded scope of preliminary feasibility studies with the implementation of the
National Finance Act and the experience of having operated them.
The need to adjust the social discount rate was raised when it was pointed out
that there is a need to improve study methods to bolster the practicability of
economic analysis (cost-benefit analysis) and to accord greater consideration to less
developed regions. Also, looking at the interest rates and growth rate, the major
economic indices, the persistently low interest rates and low growth were evident
for the last three years. They should be monitored for a longer time to determine
whether they are a temporary phenomenon or a major change in trend. Whatever the
case, there is a need to change the values of parameters that have impact on the
social discount rate.
The social discount rates of 7.5% and 6.5% suggested in the General
Guidelines (third edition) and General Guidelines (fourth edition) were
suggested at the time to avoid excessive adjustment considering that real rates of at
least 10% were used in feasibility studies before preliminary feasibility studies were
implemented. Taking into account the inflation rate from the 1990s to the present,
the value of the real discount rate could be construed to be as low as around 5%.
This lowered the social discount rate in phases, and the need to adjust it has come to
the fore amid the persistently low interest rates and low growth.
A basic interest rate is a combination of a government bonds interest rate and a
long-term yield spread. The long-term interest rate on government bonds is 5.63%
for 5-year maturity and 5.81% for 10-year maturity. When supposing the long-term
yield spread to be 1.0%, the nominal basic interest rate becomes about 7% and 7 to
8% even when the interest rate increases. The real basic interest rate is found to be 4
to 5% in consideration of the present inflation rate of 3% and the possibility of
interest rate increases in the future.
17
Refer to the part about the social discount rate in Chapter 6, Part 2 for details on how to set the
social discount rate.
Economic Analysis
61
Despite being based on a short time-series data, this has recently become
apparent in the major economic indices. Growth is forecast to slow due to slower
growth in per-capita GDP and a declining savings rate resulting from population
aging and the low birth rate, while interest rates will remain low compared to before
2000. The current real interest rate of 6.5% is, therefore, somewhat high. Of course,
the appropriate social discount rate with regard to public investment projects should
not only consider simple figures but also qualitative factors.
B. Calculation of an Appropriate Social Discount Rate (Real Rate of 5.5%)

To estimate an appropriate social discount rate, a basic interest rate, social time
preference rate ( STPR ), financial discount rate, and such were considered.
These General Guidelines (fifth edition) used the social time preference rate
for estimation due to the facts that it can be used to calculate an appropriate rate
with fewer parameters than the formula used in the General Guidelines (fourth
edition) and the value estimated as such can be regarded as the lowest limit of the
social discount rate:
STPR = r + m g
In the above formula, r refers to a discount rate of future consumption under
the assumption that per-capita consumption does not change. g is an annual percapita consumption increase rate, and m is the elasticity of marginal utility of
consumption. In the end, m g is to reflect the diminishing effect of marginal
utility due to consumption change.
Calculation of this social time preference rate according to the formula revealed
that the appropriate range is 5.0 to 5.5%.
The basic interest rate based on the real interest rate of five-year government
bonds and long-term premiums for the last five years also falls within this range.
Lastly, estimation of a real weighted average cost of capital as part of financial
feasibility analysis revealed that 5.5% is proper for a real discount rate used in
financial feasibility analysis as the spread between the interest rates of three-year
corporate bonds and government bonds narrowed from 2% to no more than 1%, and
thereby, the cost of debt capital decreased.
However, the current economic analysis does not fully review a projects risks
except for some sensitivity analysis, which can require a higher discount rate. Also,
the tendency to evade a sudden adjustment of the discount rate should be considered
62
in determining actual values to apply.

As explained so far, 5.5% is to be used for the real social discount rate.
C. Different Social Discount Rates in Consideration of the Long Term

The analysis period in water resources projects is 50 years, longer than in other
projects. This is why a lower social discount rate has been applied. The General
Guidelines (third edition) and General Guidelines (fourth edition) looked at how
the results of current value calculation converted into consumption units differ
according to the types of temporal patterns of benefit occurrence, and suggested that
a lower discount rate should be applied in long-term projects like water resources
projects. This lump-sum application of a lower rate than in other projects can be
construed as differential application of social discount rates among the different
types of projects. However, in principle, a common social discount rate should be
applied to all types of government-financed projects. It is true that the theoretical
basis for differential application among different types of projects is weak. Of
course, the application of a lower rate in water resources projects in the General
Guidelines (third edition) and General Guidelines (fourth edition) can be
construed as differential application of a discount rate for long-term projects rather
than that among different types of projects.
There is less need for differential application of a discount rate if it is a choice
within a generation. However, if it is a choice between different generations, it is
considered necessary to carefully introduce differential application. If a discount
rate fixed as a rule is exponentially discounted, there may be criticism to the effect
that it considers only the current generation, not a future generation. A theoretical
basis for this can be found in studies by Weitzman (1998), Gollier (2002), and
others. These studies show that the social discount rate decreases over time if the
rate has uncertainty in itself or there is uncertainty over future growth.
In preliminary feasibility studies, water resources projects are the only ones that
are long-term. Only in water research projects, therefore, should different discount
rates be applied where the analysis period is no less than 30 years. According to
analysis of the impacts of different discount rates, a real rate of 5.5% is to be applied
for the first 30 years and 4.5% for the following 20 years of operation.
Economic Analysis
63
3. Processing of Transfer Payments Including Taxes

In economic analysis, transfer payments like taxes should not be regarded as
pure economic costs. Transfer payments are transfers from one entity to another,
and they can be costs or benefits depending on the relevant party in financial
feasibility analysis. However, they do not have any effect on national finances in
economic analysis. Preliminary feasibility studies should attempt analysis that
excludes transfer payments like taxes as much as possible, but it is in practice
difficult to determine how to deduct taxes in the different types of projects.
It is difficult in preliminary feasibility studies to calculate tax imposition details
according to the types of inputs, so estimated total project costs minus VAT are
regarded as economic costs to use for economic analysis.
A. Exclusive Projects like Expressway and Railroad Construction

In traditional cost-benefit analysis, benefits are evaluated as willingness to pay
for public investment deliverables. This willingness to pay can be used as a market
price if the conditions of competitive sourcing, etc. are met. There are two
conditions of competitive sourcing for consumer goods: first, there should be no
restriction like a distribution system so that all consumers should be able to freely
purchase the goods. Second, there should be no monopsony and no single consumer
should be able to affect the market price.18
The sacrifice individuals have to make to use an expressway (price they have to
pay) is not limited to tolls, so tolls are not enough to evaluate their willingness to
pay for the expressway. The sacrifice individuals make to use an expressway - user
costs - should comprehensively consider and evaluate car operation costs, time
value, traffic accidents, etc. A general method adopted to evaluate willingness to
pay for use of an expressway (namely, all user costs) is indirect estimation of
individuals satisfaction from such use. The willingness to pay for private goods can
be calculated by their market price if there is one or by estimating consumer
satisfaction with them if there is no price.
For this reason, the willingness to pay for use of an expressway is calculated, as
seen above, by evaluating individuals satisfaction as cuts in car operation costs
plus value of reduced travel time plus value of reduced traffic accidents.
Individuals satisfaction from use of an expressway should, in principle, be
18
64
UNIDO, Guidelines for Project Evaluation, 1972, pp.42~47.
estimated with focus on the consumer price (price paid by consumers, which is the
supply price plus tax). When estimating reduced car operation costs, time value,
value associated with traffic accidents, etc. they should be evaluated with focus on
the price paid by consumers. Accordingly, it is appropriate to include tax in the
benefit afforded by an expressway. The benefit of an expressway should be
estimated as a consumer price that includes tax, and it is inappropriate to deduct tax
again from the estimated benefit amount.
It should be noted, however, that costs have a different aspect with regard to
analysis of expressway projects. In general, costs in public investments are
evaluated as maximum alternative benefits forgone of inputs. As long as the inputs
of expressway construction (e.g. cement, sand, asphalt) meet the conditions of
competitive sourcing, the market prices of these inputs should be regarded as social
opportunity costs. However, if the prices of inputs already include tax (indirect tax),
it can be handled in two ways: First, if inputs required in public investments are
redirected from existing users, in other words, if the entire supply to society of the
inputs is constant without regard to the implementation of a public investment, their
prices including tax should be used in cost evaluation as they are. In this case, it is
inappropriate to evaluate costs as market prices minus taxes. Second, if inputs are
additionally produced and supplied for a public investment, in other words, if the
entire supply to society of the inputs increases and the increased quantity is inputted
in the public investment, tax should be deducted to appropriately evaluate the social
opportunity costs. For instance, if tax is imposed on cement assuming a constant
supply, the social marginal utility (willingness to pay) of cement exceeds its social
marginal cost. If more cement is produced to lay an expressway, the social
opportunity costs of cement should be calculated as social marginal costs. In this
case, the market price of cement minus tax should be regarded as costs.
For this reason, textbooks on cost-benefit analysis state that the social value
(opportunity costs) of inputs is evaluated as a (market price including tax) + (1 a ) (market price excluding tax). (1- a ) here reflects the additional production
rate of inputs. That is, the a rate of inputs in public investments refers to inputs
redirected from existing users, and (1- a ) is the rate of additional production. In
other words, if inputs in public investments are all consumed by existing users, it is
appropriate to conduct cost-benefit analysis based on the market price including tax.
However, if only a portion of inputs (e.g. a portion corresponding to the a rate) is
used by existing users, the market price including tax should be used in evaluation
only for that rate. And the rest should be evaluated based on the price excluding tax.
At issue is how to estimate , the rate of inputs redirected from existing users. It
is very difficult to estimate how much of inputs are redirected from existing users in
Economic Analysis
65
a specific project. In conclusion, as it is in fact difficult to determine how much of

inputs are used by existing or other users with regard to the cost estimation of
expressway or railroad projects, these preliminary feasibility studies suggest that
analysis exclude at least 10% VAT borne by the responsible parties like the Korea
Expressway Corporation or Korea Railroad Corporation.19
B. Other Projects
When there is only one execution agency for a project like the Korea Expressway
Corporation or the Korea Railroad Corporation, and the methods and items of cost
estimation are relatively systemized based on existing data, tax deduction is possible to
some degree using the existing data. In other projects, it is not obvious who the
responsible parties are in most cases, and cost items vary greatly from one project to
another, which serves to complicate tax deduction. Namely, how to deduct which taxes
remains controversial. If there are multiple parties involved in projects, they bear various
types of taxes, which leads to variable cost items and makes it very difficult to
determine which tax is imposed on which cost item.
Accordingly, tax deduction in the economic analysis of other projects is to be
temporarily left to the discretion of each study team. There should be further study
on how to deduct taxes more systematically.
In the end, transfer payments such as taxes should be handled considering both
producers and users. The KDI plans to conduct in-depth studies to come up with the
most appropriate way to handle taxes in cost calculation.
4. Base Day of Analysis, Period of Analysis, Etc.

In economic feasibility evaluation, all the benefits and costs should be
discounted at the same point of time. As benefits and costs occur at different points
of time, they should be reconciled as the values of the same point of time using a
discount rate. This makes them comparable. Preliminary feasibility studies under
these Guidelines are to use the end of a year prior to a year when analysis of the
concerned project commenced (e.g. the end of 2007 for a project which commenced
19
66
Analysis that excludes from benefits 10% VAT borne by the Korea Expressway Corporation means
analysis that deducts 10% taxes from the costs of building various facilities suggested by the Korea
Expressway Corporation.
in 2008) as the base day of discount analysis.

The period of analysis for economic feasibility evaluation should depend on the
characteristics of each project. The Third Edition observed the prevailing practices which
required 20 years and 30 years after construction for roads and railroads, respectively. The
revised guidelines lengthened the period of analysis for roads to 30 years.20
The period subject to analysis for port projects is set at 30 years. That for water
resource projects like multipurpose dams is 50 years. For dam projects, domestic and
foreign cases were considered that usually apply a very long analysis period. The period
for projects to form cultural, tourism, sports, and science complexes is 30 years.
The same guidelines should be in place for annual expenditures of project costs
during the analysis period. For instance, in expressway projects, 30% and 70% of lot
purchase costs are set to be spent in the first and second year, respectively, and 5%,
15%, 25%, 35%, and 20% of construction costs are set to be spent in each year of
the construction period of five years.
5. Processing of Salvage Value

Salvage value is closely related to the duration of the concerned facility and the
analysis period of economic feasibility. For instance, a road is paved again some 15
years after completion. Such repaving does not require much reinvestment; only
ordinary maintenance and operation costs are incurred each year. What preliminary
feasibility studies, therefore, consider as salvage value in a road project is
acquisition costs of land. The study team should set acquisition costs of land as
salvage value in a road project and deduct them from the costs of the final year of
analysis.
Unlike roads, railroads require a great deal of reinvestment. Additional train cars
are input as demand increases and reinvestment is made to replace fully depreciated
cars and facilities. Items that can be considered as salvage value 30 years after
service opened are acquisition costs of land as well as cars, and facilities and
equipment in which reinvestment is made. Preliminary feasibility studies in railroad
projects are to consider the salvage value of both acquisition costs of land and items
in which reinvestment is made. The period over which train cars in general railroads
and urban railroads are depreciated is that specified in the Enforcement Rule of the
20
For more details, refer to the Study to Revise and Supplement the Sectoral Guidelines for
Preliminary Feasibility Studies for Road and Railroad Projects (fifth edition).
Economic Analysis
67
Railroad Safety Act and Rules on Management of Urban Railroad Cars,

respectively. For facilities of which the durability life is not specified by law, the
durability life suggested in the Investment Evaluation Guidelines for
Transportation Facilities (Ministry of Land, Transport and Maritime Affairs, 2007)
is used as a standard to calculate reinvestment costs and salvage value. In any other
case where salvage value can be realistically calculated and a sufficient basis can be
stated, all possible salvage values shall be reflected.
In projects other than road and railroad projects, salvage value shall be reflected
based on the durability life.
6. Sensitivity Analysis
The calculation of benefits and costs in economic analysis used to evaluate
feasibility engenders many uncertainties. Sensitivity analysis is often conducted to
deal with these uncertainties. This analysis looks at how economic feasibility
changes when each important variable that can affect investment costs or economic
feasibility like initial construction costs, operating costs, demand for transportation,
discount rates, etc. changes by a certain degree.
Preliminary feasibility studies conduct sensitivity analysis about these variables.
The scope and methods of sensitivity analysis can differ slightly depending on the
type of a project.
. Ways to Attract Private Investment
1. Background and Purpose of Review

Preliminary Feasibility Studies are designed to transparently and fairly
determine whether to invest in large-scale public investment projects based on
priorities to prevent budget waste and help increase efficiency in public investment
management. They also provide sufficient objective and neutral data in advance for
project plans established by each ministry like their feasibility, review of
alternatives, and considerations to make so that rational decisions can be made
regarding whether to pursue them, a proper time to implement them, and their
68
optimal scale, etc.

Public-Private Partnership (PPP) projects solicited by the government where
government financial support of no less than 30 billion are inputted proceed by the
same process as public investment projects until announcement of a Request For
Proposal (RFP). Therefore, if the details of an RFP can be reviewed in advance at
the step of preliminary feasibility study, the project period of PPP projects solicited
by the government can be greatly reduced.
The details of an RFP offer a practical blueprint for pursuing the concerned PPP
project. As such, the competent government office can offer predictability about the
project to a concessionaire to be designated later, which can have a big impact on
the projects risk analysis, writing of financial models, and devising of financing
and borrowing conditions.
The General Guidelines (fourth edition) saw that there was no need to review
financial feasibility and the possibility of private investment for any project at the
step of preliminary feasibility study. Still, financial feasibility evaluation was
conducted for projects with the possibility that the private sector would participate
voluntarily because of their economic feasibility and high business value.
These General Guidelines (fifth edition) intend more detailed analysis based
on the Fourth Edition and to review the possibility of private investment in projects
where the benefit-cost ratio of an optimal alternative exceeds 0.9 as a result of
economic feasibility analysis. The Fifth Edition also suggests procedures to be used
for appropriate projects.
Preliminary feasibility studies do financial feasibility analysis to provide basic
data for determining whether or not to pursue a PPP project in such way as roughly
suggesting the possibility of profitability and a minimum rate of government
financial support when the concerned project is pursued as a PPP project. However,
as far as financial feasibility analysis in preliminary feasibility studies is concerned,
analysis to calculate a minimum amount of government financial support for each
project fails to comprehensively consider qualitative elements like improvement in
service, ease of management, risk distribution, and ripple effects other than
profitability that help determine suitability as a PPP project. From the perspective of
the government or nation, whether it is a public investment project that is 100%
publicly financed or a PPP project partially funded by public finances, it is still the
taxpayers money, so there should be principles to systematically select projects in
place in advance without regard to whether it is a public investment project or PPP
project.
The Basic Plan for PPP Projects (Ministry of Strategy & Finance, January
2008) stipulates that projects from among those pursued as public investment
projects that are appropriate to convert into PPP projects in consideration of
financing conditions, urgency, profitability, and such and need to secure profitability
Economic Analysis
69
with an appropriate level of government financial support can be turned into PPP
projects. It also prescribes that whether to pursue a project with public finances or
with private investment should be determined when conducting a preliminary
feasibility study. To satisfy this regulation, there should, obviously, be a way to
determine whether or not to pursue a project with public finances or with private
investment at the step of preliminary feasibility study.
2. Review of the Possibility of Private Investment at the Step of

A. Process to Review the Possibility of Private Investment
This process is divided into two parts: review of the possibility of private
investment and study of feasibility as a PPP project (Value for Money (VfM)
test). The following model in Figure 3-3 is used to ascertain whether a project
should be pursued as a public investment project or PPP project.
First, projects subject to a checklist to review the possibility of private
investment are those where the benefit-cost ratio of the optimal alternative exceeds
0.9 in the results of economic feasibility analysis. At the first step, their feasibility in
terms of law and policy and a possible implementation method of private investment
are determined. The second step reviews the possibility of private investment
through qualitative and financial feasibility analysis with the checklist items of
economic feasibility, ease of management, creativity & efficiency, risk distribution,
and public nature. Financial feasibility analysis is conducted only for profit (BuildTransfer-Operate, BTO) projects. BTL (Build-Transfer-Lease) projects are an
exception to the principles of users being willing to pay higher usage fees and
profitability being secured, which are part of the principles of selecting PPP projects.
The procedures to use a checklist as part of preliminary feasibility studies are
indicated in Figure 3-4 below.
Second, a simplified VfM test can be performed informally for project proposals
that are found to be very concrete as a result of a checklist of the possibility of
private investment; that are believed to be more suitable as PPP projects than as
public investment projects as a result of comprehensive evaluation; and that are
found feasible by comprehensive evaluation at the step of preliminary feasibility
study (AHP 0.5).
70
Figure
3-3 Preliminary Feasibility Studys Evaluation Model to Determine Whether to Pursue a

Project as a Public Investment or PPP Project
Implement a preliminary feasibility study
Conduct feasibility analysis
Determine
feasibility
No
Reject a project
proposal
Yes
Determine eligibility
for VFM test
No
Yes
Determine feasibility
as a private
investment
No
Yes
Pursue as a PPP Project
Pursue as a government-financed
project
Note: 1) PSC: public sector comparator

2) PFI: Private finance initiative
Economic Analysis
71
Figure 3-4
Procedures to Perform a Checklist in Preliminary Feasibility Studies

Implement a preliminary feasibility study
Economic feasibility analysis
Possibility of
being pursued as
a PPP project
(B/C : 0.9)
Policy analysis
No
Yes
Yes
Step 1 check list

l
l
Projects asked to be
a BTL type by the
competent authority
No
Legal and policy feasibility

PPP implementation method
Financial feasibility
analysis (BTO)
Step 2 check list

l
l
l
l
l
Economic feasibility
Ease of management
Creativity and efficiency
Risk distribution
Publicness
Comprehensive evaluation of whether or not to implement a project
B. Checklist Items to Evaluate the Possibility of Private Investment

Feasibility in terms of law and policy, etc. is checked to ascertain the possibility
of a project proposal being accepted from a national perspective and to determine
whether to conduct a VfM test. The checklist items are as follows in Table 3-17:
72
Table
Step
3-17 Preliminary Feasibility Study Checklist Items to Evaluate the Possibility of Private
Investment
Evaluation
Items
Evaluation Details
n Legal feasibility of the concerned project including whether it is

one of the 44 types of facilities subject to private investment as
defined in Article 2 of the Act on Public-Private Partnerships in
Feasibility in
terms of law and
Infrastructure
policy
n
Whether it is aligned with the mid- & long-term plan for SOC
Step
facilities, and the investment policy and priorities of the
1
government or competent authority.
PPP project
implementation method
Economic
feasibility
Step
Remarks
Can move to
Required
the next step
items
only if yes is
selected
n BTO or BTL depending on whether users are willing to pay

higher usage fees and the project is profitable, which are two
of the principles of selecting PPP projects
n To determine feasibility as a PPP project, the possibility to
secure value for money in total project costs and economic
feasibility should be confirmed first.
Ease of
management
n Whether the concerned service can be independently provided

and the required level of performance can be met.
Creativity &
efficiency
n Whether the private sectors creativity is used to increase

efficiency in SOC construction and operation and competition
with other public investment facilities is facilitated to improve
service quality
How to
Score
The more
items with
high scores
Scoring
there are, the
survey
higher is the
results
score to
determine
Risk distribution
Publicness
n Whether risks can be appropriately distributed when pursuing

with private capital, and whether the scale and facilities of the
project impose any restriction in providing service, when seen
from the governments perspective
project
implementation
n Whether participation by a private party can generate the

ripple effects of improvement in technology, management
skills, etc. in the public sector
C. First-Step Checklist Evaluation

Legal review checks whether projects are for infrastructure types that are subject
to private investment under the Act on Public-Private Partnerships in Infrastructure.
This checks whether the concerned project is one of the infrastructure types under
Article 2 of the Act, and when necessary, applicable laws (e.g. Road Act, Toll Road
Act) and cases suggested under the Act are referred to.
Economic Analysis
73
Table
3-18 Infrastructure Types (Article 2, Act on Public-Private Partnerships in Infrastructure)
Project Type
Responsible Ministry
Road (3)
Ministry of Land, Transport and

Maritime Affairs (MLTM)
Infrastructure Type
Railroad (3)
MLTM
Port (3)
MLTM
Airport (1)
MLTM
Airport facilities
Water resource
(3)
MLTM
Multipurpose dams, river facilities
Road and ancillary facilities, offstreet parking facilities,

intelligent transportation systems
Railroads, railroad facilities, urban railroads
Port facilities, fishery harbor facilities, new port construction
facilities
Ministry of Environment
Waterworks systems and intermediate waterworks
Information &
telecommunications (5)
Korea Communications
Commission
Telecommunications facilities, information and

communications networks, super-high-speed information and
communications networks, ubiquitous urban infrastructure
Energy (3)
Ministry of Knowledge Economy
Power supply facilities, gas supply facilities, integrated energy

supply facilities
Environment (5)
Ministry of Environment
Sewage treatment facilities, public sewage disposal facilities &

excreta treatment facilities, waste treatment facilities,
wastewater terminal treatment facilities, recycling facilities,
public livestock wastewater treatment facilities
Distribution (2)
MLTM
Logistics terminals and complexes, passenger car terminals
Ministry of Culture, Sports and

Tourism
Tourist resort and resort complexes, youth training facilities,

professional sports facilities1) & public sports facilities,
libraries, museums & art museums, international conference
facilities, cultural facilities
Culture &
tourism (9)
MLTM
Ministry of Education, Science and

Technology (MEST)
Geographic information systems
Science museums
MLTM
Urban parks
Education (1)
MEST
Kindergartens and schools
National
defense (1)
Ministry of National Defense
Housing (1)
MLTM
Welfare (3)
Ministry for Health, Welfare and

Family Affairs
Forest (2)
Ministry for Food, Agriculture,

Forestry and Fisheries (Korea
Forest Service)
Military residential facilities and ancillary facilities

Public rental housing
Residential, medical, & home care facilities for the elderly,
public health & medical facilities, nursing facilities
Natural and recreational forests
Note: Enforced three months after promulgation of a revision to the Act on Public-Private Partnerships in Infrastructure.
Source: Act on Public-Private Partnerships in Infrastructure ([Enforced on July 31, 2009]).
74
Feasibility evaluation in terms of policy evaluates whether the concerned project

is aligned with mid- & long-term SOC plans, the directions of investment policies,
and investment priorities adopted by the government or competent authority, etc.
Comprehensively considered are a project plan submitted by the competent
ministry together with a preliminary feasibility study request; raw data collected and
analyzed while conducting the study; higher-level and relevant plans and policy data;
interviews with interested parties; and main issues of the study. Feasibility in terms
of policy is different from feasibility evaluation in terms of policy, an evaluation
item of preliminary feasibility studies. This is evaluated for projects that suit mid- &
long-term SOC plans and the governments investment priorities; meet the
principles of selecting PPP projects such as users being willing to pay higher usage
fees,21 the project being profitable,22 beneficial,23 and efficient;24 and therefore are
believed to be more efficiently pursued as a PPP project from the perspective of
government policy.
Determining a PPP project implementation method is about choosing between
BTO and BTL types. If all the questions under feasibility in terms of law and
policy are answered with yes, the concerned project is to be pursued as a PPP
project. Then a PPP project implementation method is to be determined. If all
relevant questions are answered with yes, the project is judged to be a BTO.
No financial feasibility analysis is conducted for projects that are evaluated to be
BTLs in the above checklist. These projects are considered to have no possibility of
attracting private investment at the step of preliminary feasibility study. Those asked
to be BTL-type PPP projects by the responsible department in the project plans are
checked to meet the BTL-type conditions.
21
22
23
24
The principle of users being willing to pay higher usage fees (except for BTL projects): Higherquality service can be provided compared to that of the existing facility with lower usage fees, and
users are willing to pay higher usage fees for such higher benefits.
Principle of being profitable (except for BTL projects): The private investor can secure profitability
that justifies investment in consideration of usage fees allowable by the government and payable by
users and construction subsidies providable by the government.
Principle of being beneficial: If the project is public investment, it is difficult to quickly complete
facility construction and provide service due to budget limits, etc. If private investment is made, it
can be completed by a scheduled time, quickly generating benefits.
Principle of being efficient: The private sectors creativity is leveraged to increase efficiency in SOC
construction and operation, and competition with other public investment facilities is facilitated to
improve service quality
Economic Analysis
75
Table 3-19
PPP Project Implementation Method: BTO and BTL
Type
1. Core Service
2. Usage Fee
3. Profitability
X/
Case
Expressway, light rail

transit, port
Environmental
treatment
facility,
railroad
Museum,
science
museum
School,
military facility,
welfare facility
PPP Project
Implementation Method
BTO
BTL/BTO
BTL
BTL
Theme park,
National road,
public rental
sewer system
housing
BTL
BTL/BTO
First-step checklist evaluation is performed by the study team (three persons:

project manager, researcher responsible for demand analysis, and researcher
responsible for cost analysis). The project manager is to put evaluation results in an
evaluation form Table 3-20 and write a report that is as concrete as possible about
the basis for evaluation and comprehensive judgment.
Table 3-20
Evaluation
Item
Feasibility in
Terms of Law
and Policy
PPP Project
Implementation
Method
First-Step Checklist Evaluation of Project A (example)

Survey Item
Evalu Evalu Evalu

- ator 1 - ator 2 -ator 3
Whether it is a facility subject to private

investment specified under Article 2 of the
Act on Public-Private Partnerships in
Infrastructure
Whether the project suits the governments
mid- & long-term SOC plans, investment
priorities, and policy directions, etc.
Can a private party provide infrastructure
and service under its responsibility without
government support?
Can be a usage fee charged on facility
use?
When charging a toll/usage fee, can users
opt for alternatives?
76
Comprehensive
judgment
Remarks
D. Financial Feasibility Analysis

Financial feasibility analysis is conducted only for projects of which feasibility
in terms of law and policy was recognized at the first-step checklist evaluation and
that can be pursued as BTOs.
It is not conducted for those which were found to be better as BTLs as a result of
first-step checklist evaluation or were suggested as BTLs in their project plan. This
kind of analysis is conducted in accordance with these Guidelines, and relevant
details are indicated in the next section.
E. Second-Step Checklist Evaluation

Projects subject to second-step checklist evaluation are those that secured
feasibility in terms of law and policy as PPP projects at the first-step checklist
evaluation and are classified as BTOs or requested to be BTOs in the project plan.
The second-step checklist evaluation is qualitative evaluation of answers to
survey questions (projects economic feasibility, ease of management, creativity and
efficiency, risk distribution, and public nature) in consideration of the results of
economic and financial feasibility analysis, raw data, issues identified, and cases of
similar projects.
The project manager is to write a report that is as concrete as possible about the
basis for evaluation and comprehensive judgment.
Economic Analysis
77
Table 3-21
Second-Step Qualitative Evaluation of Project A (example)
Evaluation
Item
Economic
Feasibility
Review Item
Are the total costs of this project high enough to secure value for money?
Is the project sufficiently economically feasible?
Can it stand alone without being connected with existing facilities (projects)?
Ease of
Management
Are the interested parties of this project clearly defined, and can opinions and
information be effectively exchanged?
Are the purpose and scope of the project clear, and can it suggest a definite required
service level for the concerned facility?
Is it believed that the private sectors creativity and efficiency will be exercised to
substantially reduce life cycle costs at the construction and operation phases?
Is it believed that the private sectors creativity will be exercised to provide better
Creativity &
Efficiency
service than if operated by the government?

Is this a facility that can guarantee autonomy in operation, management, and
maintenance by the private investor and reduce costs?
Will this project invite many private companies in the bid to win it to generate
sufficient competition?
Will a considerable part of its demand risks be transferred to the private investor so
that risk management will be more efficient?
Risk Distribution
Will its risks related to design and construction be transferred to the private investor to
reduce the governments burden?
Are there any restrictions to consider in project implementation (design, construction,
operation, acquiring approval, etc.)?
Is there a possibility that excessive benefits will accrue to a special interest party if
this project is implemented?
Are considerable ripple effects expected with the private partys participation such as
Publicness
improvement in technology and management skills in the public sector?

Is this project sufficiently differentiated from other projects of the same type in
relevant plans?
Comprehensive evaluation
78
Remarks
. Financial Feasibility Analysis
Financial feasibility analysis is conducted for projects of which feasibility in

terms of law and policy is recognized at the first-step of checklist evaluation and
that can be pursued as BTO projects, or for those proposed as BTO projects in the
project plan submitted by the responsible department. Even projects which are not
profitable enough to be pursued by a private party can be pursued as PPP projects
with some level of government financial support if they are more suitable to be
pursued by such party in terms of creativity and efficiency. In this case, financial
feasibility analysis needs to be conducted to ascertain an appropriate amount of
government financial support.
1. Comparison between Economic Feasibility Analysis and

Financial Feasibility Analysis
Economic feasibility analysis is to measure public projects costs and benefits
from the perspective of the entire nation (society) and accordingly to calculate their
economic profitability and to determine their feasibility. In comparison, financial
feasibility analysis estimates actual monetary costs and cash flows from the
perspective of individual parties responsible for projects, not the entire society, and
accordingly calculates financial profitability to ascertain projects feasibility.
Financial feasibility analysis places utmost importance on the actual investment
budget amount and cash flows. The differences in the calculation of income and costs
between economic feasibility analysis and financial feasibility analysis are as follows:
First, as economic feasibility analysis calculates costs and benefits from the
perspective of the national economy, it has to calculate product prices, exchange
rates, wages, etc. as shadow prices, in principle. Financial feasibility analysis can
use simple market prices as it calculates everything from the perspective of
individual responsible parties.
Second, transfer payments like taxes and interest should be excluded from
economic feasibility analysis but be included in financial feasibility analysis.
Third, economic feasibility analysis uses the social discount rate as a discount
rate, but financial feasibility analysis uses the financial discount rate in
consideration of market interest rates, project risks, etc.
Economic Analysis
79
Table 3-22
Comparison between Economic and Financial Feasibility Analysis
Classification
Economic Analysis
Financial Analysis
Perspective of evaluation:
National economy
Individual responsible party
Measured price:
Shadow price
Market price
Transfer payments:
Excluded
Included
Discount rate to apply:
Social discount rate
Market interest rate, project risks, etc. (financial

discount rate)
2. Basic Assumptions
A. Investment Methods of Projects
Financing for public investment projects can be divided into cases where a
separate corporation is established and those where an existing corporation serves as
a responsible party. Both cases use equity capital and debt capital and can
additionally consider government subsidies, government loans, etc. Equity capital is
funds raised by the responsible party with reserve funds or capital increase, or funds
by a separate corporation through equity participation by specific parties, IPOs, and
such. Debt capital can be raised through borrowing from domestic and foreign
financial institutions, issuance of corporate bonds, etc. As SOC construction is
usually capital-intensive, the share of debt capital is often high.
In financial feasibility analysis, which often uses the discounted cash flow
method based on conventional financial theories, different financing methods,
strictly speaking, do not have a big impact on analysis results. Nevertheless,
assumptions about the ratios of equity capital and debt capital, financing methods,
etc. have an impact on the calculation of appropriate discount rates, so these should
be determined in advance.
Public investment projects pursued with private capital usually take the form of
BOT (Build-Operate-Transfer), BTO (Build-Transfer-Operate), BOO (Build-OwnOperate), and BTL (Build-Transfer-Lease), etc. Preliminary feasibility studies, in
general, validate whether target projects are suitable to be pursued as BOT or BTO
projects, if unless other implementation methods are economically persuasive.
80
B. Base Year of Analysis, Analysis Period, & Completion Rate

Assumptions to be used in financial feasibility analysis such as the base year of
analysis, analysis period, and completion rate related to costs executed each year are
basically the same as those used in economic feasibility analysis.
The base year of analysis is the end of the year before analysis is requested, as in
economic feasibility analysis.25
Also as in economic feasibility analysis, the analysis period varies depending on
the characteristics of each project. The analysis period is 30 years after the
commencement of operation for transportation projects like roads, railroads, ports,
and airports. It is 50 years for dam projects according to the practice at home and
abroad of applying a longer period in water resource projects than in transportation
projects. It is 30 years for projects to form industrial, cultural, and tourism
complexes.
For the completion rate during the analysis period, the same standards are
applied as those in economic feasibility analysis. In the first two years of a project,
respectively, 30% and 70% of lot purchase costs are to be executed. Annual
execution of project costs is to be in accordance with the completion rate from
economic feasibility analysis.
C. Salvage Value
In general, salvage value is related to the duration of the concerned facility and
period of economic feasibility analysis. In the case of facilities and equipment, the
calculation and amount of salvage value can vary according to such project types as
BOT, BTO, and BOO. It should, therefore, be calculated accordingly. In economic
feasibility analysis, salvage value is included as part of negative costs at the final
point of analysis. In financial feasibility analysis, as the ownership of a facility
reverts to the government or a local government organization in a BOT or BTO
project, the private party does not get to have salvage value. However, if the private
party is granted facility ownership at the end of analysis, salvage value shall be
considered as a negative cost.
25
As values estimated from economic feasibility analysis are used for income and costs, the analysis
standards should be the same as those in economic feasibility analysis.
Economic Analysis
81
D. Taxes and Charges, Financing Costs, and Interest Rates

Economic feasibility analysis recognizes various taxes and charges as transfer
payments and thereby does not include them in the analysis. They are included in
financial feasibility analysis as acquisition taxes, registration taxes, corporate taxes,
etc. and are clearly cash outflows from the perspective of the private party.
For an interest rate to apply when calculating interest costs for borrowings, an
actual current market rate should be used rather than an interest rate predicted over a
long term. In general, interest costs for general borrowings are calculated by
reflecting the spread (e.g. within 3%) in the market interest rate (e.g. yield to
maturity of five-year government bonds) at the time of analysis.
New stock issuance costs, another type of financing costs, can be calculated by
applying a certain portion of the paid-in capital (e.g. 0.5%), but because they are not
high, they can be excluded at the step of preliminary feasibility study.
E. Supplementary Projects
If the responsible party conducts not only the concerned project but also
supplementary projects, the costs and revenues of the supplementary projects should
be included in financial feasibility analysis. Supplementary projects here refer to the
construction of supplementary facilities directly related to the concerned project.
Minor supplementary projects should be excluded. These include shopping malls
and the like that have little direct bearing on the characteristics of the project.
Supplementary projects that can be reviewed in financial feasibility analysis as part
of a preliminary feasibility study are those that can be directly handled by the
government when the government is the implementation party of the main project.
The investment costs of supplementary projects should fall within the scope of
the costs of the concerned PPP project. Supplementary projects should serve to
increase benefits in the national economy and the business value of the concerned
project, and be implemented at locations geographically close to that of the
concerned project.26
Cases that can be considered as supplementary projects are, in road projects, the
net income of advertising facilities and net income of amenities leasing. In railroad
26
82
The upper limit on the amount of income from supplementary projects cannot be suggested by law
or regulation. In the case of the Korea Expressway Corporation, income from supplementary
projects (rest area lease) accounts for less than 3.0% of the total income. This can be used as a
benchmark.
projects, an example is income other than fares such as the income of advertising in
train cars and stations or of vending machines. The estimation of investment costs
(e.g. installation costs), operating costs, and profits related to supplementary
projects should consider the installation costs of rest areas from the Korea
Expressway Corporation and income of advertising in subway cars of the Seoul
Metro.
3. Analysis Methods
The most commonly used discounted cash flow methods are used for financial
feasibility analysis.
The discounted cash flow methods estimate future cash flows and calculate
present values discounted by the opportunity cost of capital (e.g. weighted average
cost of capital). The discounted cash flow methods include the Net Present Value
(NPV), Internal Rate of Return (IRR), Profitability Index (PI) methods, and more.
The NPV method is the sum of expected cash flows, both incoming and
outgoing, that are discounted by the weighted average cost of capital. This means
the amount by which corporate value increases when the concerned investment
proposal is adopted. If the financial NPV is positive, the project is believed to be
financially feasible.27
n
FNPV =
Rt
Ct
(1 + r ) - (1 + r )
t
t =0
t =0
where Rt refers to the incoming cash flow of period t , and Ct to the outgoing
flow of period t .
The IRR method calculates an IRR (FIRR), a discount rate that reconciles the
present values of incoming and outgoing cash flows expected from investment into
the planned project, and compares it with capital costs to evaluate an investment
proposal. When the IRR exceeds the capital costs, the project is considered
financially feasible.
27
To distinguish from the NPV and IRR used in economic feasibility analysis, they are indicated as
FNPV and FIRR in financial feasibility analysis.
Economic Analysis
83
0=
t =0
Rt
(1 + FIRR)t
Ct
(1 + FIRR)
t =0
The PI method is the ratio of the net value of incoming cash flows divided by
that of outgoing cash flows (cash flows occurring from investment). If the PI is
higher than 1, the project is judged to be financially feasible. While the NPV method
measures the financial feasibility of an investment proposal as an absolute amount,
the PI method measures the ratio of cost vs. profit in a proposal as a relative ratio.
n
PI =
t =0
n
Rt
Ct
/
t
(1 + r ) t = 0 (1 + r )t
4. Cost & Income Estimation and Feasibility Analysis

A. Definition of Cash Flows
The cash flows used for financial feasibility analysis are free cash flows, which
are calculated as follows:
Free Cash Flow = Operating cash flow - capital expenditure - increase in
working capital
= Operating profit (1 - corporate tax rate) + depreciation cost capital expenditure - increase in working capital
For financial feasibility analysis, all cash flows should be estimated as or
converted into constant prices, and cash flows estimated as constant prices should be
discounted by a real discount rate.
B. General Principles for Cash Flow Estimation

General principles for cash flow estimation are as follows:
First, the cash flows of all projects related to the concerned investment project
should be simultaneously considered. For instance, the costs and income of
84
supplementary projects and environment-related costs are cash flows incurred due to
the investment project and should, therefore, be included in the cash flow estimation
of financial feasibility analysis.
Second, sunk costs are not considered. Such costs have already occurred without
regard to implementation of the investment project, so they are not included in its
financial feasibility analysis.
Third, opportunity costs resulting from the use of existing facilities, land, and
buildings should be considered. Cash flows that can occur when existing facilities,
land, buildings, etc. are used not for the investment project but for alternative
purposes are lost as these assets are used for the investment project. They should be
used as the opportunity cost of the investment project targeted for analysis.
Fourth, additional opportunities that occur in relation to the investment project
should be considered. If there are expansion options that can further increase the
scale of the project after its implementation, additional cash flows that can occur
accordingly should be considered.
Fifth, expense distribution should be considered.
C. Guidelines for Income and Cost Estimation28

a. Income (Incoming Cash Flow)
1) Operating Revenue
Operating revenue uses the estimate of the operators income included among
benefits in economic feasibility analysis. However, in the case of an expressway
project explained below, the operators income can differ between economic
feasibility analysis and financial feasibility analysis. This should be considered for
calculation.
In the case of a road project, economic feasibility analysis as part of current
preliminary feasibility studies looks at the difference in the operators income before
and after project implementation with regard to not only the roads and railroads
subject to evaluation but also all the toll roads and railroads within the affected area.
If this figure is fully reflected in financial feasibility analysis, the operating revenue
of the concerned route can be overestimated.29 In financial feasibility analysis, only
28
29
Refer to the appendix for cash flow calculation and how to fill out pro-forma financial statements.
Nevertheless, if a government agency and the Korea Expressway Corporation are the responsible
party of the project, the figure from economic feasibility analysis can be used as it is.
Economic Analysis
85
the operators income of the route subject to the study should be used from among
the operators income estimated in economic feasibility analysis. In this case, the
operators income can be calculated by using the traffic volume of the route ( q )
computed in economic feasibility analysis and the toll rate of the expressway ( p )
used in the generalized cost formula.30
The toll level ( p ) used at the step of preliminary feasibility study is a value
based on the toll rate of the Korea Expressway Corporation in consideration of
social benefits. As the toll level of privately financed expressways currently under
operation is higher than that of the Korea Expressway Corporation, use of the Korea
Expressway Corporation rate for financial feasibility analysis can distort the
profitability of the project. When the assumption is that the project is to be
conducted by a private party, a realistic toll level should be applied. If the traffic
volume resulting from a preliminary feasibility study is used to calculate operating
revenue, the demand can be overestimated. For this reason, the private party needs
to analyze the traffic demand again to set the toll at a more rational level.
As a toll is determined through negotiations when it becomes certain that a
project is to be implemented as a PPP project, usage fees including tolls should be
reset at rational levels and traffic volume reestimated to conduct financial feasibility
analysis again when the possibility of private financing of a project is strong.
2) Other Revenues
Other revenues can include cash flows from supplementary projects and ancillary
projects, but it is difficult to estimate them at the step of preliminary feasibility study. In
general, supplementary projects and projects to construct affiliated facilities are judged
to be small enough to be disregarded. It is best to consider only indispensible ones from
among them at the step of preliminary feasibility study and to consider income and costs
from them when determining tolls and the length of the free-use period at the step of
full-fledged evaluation or negotiations.31 Nevertheless, if there is supplementary income
that is definitely expected, it can be calculated by a rational method and included among
other revenues.
30
31
86
As of 2007, the basic rate of a closed toll collection system of the Korea Expressway Corporation
was 862 won; and the toll rate of a two-lane expressway was 40.50 won/km for type 1 vehicles,
41.30 won/km for type 2, 42.90 won/km for type 3, 57.50 won/km for type 4, and 68.00 won/km for
type 5. The standards used in economic feasibility analysis should be consistent with these.
90.3% of the total revenue of the Korea Expressway Corporation is toll income; 6.0% is from
supplementary projects like government projects and research outsourcing; and 3.7% is from
ancillary projects like lease income. In case of a large-scale road project, the percentages of
different items can be used in these feasibility studies or evaluation to select a responsible party.
b. Cost (Outgoing Cash Flow)

1) Total Project Costs
Total project costs are spending to build, extend, or improve SOC facilities. The
items of total project costs include survey and research costs, design costs, construction
supervision costs, construction costs, lot purchase costs, incidental costs, operating
facility costs, various taxes and charges, and the operating reserve, etc.32
VAT is added to total project costs33 unlike economic feasibility analysis, and when
lots are purchased by the government in a lump sum or provided by the government or a
local government organization, individual responsible parties do not have to consider lot
purchase costs and salvage value.
32
33
Survey and Research Costs: Survey and other costs in preparation for
project implementation (based on the standard fees for compensation
for engineering projects under Article 10 of the Engineering
Technology Promotion Act)
Design Costs: Costs of design for construction (based on the standard

fees for compensation for engineering projects under Article 10 of the
Engineering Technology Promotion Act or the standard fees for
compensation under Article 19-3 of the Certified Architects Act)
Construction Costs: Sum of costs of raw materials, labor, overhead,

general administration, and contractors profits [based on the criteria
for determination of projected prices under Article 9 of the
Enforcement Decree of the Act on Contracts to Which the State Is a
Party, standard pricing criteria of the government, and unit prices
(referring to official prices announced by the government when there
are such)]
Lot Purchase Costs: Costs associated with lot purchases (based on

Articles 70 to 79 of the Act on the Acquisition of Land, Etc. for Public
Works and the Compensation Therefore). In principle, the appraised
value of the corresponding land is to be used for acquisition costs of
Article 22(1) of the Enforcement Decree of the Act on Public-Private Partnerships in Infrastructure
and Article 9 of the Basic Plan for PPP Projects (calculation of total project costs) are referred to.
As there are cases where a zero tax rate is applied, like construction outsourcing of urban railroad
projects, analysis tables of profitability and financial statements should be written in consideration
of VAT application for different areas.
Economic Analysis
87
land. If there is none, the Detailed Guidelines for VfM Test shall
apply mutatis mutandis.
n
Incidental Costs: Project feasibility analysis costs, environmental

impact evaluation costs, construction supervision costs, Construction/
Project Management (CM/PM) costs, review costs of construction unit
prices, Value Engineering (VE) costs to review the economic feasibility
of design, and financial incidental costs for financing
Operating Facility Costs: Prices of equipment, facilities, and machinery

and tools initially inputted for facility operation
Taxes and Charges: All the taxes related to commencement and

completion of construction, registration, and ownership transfer like
acquisition taxes, registration taxes, and VAT; utility bills; and other
charges imposed by other laws
Operating Reserve: Initial necessary costs to establish a corporation for

a PPP project required to prepare for facility operation
Meanwhile, there is interest during construction and contingencies (price

fluctuations) as items that are part of a responsible partys total investment costs but not
part of total project costs. Interest during construction is an actual outgoing cash flow
but not included in the assumption of cash flows because, in the process of calculating a
present value by discounting the cash flow by an appropriate discount rate under the
discounted cash flow method, financial risks resulting from use of a debit are already
reflected. Contingencies are divided into contingencies for price fluctuation and
contingencies for design change (quantity change). As financial feasibility analysis
under these Guidelines evaluates feasibility with constant prices, there is no need to
consider the former. The latter is included as part of total project costs to ensure
consistency with economic feasibility analysis.
2) Operating Costs
Operating costs are the sum of costs of facility operation during the operating period
after facility completion. The items included are costs of sales, maintenance costs,
selling and general administrative costs, corporate taxes (actual corporate taxes +
interest costs corporate tax rate), VAT, etc.
As in the assumption of total project costs, interest costs occurring in the operating
88
period are not included in the assumption of cash flows.

Depreciation cost (including amortization cost of goodwill, etc.) is also not
accounted for as an operating cost item as it is preserved as recovery of total project
costs during the service life of the facility.34
3) Additional Costs Related to Supplementary Projects

Additional costs related to supplementary projects are costs incurred from leasing of
advertising boards and rest areas in the case of road projects; costs of construction and
maintenance of station buildings in the case of railroad projects; costs of operation of
cultural facilities that charge visitors in the case of port projects, etc.
The scale and form of supplementary projects can vary greatly depending on the
nature of investment projects. Their share is expected to be negligible, so concretely
determining the scale of supplementary projects and forecasting project costs and profits
at the step of preliminary feasibility study is deemed unnecessary, except for special
cases like projects where supplementary projects are certain to be executed.
Considerations for supplementary projects can be made in a feasibility study under
these Guidelines or negotiations after the selection of a responsible party. It is desirable
that their estimated profit does not exceed 5% of the projects total profit.
c. Order of Project Costs Being Spent and Debt Repayment Schedule
When covering the costs of a project, all equity capital is spent first before using
any debt capital. If there is a government subsidy, the order is assumed to be equity
capital, government subsidy, and then debt capital.
The debt repayment schedule can be a determinant of the corporate tax on
interest income and cost. This has only insignificant impact on overall financial
feasibility analysis and thereby is not given consideration. For ease of calculation, it
is assumed that debt is repaid with new cash inflows at the end of the term.
34
Depreciation cost is accounted for as a deduction item when calculating pre-tax profits, but as it
does not accompany cash disbursements, it is not included in the assumption of cash flows. A
reduction in corporate taxes due to depreciation cost should nevertheless be considered.
Economic Analysis
89
5. Financial Discount Rate Calculation35

To calculate the present value of cash flows expected from the concerned project,
estimated cash flows should be discounted by an appropriate financial discount rate.
The appropriate rate here is the weighted average cost of capital, which is the capital
cost of each source of financing (equity capital and debt capital) average-weighted
by its component ratio.
r0 = [(1 - T ) rb L ] + [rs (1 - L )]
r0 : Weighted average cost of capital
rb : Cost of debt capital (capital cost of debt)
rs : Cost of equity capital (capital cost of equity)
T : Corporate tax rate
L : Debt ratio (=debt/equity capital)
A. Assumption of the Capital Cost of Debt

a. Assumption of the Risk-Free Rate
The risk-free rate is to be assumed based on the Yield To Maturity (YTM) of
five-year government bonds. Though it is desirable to use the YTM of a bond with a
longer maturity as cash flows in investment projects occur over a period much
longer than five years, the five-year government bond will most comprehensively
reflect the market situation since it is so liquid. The average YTM of the five-year
government bond for the last seven years is used as the risk-free rate taking into
account the fact that the YTM of the present point can introduce bias due to a shortterm imbalance between supply and demand. Analysis under these Guidelines uses a
risk-free rate of 5.7%, the average YTM of the five-year government bond for the
last seven years, from 2000 through 2006.
In the case of SOC investment, a liquidity premium needs to be added as
compensation for capital being tied up for long. Taking account of the average
interest rate spread of U.S. government bonds (three to 30 year maturity) (some
1.1%) from the past 20 years, 6.8% is to be used as a long-term risk-free rate.
35
90
Refer to Section 3 of Chapter VII for detailed discussions on discount rate calculation.
b. Assumption of a Default Risk Premium

The capital cost of debt is calculated by adding a default risk premium (spread)
to a long-term risk-free rate. The possibility of a PPP project falling into default is
low, and the systemic risk of debt seems low. Nevertheless, since a relatively high
amount of debt is used, a long-term risk-free rate is added with a spread for default
risk (a difference between the rate of return on three-year government bonds and
that on three-year corporate bonds from the past three years).
The General Guidelines (fourth edition) calculated the rate of return on
corporate bonds by deducting the rate of return on government bonds from the
average of AA-grade and BBB-grade bonds. These General Guidelines (fifth
edition) used that of AA minus (-)-grade corporate bonds in the assumption that a
PPP project has a low default risk, unlike private-sector companies.
When calculating the capital cost of debt by applying the spread of debt to a
long-term risk-free rate, the recent narrowing of the interest rate spread between
government and corporate bonds is reflected and the spread of debt is changed to 2%
under the General Guidelines (fourth edition) to 1% under these General
Guidelines (fifth edition). As a result, 7.8% is used for the capital cost of debt.
Table 3-23
Year
Interest Rates of Government and Corporate Bonds
Government Bond
Corporate Bond
(3 year)
(off-board, three year, AA-)
Spread Between Government Bond

(3 year)-Corporate Bond (3 year)
1995
13.39
13.79
0.40
1996
11.84
11.87
0.03
1997
12.26
13.39
1.13
1998
12.94
15.10
2.16
1999
7.69
8.86
1.17
2000
8.30
9.35
1.05
2001
5.68
7.05
1.37
2002
5.78
6.56
0.78
2003
4.55
5.43
0.88
2004
4.11
4.73
0.62
2005
4.27
4.68
0.41
2006
4.83
5.17
0.34
Overall average
7.97
8.83
0.86
1999 to 2006
5.36
6.14
0.83
Economic Analysis
91
B. Assumption of the Capital Cost of Equity

The capital cost of equity is the sum of the risk-free rate and a risk premium. A
discount rate and a risk premium to determine it are calculated using the CAPM
(capital asset pricing model):
rj = rf + b j (rm - rf )
where ri refers to the cost of equity capital for an investment project j ; rm to the
market-expected rate of return; r f to the risk-free rate; and b j to the systemic
risk of the investment project j .
a. Assumption of a Market Risk Premium
The markets risk premium, (rm - r f ) has a relatively stable time series, so a rate
of about 6% is to be used, which is (rm - r f ) of the last roughly 30 years in 11

advanced countries.36
b. Assumption of Systemic Risk
As the systemic risk of equities reflects both the operating risk and financial risk,
the operating risk is to be first calculated, and it is adjusted according to the
financial risk. The operating risk is usually calculated as b u of the asset, and these
Guidelines use 0.515, which is the median value of the asset beta among the top 440
domestic companies.
When a project solicited by the government is pursued with private capital and
the actual operating revenue (e.g. toll income of an expressway) fails to meet a
certain level of the assumed operating revenue, the government covers the loss or
provides assistance to meet the level. The actual loss borne by the private party is,
therefore, considerably limited and the operating risk indicated as the beta is
expected to be lower than 0.515.37
36
37
92
In the U.S., the (r - r ) of the last 100 years is about 8%.

Under the 2004 Basic Plan for PPP Projects (Ministry of Planning and Budget), the maximum
limit for the guaranteed operating revenue in PPP projects solicited by the government is up to 90%
of the assumed operating revenue for five years after commencement of operation; 80% for six to
ten years; and 70% for 11 to 15 years.
m
The equity beta ( b s ) is affected by the debt ratio of each company, and the beta
needs to be adjusted as follows according to the target debt ratio of a PPP project:
b s = b u [1 + (1 + T ) (target debt ratio) ]
T refers to the corporate tax rate.

The upper limit of a debt ratio for large companies, especially subsidiaries of
business groups, is set at 200%. If the debt ratio goes beyond 200%, default risk can
become apparent, so SOC investment projects set 200% as the target debt ratio. If
the government provides financial support and the operating risk is relatively low, a
debt ratio of 300% can be allowed.
C. Assumption of the Weighted Average Cost of Capital

For estimation of the average cost of capital, a beta adjusted by the target debt
ratio is used to calculate the capital cost of equity. It is average weighted by the
already calculated capital cost of debt to estimate a weighted average cost of capital
(WACC). The WACC ( r0 ) to be used as a discount rate is computed as follows:
r0 = [(1 - T ) rb L] + [rs (1 - L )]
Nevertheless, L = B /( B + S ) =66.7% (debt ratio of 200%)

The assumption is T =27.5%38
The process to calculate a nominal discount rate using the values of market
parameters suggested above is as follows in Table 3-24.
38
This 27.5% is a sum of the corporate tax rate of 25% to be applied from 2005 and residence tax (10%
of the principal tax) (2.5%).
Economic Analysis
93
Table 3-24
Calculation Process of a Nominal Financial Discount Rate
Discount
Rate
Capital Cost of
Debt
Calculation Process
Long-term risk-free rate
(rf ) = 6.8% (long-term liquidity premium of 1.1% reflected)
Capital cost of debt ( rb ) = ( rf ) + debt spread (1.0%) = 7.8%

Long-term risk-free rate
Markets risk premium
(r f ) = 6.8%
(rm - rf ) = 6%
Asset beta ( b u ) = 0.515

Capital Cost of
Equity
Target debt ratio = 200% (share of debt=66.7%)

Equity beta ( b s ) =
b s = b u [1 + (1 + T ) (target debt ratio) ]
= 0.515 (1 + (1-0.275) 2.0) = 1.262

Capital cost of equity capital
(rs )
= rf + b s rm - rf
= 6.8% + 1.262 (6%)

= 14.4%
WACC
WACC
(r0 ) = [(1 - T ) rb L] + [rs (1 - L )]

= (1-0.275)(7.7)(0.667) + (14.4)(1-0.667)
= 8.56%
D. Calculation of a Real Discount Rate

For estimation of future cash flows, the (actual) cash flow of constant prices is
discounted by a real discount rate as the cash flow of constant prices does not
readily lend itself to arbitrary intervention in estimation compared to the cash flow
of nominal prices. The relationship between the nominal discount rate ( r ) and the
real discount rate ( r * ) is as follows:
r * = (1 + r ) (1 + expected inflation rate ) - 1
= (1.0856 1.03) - 1 = 5.4%
The real discount rate becomes 5.4% by deducting the expected inflation rate of
3% from the nominal WACC of 8.56%. The figure is derived from various
assumptions. In future financial feasibility analysis of preliminary feasibility studies,
an approximate value to the derived value - 5.5% - is to be used as a real financial
discount rate.
Depending on the nature of PPP projects and changes in the economic situation,
the beta value, target debt ratio, economic growth rate, and expected inflation rate
94
can differ. Table 3-25 shows the calculation results of a real discount rate according
to changes in the economic growth rate, debt ratio, and beta. The study team can set
an appropriate discount rate for individual projects in consideration of their risks
and government assistance.
Table 3-25
Calculation of a Real Financial Discount Rate
Risk-free rate
5.2%
5.7%
6.2%
Target debt ratio
100%
200%
300%
100%
200%
300%
100%
200%
300%
b1 = 1.157
8.88
8.53
8.35
9.30
8.92
8.73
9.72
9.32
9.12
b 2 = 0.671
6.44
6.21
6.10
6.86
6.61
6.49
7.28
7.01
6.87
b med = 0.515
5.65
5.47
5.38
6.07
5.87
5.76
6.49
6.26
6.15
b 3 = 0.406
5.11
4.95
4.88
5.53
5.35
5.26
5.94
5.75
5.65
b 4 = 0.153
3.84
3.75
3.71
4.25
4.15
4.09
4.67
4.54
4.48
Note: Assumptions are as follows: inflation rate=3.0%; short-term risk-free rate=YTM of three-year government bonds; long-term
liquidity premium=1.1%; long-term risk-free rate=short-term risk-free rate + long-term liquidity premium; default risk
premium=2.0%; capital cost of debt=long-term risk-free rate + default risk premium.
6. Calculation of a Minimum Rate of Government Financial

Support
Some public investment projects that are economically but not financially
feasible are implemented as PPP projects with some level of government financial
support. Financial feasibility analysis should assume cases where financial support
is provided for some of the construction costs and cases where financial support is
provided so that the FNPV becomes zero, except for cases when projects are 100%
privately financed.
The basic framework to determine the amount of government financial support
for public investment projects that are not financially feasible only with cash flows
occurring from the projects themselves is to calculate ( z, a ) that meets the following
condition:
Economic Analysis
95
FNPV =
CFt + zt
(1 + r ) -
t
Invt - subt
and a =
(1 + r ) t
Sub
Inv
Each variable refers to the following:

CFt : Cash flows from the investment project,
zt : Government subsidy for operation, compensation for loss, income from
supplementary projects, etc.,

r : Opportunity cost of capital (namely, cost of capital)
Invt : Investment cost occurring every year,
Subt : Government financial support from among the investment cost occurring
in year t , and
a : Share of government financial support in the total investment costs.
A practical calculation method using the above formula can be summarized as
follows:
Indicate the government financial support rate as a and multiply this by the
total investment costs to calculate a total support amount. Financial support
is to be granted only after input of equity capital but before borrowing.
Calculate the net present value of cash flows from investment projects,
government financial support, and construction costs occurring each period.
By trial and error, change the government financial support rate, a , to a
figure that makes the FNPV zero.
Financial feasibility analysis at the step of preliminary feasibility study is to
calculate the FNPV by disregarding other revenues except for income from
supplementary projects ( zt ) in the above formula and assuming the share of
government financial support among basic investment costs to be a certain level.
This is for preliminary evaluation of financial feasibility.
96
CHAPTER 4
Policy Analysis
. Policy Analysis System
The analysis of preliminary feasibility studies entails economic feasibility

analysis and policy analysis. Policy analysis includes elements that are not included
in economic feasibility analysis but should be considered to evaluate the feasibility
of projects. Economic feasibility analysis quantifies effects projects have on the
national economy using the framework of cost-benefit analysis. Policy analysis is
for elements that are among social benefits or costs resulting from projects, cannot
be quantified by the framework of cost-benefit analysis, but should still be evaluated
to determine whether to go ahead with the projects. For instance, to determine
whether to carry out a project based on balanced regional development - for which
there is a strong national consensus - the level of regional development, ripple
effects on the regional economy, and such are analyzed.
Evaluation in policy analysis is divided into basic evaluation items and projectspecific evaluation items depending on whether they can apply to any project subject
to a preliminary feasibility study. Basic evaluation items are those that should be
commonly included in the evaluation of any project subject to a preliminary
feasibility study without regard to its characteristics. Predefining basic evaluation
items is especially important in that there are generally common matters to consider
when inputting the already limited central government funds into projects subject to
preliminary feasibility studies without regard to their characteristics, and there
should be some modicum of uniformity among evaluation items to ensure
consistency in the evaluation of different projects.
At the step of preliminary feasibility study, considered as the basic evaluation
items of policy analysis, are the level of regional development and ripple effects on
the regional economy for balanced regional development, consistency with relevant
plans and policy directions, willingness to pursue and preference for projects,
Policy Analysis
97
possibility of financing, environmental impact analysis, etc. Project-specific

evaluation items are special items to consider in the evaluation of the concerned
project. They can differ depending on the project type like national defense, culture,
and urban development.
The previous guidelines categorized the evaluation items of policy analysis into
basic evaluation items and project-specific evaluation items. This categorization was
intended to ensure consistency in evaluation among different projects, and it is for
easy collection of consistent data. However this kind of evaluation structure can be
restrictive in AHP (Analytic Hierarchy Process) analysis-based comprehensive
evaluation. The evaluation items that are actually interrelated are divided into basic
evaluation items and project-specific evaluation items, so evaluators not familiar
with AHP analysis may fixate on individual evaluation items. To address this issue,
these Guidelines divided policy analysis evaluation items into four mid-level
categories: balanced regional development, consistency with policy and willingness
to pursue projects, risks in pursuing projects, and project-specific evaluation items.
Table 4-1
Categorization of Policy Analysis Items
Mid-level categorization
Balanced regional development
Consistency with policy and willingness

to pursue projects
Detailed evaluation items

n Level of regional development
n Ripple effects on the regional economy
n Additional evaluation items (elective)
n
n
n
n
Consistency with relevant plans and policy directions

Willingness to pursue and preference for projects
Level of project preparedness
Additional evaluation items (elective)
Risks in pursuing projects
n Possibility of financing
n Environmental nature
Project-specific evaluation items
Under the mid-level category balanced regional development are the level of
regional development and ripple effects on the regional economy. Added are
project-specific evaluation items related to balanced regional development. Under
consistency with policy and willingness to pursue projects are consistency with
relevant plans and policy directions, willingness to pursue and preference for
projects, level of project preparedness, and other relevant evaluation items. Under
risks in pursuing projects are the possibility of financing, environmental nature,
and other relevant evaluation items. Lastly, the project-specific evaluation items
category includes evaluation items not included in the above three categories.
98
. Analysis by Evaluation Item
1. Balanced Regional Development

When evaluating the feasibility of projects based only on the results of economic
feasibility analysis that are represented as the B/C ratio at the step of preliminary
feasibility study, imbalance among regions might become worse. This is because the
least developed regions have less feasibility for projects under the structure of economic
feasibility analysis. For instance, when evaluating the feasibility of a project to build a
road in a less developed region, its economic feasibility is often low as the population
and traffic volume are relatively low, with the result that there is little benefit of road
construction. Investment opportunities in such a region are, therefore, lower, and
investments are concentrated on other regions where economic feasibility is high, which
serves to exacerbate the disparity in development among them.
To prevent this, preliminary feasibility studies consider balanced regional
development, a higher-level government policy, to evaluate project feasibility. A
regional development index was developed to reflect balanced regional development
in evaluation, and a Multi-Regional Input-Output Model (MRIO) was developed to
analyze the ripple effects of projects in regions. The fundamental purpose of this
analysis is to prevent regional imbalances from worsening by granting some kind of
additional scores to government-financed projects in less developed regions and
projects with significant ripple effects in such regions so that even projects with
somewhat lower economic feasibility can be pursued.
A. Level of Regional Development

a. Calculation of the Regional Development Index under Current Preliminary
Feasibility Studies
In preliminary feasibility studies, the regional development index is calculated as follows:
UI r =
r
i
Wi
UI r = Regional development index of region r

Z ir = Value of the standardized index i in region r ( i = 1, 2, ..., 8)
Wi = Weight of index i ( i = 1, 2, ..., 8)
Policy Analysis
99
The regional development index is a weighted average of indices comprising the

level of development. The following eight indices used for the designation of
development promotion districts suggested in the Ministry of Land, Transport and
Maritime Affairs Work Guidelines for Regional Development Projects (2003)39
are used to comprise the regional development index.
Table 4-2
Area
Indices Used in the Calculation of the Regional Development Index

Index
Measurement method
Data source
Before change
After change
Statistics Korea
web site
Population
Population
increase rate
Annual average population

increase rate for the last five years
Statistics Korea, major

city, county, gu-district
statistical indices
Industry
Ratio of people
engaged in
manufacturing
(No. of people engaged in

manufacturing/population)100
Basic statistical survey

report of businesses in
cities and provinces
Statistics Korea,
basic statistical
survey report of
businesses
Local
infrastructure
Road ratio
(Length of legal roads/area of

administrative district)100

statistical indices
Annual urban &

provincial statistical
report
Transportation
No. of registered
passenger cars
(No. of registered passenger

cars/population)100

statistical indices
Annual urban &

report
No. of doctors per

(No. of doctors/population)100
population

statistical indices
Annual urban &

report
Aging index
(Population of 65 years of age or

older/ population of zero to 14
years of age)100

statistical indices
Statistics Korea
web site
Degree of
financial selfreliance1)
(Local taxesnon-tax
Ministry of Public
revenue/total tax revenue under Administration and Security
general accounting)100;
(MOPAS), annual report on
last three years average
local finance
Health
social welfare
Government
administration,
finance, etc.
Urban land use

ratio
Land category (building

lotfactory lotschool lot) /
area of administrative
district100
MOPAS,
annual report on
local finance
Korea Appraisal Board,

Annual urban &
annual report on cadastral provincial statistical
statistics
report
Note: According to the custom of calculating the degree of financial self-reliance of Seoul, six metropolitan cities, and nine
provinces, the fiscal data of gross totals of the provincial and metropolitan city governments is used for calculation of the
level of regional development of cities and counties; and the fiscal data of net totals of the provincial and metropolitan city
governments, and lower-level local governments is used to calculate the level of regional development of cities and
provinces.
39
100
Ministry of Land, Transport and Maritime Affairs, Work Guidelines for Regional Development
Projects, February 21, 2003.
The scales of the eight indices are different but need to be reconciled to control
the effects. For this purpose, the eight indices are standardized using the following
unit normal scaling. Nevertheless, as a higher aging index is interpreted as a strong
indication of low regional development, it is given a negative value when calculating
the regional development index.
Zi =
Xi - Xi
Si
S i refers to the standard deviation, X i to the sample mean
For calculation of the regional development index, weights for indices should be
set up. For this purpose, a survey was conducted of people working at appropriate
academic societies and research institutes, who have experience in preliminary
feasibility studies, etc. to set up weights for indices as in Table 4-3.
Table 4-3
Weights for Indices to Calculate the Regional Development Index

Index
Weight (%)
Index
Weight (%)
Population increase rate
8.9
No. of registered passenger cars
12.4
Aging index
4.4
Road ratio
11.7
Degree of financial self-reliance
29.1
No. of doctors per population
6.3
Ratio of people engaged in manufacturing
13.1
Urban land use ratio
14.2
Source: KDI, Study to Amend and Supplement General Guidelines for Preliminary Feasibility Studies (fourth edition), 2004.
In comprehensive evaluation of preliminary feasibility studies, the level of

regional development is reflected as follows: preliminary feasibility studies use the
Analytic Hierarchy Process (AHP) method, one of the multi-criteria decision making
analysis methods.40 There are three categories of weights under AHP analysis:
economic feasibility analysis, policy analysis, and balanced regional development.
As in Table 4-4, weights of 15 to 25% are given to balanced regional development
without regard to the project type.
Under Paragraph (2) of Article 38 (comprehensive evaluation) in the 2009
40
The AHP method is one of the decision-making techniques for systematic evaluation of opposing
alternatives when there are multiple and complex goals for decision-making or multiple and
complex evaluation standards. It stratifies complex issues into major or detailed elements and
derives their level of importance through pair-wise comparison. It is widely used in multi-criteria
decision-making that includes qualitative evaluation items. For AHP, refer to the Study on MultiCriteria Analysis for Preliminary Feasibility Studies (2) by Park et al. (2001) (KDI).
Policy Analysis
101
Operating Guidelines for Preliminary Feasibility Studies (Ministry of Strategy &

Finance (MOSF), 2009), the weight of each evaluation item is to fall in the range of
weights of the following Table 4-4 by project type when conducting AHP analysis
unless there is a reason not to do so. In the case of construction projects that include
balanced regional development analysis, the upper limit of weights for balanced
regional development increased from 25% to 30%. These General Guidelines (fifth
edition), therefore, use the changed weights.
Table 4-4
Weights in each Evaluation Area in Preliminary Feasibility Studies

(Unit: %)
Evaluation Area
Classification
Project Type
Economic
Feasibility Analysis
Policy Analysis
Balanced Regional
Development
Before
Change1)
40 ~ 50
25 ~ 35
15 ~ 25
Construction
40 ~ 50
25 ~ 35
15 ~ 30
R&D,
informatization
30 ~ 50
50 ~ 70
(Analysis of technical nature and
policy nature)
Other non-investment
finance projects
25 ~ 50
50 ~ 75
(Analysis of technical nature and
policy nature)
After
Change 2)
Note: 1) KDI, Study to Amend and Supplement General Guidelines for Preliminary Feasibility Studies (fourth edition), 2004.
2) MOSF, 2006 Operating Guidelines for Preliminary Feasibility Studies, April 2006.
3) MOSF, 2009 Operating Guidelines for Preliminary Feasibility Studies, April 2009.
b. Current Indices for Determining Less Developed Regions and Their Change
1) Standards for selection of less developed regions under the Special Act on
Balanced National Development
Subparagraph 5 of Article 2 of the Special Act on Balanced National
Development defines less developed regions as follows:
Remote areas under Article 2 of the 'Remote Area Development Promotion Act;
Islands to develop under Paragraph 1 of Article 4 of the Island Development
Promotion Act;
Border areas under Subparagraph 1 of Article 2 of the Border Area Support Act
Development promotion districts under Article 9. (1) of the Balanced Regional
102
Development and Support for Local Small and Medium Enterprises Act; and
Other areas where the standard of living and the level of development are
very low and designated by presidential decree
Applicable laws suggest concrete standards for different kinds of less developed
regions. Article 2 of the Remote Area Development Promotion Act41 classifies
remote areas as those which are located far from cities; have underdeveloped
transportation systems, low income levels, low standard of living; and meet
conditions designated by presidential decree. Article 2 of the Enforcement Decree of
this Act stipulates the designation standard of remote areas as myeon-level (villageor township-level) administrative districts that fall below the average of myeon
districts across the nation in terms of the level of development (indices that indicate
the population increase/decrease rate, population density, and income or
development level. Result of comprehensive analysis as designated by the Minister
of Public Administration and Security) as a result of a basic survey of myeon
districts across the nation. Nevertheless, myeon districts that fall under the Island
Development Promotion Act and those not inhabited or without a myeon district
office are excluded from the scope of remote areas.
Table 4-5
Designation Standards for Less Developed Regions
Type
Designation Standards
n Administrative districts that fall below the average of myeon districts
Remarks
n Islands to
across the nation in terms of the level of development (indices that
develop and
indicate the population increase/decrease rate, population density, and
uninhabited
income or development level. Results of comprehensive analysis as
areas excluded
designated by the Minister of Public Administration and Security) as a
n 399 myeon
Remote
result of a basic survey of myeon districts across the nation (Article 2.(1)
districts as of late
area
of the Enforcement Decree)
2003
Three indices: Population increase/decrease rate, population

density, and residence tax (income base)
Weights for the three indices: 1 : 1 : 1
Composite index: Z (population increase/decrease rate) + Z

(population density) + Z (income-base residence tax)
Table 4-5
41
Continued
The Remote Area Development Promotion Act was abolished (March 28, 2008, Act no. 9008), but
its Enforcement Decree remained in effect until December 31, 2009.
Policy Analysis
103
Type
Designation Standards
n Island districts constantly inhabited by no fewer than ten people which
Island
Remarks
n Uninhabited islands
request to be developed
excluded
n 410 islands
n Eup, myeon, and dong districts belonging to cities and counties within
Border
area
15 cities and
20km south of the Civilian Control Line (CCL) where no fewer than three
provinces 98 eup,
out of the population increase/decrease rate, road pavement rate, water
myeon, and dong
service penetration rate, ratio of people engaged in manufacturing, and
districts
occupation rate of areas subject to the Protection of Military Bases and

Installations Act are lower than the national average in the last five years
n Areas north of the CCL subject to improvement of agricultural base, and
exchange and cooperation projects between South and North Korea

n Five islands near the Northern Limit Line, namely Baengnyeongdo,
Daecheongdo, Socheongdo, large Yeonpyeongdo, and small

Yeonpyeongdo, and their surrounding islands
Note: The standards for remote areas are rewritten according to the legislative revision on May 13, 2005.
Source: 1) MOPAS, Development of Selection Indices of Less Developed Regions, July 2004.
2) MOPAS, Basic Statistical Survey Guidelines for Designation of Remote Areas for Development, 2005.
Article 2 of the Island Development Promotion Act defines the scope of islands
as all the islands on the sea excluding the main island of Jeju. Islands that can be
designated as less developed regions are those constantly inhabited by no fewer than
ten people (Article 4 of the Enforcement Decree of the Act).
Article 2 of the Border Area Support Act stipulates border areas as belonging to
the jurisdictions of cities and provinces south of the CCL under Paragraph 3 of
Article 2 of the Protection of Military Bases and Installations Act and designated
by presidential decree based on the distance from the CCL, geographical conditions,
degree of development, etc. Paragraph 3 of Article 2 of the Protection of Military
Bases and Installations Act prescribes the designation standards of border areas as
eup, myeon, and dong (small district units) belonging to cities and counties within
20km south of the CCL where no fewer than three out of the population
increase/decrease rate, road pavement rate, water service penetration rate, ratio of
people engaged in manufacturing, and occupation rate of areas subject to the
Protection of Military Bases and Installations Act are lower than the national
average in the last five years (Article 2 of the Enforcement Decree of the Act). Also,
border areas are the areas located between the CCL and 2km south of the Military
Demarcation Line (MDL), and Baengnyeongdo, Daecheongdo, Socheongdo, large
Yeonpyeongdo, and small Yeonpyeongdo, and their surrounding islands south of the
104
Northen Limit Line on the sea.

Development promotion districts are defined in Article 10 of the Balanced
Regional Development and Support for Local Small and Medium Enterprises Act.
The Act prescribes that development promotion districts be designated in
consideration of Gross Regional Domestic Product (GRDP) or the degree of
financial self-reliance that is notably lower than other areas, constantly decreasing or
stagnant population, need to create a new income base, and need to improve the
production and living environments. Article 12 of the same Act specifies designation
conditions for a less developed region type for development of general less
developed regions; town and village integrated type for structural improvement of
farming and fishing villages; and balanced development type for privately-financed
development of metropolitan and specific regions.
The less developed region type is districts which are in the nations bottom
30/100 in terms of the population increase rate or degree of financial self-reliance, or
both, and in the nations bottom 30/100 in terms of one or more of the ratio of
people engaged in manufacturing to the population, road ratio, ratio of registered
passenger cars in possession, number of doctors per population, aging index, or
urban land use ratio. The town and village integrated type is farming and fishing
villages where local industries have rapidly declined and which need to be
developed in connection with nearby cities to develop new income bases. Lastly, the
balanced development type is districts belonging to metropolitan development zones
or specific regions where private capital needs to be attracted for intensive
development to ensure balanced regional development.
The less developed region type is a similar concept to the level of regional
development in preliminary feasibility studies. Comparison between the changed
indices for designation of the less developed region type in Table 4-6 and those of
the level of regional development in preliminary feasibility studies reveals that items
, , , and are different.
Table
4-6 Selection Standards for Development Promotion districts (Less Developed Region
Policy Analysis
105
Type)
Index
Detailed Standards
Population
density
Ratio of the population of 2004 divided by the area of administrative districts under Statistics
Koreas National Demographics(2004) & MLTMs Administrative Districts and Population in
Local Governments (2004)
Annual
average
population
increase/
decrease rate
Annual average population increase/decrease rate for 34 years ((population of a past year for
comparison - population of the base year) period from the past year to the base year
population of the base year)) based on Statistics Koreas Population & Housing Census (1970
2004) and National Demographics(2004)
Total of
income-base
residence tax
Total of tax amounts imposed each year under MOPASs Annual Regional Tax Administration
Report (2001~03) (tax amounts in each city or county in the corresponding year=lease
income+interest income+personal income like transfer+income subject to withholding
tax+dividend income+pension income+temporary property income+other incomes <agricultural
income tax and residence tax (corporate tax base) are excluded>)
Financial
power index
Ratio of base revenue divided by base demand for finance from the last three years from 2003 to
2005 according to MOPAS Comprehensive Report on Analysis of Local Governments Finances
(2003~2005) and the ministrys web site on local governments finances (lofin.mogaha.go.kr)
(2005)
Aging index
Ratio of the number of 65-year-old or older people divided by that of 14-year-old or younger people of
the corresponding city or county under Statistics Koreas National Demographics (2004)
Ratio of the
employed
Ratio of the total number of people engaged in businesses by the size of population of the
corresponding city, county, or gu district under Statistics Koreas Statistics on the Number of People
Engaged in Each Industry (2003) and major statistics on cities, counties, and gu districts (2003)
Ratio of the length of the roads of the corresponding city, county, or gu district by its population
and administrative district area ((length of roads of base year
Road ratio
Accessibility
populaton of base year x administrative district area of base year 100

under Statistics Koreas Major Statistics on Cities, Counties, and Gu Districts (2003) and
MLTMs Administrative Districts and Population in Local Governments (2004)
Ratio resulting from multiplying the population of a large city by that of the corresponding city,
county or gu district, and dividing this by the distance between them and the time spent to access
them under Statistics Koreas National Demographics (2004), MLTMs Administrative Districts
and Population in Local Governments (2004), and the portal site on national land
(www.land.go.kr)(2005)
Source: Ministry of Land, Transport and Maritime Affairs, Work Guidelines for Regional Development Projects, March 2006
106
2) Standards for Selection of less Developed Regions as Regions for

Revitalization
Separate from the less developed regions discussed above, item (e) of
subparagraph 5 of Article 2 of the Special Act on Balanced National Development
allows areas where the standard of living and the development level are very low
to be designed by presidential decree as less developed regions. Article 2 of the
Enforcement Decree of this Act requires that the Minister of Public Administration
and Security comprehensively evaluate such indices as the annual average
population decrease rate, financial situation, and income level, and designate and
announce areas where the standard of living and development level are very low
every three years.
The Minister of Public Administration and Security named the areas under item
(e) of subparagraph 5 of Article 2 of the Special Act on Balanced National
Development as regions for revitalization and selected such in 2004 for the first
time. Areas designated as regions for revitalization are those that are less developed.
They have been largely passed over in the process of modernization,
industrialization, and urbanization, and they are to receive support to hasten their
development and ensure balanced regional development across the nation while
retaining their regionality.
Regions designated for revitalization are those that have suffered industrial
decline, declines in population, etc., lack an economic base, are in poor financial
condition, and are thereby less competitive than developed regions. To ensure
transparency, fairness, and credibility in designation, MOPAS outsources the
development of indices to universities, research institutes, and other specialists. The
appropriate ministers, city mayors, and provincial governors are consulted in the
designation process, and deliberation by the Presidential Committee on Regional
Development (PCRD) is held before selection.
Indices for selection of regions for revitalization were developed over two steps.
The first-step selection was based on four indices in three areas as in Table 4-7.
Policy Analysis
107
Table 4-7
Indices for Designation of Regions for Revitalization (Step 1)
Area
Index
Population
Industry
economy
Finance
Data
n Population & housing census (Statistics

Population increase/decrease rate
Korea)
Linear population increase/decrease rate from
n Analysis data of the population
1970 to 2000
increase/decrease rate for 30 years
Population density
n Demographics of registered residents
Population with resident registration as of late 2003
as of late 2003 (MOPAS)
Income-base residence tax

Average of 2000 to 2002
Annual regional tax administration

report (MOPAS, 2001~2003)
Financial power index(base revenue/base

demand for finance)
Average between 2000 and 2002
Comprehensive finance analysis report

(MOPAS, 2002~2004)
Source: MOPAS, Guidelines for Projects on Regions for Revitalization, October 2004.
A composite index for selection of regions for revitalization is calculated as

follows: The weights of the three areas are set at 1:1:1, and those of the two indices
in the population area to be 0.5:0.5. To reconcile the different scales of the indices,
the individual indices were converted to a standardized Z (Z-Score) value.
Composite Index
1
=
[Z(population increase/decrease rate ) + Z ( populaton density)]
2
+ Z(income - base residence tax) + Z(financial powerindex)
A composite index for 234 local governments was calculated, and the bottom 30%
or the bottom 70 regions were designated as regions for revitalization. The amount
of support for them was determined in consideration of special accounting for
regional development, cases of support for less developed regions overseas, etc.
For the second step of designation, the PCRD announced in 2007 a draft
proposal on regional classification according to the level of regional development
(selection base: 14 indices in five areas). The proposal classified 234 local
governments according to the development level in comprehensive consideration of
14 indices in the five areas of population, economy, finance, welfare and
infrastructure. 234 cities, counties, and gu districts were divided into four groups,
less developed regions (1), stagnant regions (2), growth regions (3), and developed
108
regions (4). Nevertheless, the special city, metropolitan cities (counties excluded),
and Jeju Special Self-governing Province are each classified as one region by using
the average value of their cities, counties, and gu districts. Also, in consideration of
different levels of regional development, the grade for the Seoul metropolitan area is
automatically raised one level. More specifically, a region which would be given
grade 1 in the provinces is given 2 in the Seoul metropolitan area, and so on.
Table 4-8
Classification
Indices and Weights
Weight
0.33
Population
0.33
0.33
0.25
0.25
Industry,
economy
1
0.25
0.25
0.33
Finance
0.33
0.33
0.25
Welfare
n Population increase/decrease rate
0.25
0.5
0.25
Description
n Population increase/decrease rate
(10 years)
n Population density
n No. of people per unit area
n Ratio of the aged to the population
n No. of people 65-years old or older to the
n Income-base residence tax per
n Income-base residence tax/population
population
person
n Average land value of individual
appraised land values

n No. of employed people per 1,000
n Average of individual appraised land
values of sample lots

n Total no. of employed people/population
people
n Increase/decrease rate of the total no.
of employed people
n Increase rate of businesses from 2001 to
2005
n Financial power index
n Revenue to base demand for finance
n Collected amount of local taxes per
n Total amount of local taxes collected/
person
n Increase/decrease rate of the
collected amount of local taxes
population
n Increase rate of the collected amount of
local taxes for four years
No. of hospital beds per 1,000

people
n Total no. of hospital beds/population
No. of public library seats per 1,000

people
n Total no. of public library seats/population
Road ratio
n Road area to the total area
Water and sewage penetration rate
n Average no. of people with water service
0.5
0.25
Infrastructure
Index
to the total population, no. of people with

sewerage to the total population
Source: MOPAS press release, presentation on a Draft Proposal on Regional Classification according to the level of regional
development, September 2007.
Policy Analysis
109
b. Need to Change Indices to Calculate the Regional Development Index42

1) Change of Indices and Weights
As seen above, Korea has adopted balanced regional development as an
important policy goal and implements various regional development policies. These
policies to develop less developed regions adopt standards to determine less
developed regions according to their purposes. These standards to determine the
degree of regional development depend on policy makers transcendental experience
or experts opinions but empirical review as to whether they are appropriate is
lacking. Knowing the level of development of each region is the most basic in
establishing a regional policy. To increase the effectiveness of regional development
policy, objective standards for determination of the current level of development
should be in place first.
Nevertheless, it is difficult to prove the propriety of the selected indices and
weights in applying the standards to define less developed regions by the regional
development policies now in effect. The root cause of the difficulty in empirical
review is that there is no consistent evaluation of the current level of development.
To solve this, the Direction and Strategy of Regional Development Policy
(KDI, 2008) conducted a survey of those responsible for the regional development
budget in cities and provinces on the ranking of their belonging cities, counties, and
gu districts in terms of regional development. It came up with statistically significant
indices that can best explain the ranking. There are various combinations of socioeconomic indices to explain regional development ranking, and this study used
MOPAS indices to select regions for revitalization (2007), the MLTMs selection
indices of less developed region-type development promotion districts, and three
index groups currently under development by the Korea Rural Economic Institute to
lay the foundation for agricultural statistics.
It was confirmed that a combination of statistically significant indices can be
found through various regression analysis models that can explain the ranking of
regional development resulting from the survey. However, review of the practical
suitability of the chosen models revealed that the ranking of local governments in
regional development can greatly differ depending on the combination of chosen
indices. To address this issue, the ranking of regional development was set based on
the average value of regional development ranking of multiple analysis models.
Table 4-9 compares the propriety of the ranking of the current preliminary
feasibility studies with that of the ranking of combined models. Based on a
difference of no less than 10%, the comparison showed that the ranking of combined
42
110
For details, refer to Chapter 10, Calculation of Regional Development Indices of the Direction
and Strategy of Regional Development Policy (KDI, 2008).
models was slightly better, but based on differences of no less than 20% and 30%,
that of the current preliminary feasibility studies was slightly better.
Table 4-9
Propriety Evaluation of Preliminary Feasibility Studies and Combined Models
Classification
No. of cities,
counties, & gu
districts (a)
Combined
models
Current
preliminary
feasibility
study
No. of cities, counties, & gu

districts where difference occurs
between survey and analysis
rankings (b)
Ratio of no. of cities, counties &

gu districts with difference to no.
of cities, counties, and gu districts
in the region ((b)/(a))
No less than No less than No less than

10%
20%
30%
No less No less than No less than

than 10%
20%
30%
158
41
17
25.9%
10.8%
4.4%
158
46
15
29.1%
9.5%
3.8%
Nevertheless, this approach is problematic in that analysis results change when

individual statistically-significant models change, making it difficult to achieve the
initial purpose of developing statistically significant regional development indices.
The results of propriety review showed that an approach using average values has a
similar capability to explain the reality to the regional development index of the
current preliminary feasibility studies.
In conclusion, this study determined that regional development indices
developed through quantitative analysis are not much better than the regional
development index of the current preliminary feasibility studies, and that it is
appropriate to use the regional development index of the current preliminary
feasibility studies to explain the regional development index and ranking.
For this reason, for the level of regional development, these General Guidelines
(fifth edition) are to use the eight indices of the MLTMs Work Guidelines for
Regional Development Projects (2003) and the weights of the General Guidelines
(fourth edition) despite various index changes and the current situation.
Nevertheless, as the base year of the raw data of the eight indices from the
General Guidelines (fourth edition) is 2002, these General Guidelines (fifth
edition) recalculated them based on 2005 data. Also, as North Jeju County was
recently integrated into Jeju City and South Jeju County into Seogwipo City, the
number of cities and counties fell from 170 to 168.
The following are the results of regional development index calculation and the
ranking of cities and provinces, and cities and counties in terms of regional
development:
Policy Analysis
111
Table 4-10
Cities and Provinces Regional Development Index and Ranking

Population
Region
Population
Aging
increase
index
ratio
Spe-cial
Economy
Financial
selfreliance
Infrastructure
Ratio of
No. of
people in
registered
Road
manufa-
passenger
ratio
cturing
cars
No. of Urban
Compo-
Compo-
site
site
Regional
doc-
land use
develop-
tors
ratio
ment index
Regional
development
ranking
Seoul
-0.148
38.815
95.065
5.556
21.458
13.130 0.185
39.920
1.400
Busan
-0.828
46.493
73.203
5.492
19.131
3.488
0.148
16.267
0.140
Daegu
-0.098
37.403
73.923
6.156
24.814
2.407
0.152
11.806
0.469
Incheon
0.538
30.805
71.876
8.837
21.946
2.704
0.117
10.986
0.387
Gwangju
0.473
29.204
59.254
4.943
22.763
2.684
0.159
14.136
0.266
Daejeon
1.010
30.171
73.406
3.236
26.479
2.982
0.153
13.456
0.590
Ulsan
0.953
22.103
66.591
12.845
26.834
1.477
0.103
8.187
0.690
Gyeonggi
3.132
29.836
76.897
9.173
23.942
1.090
0.122
5.467
0.649
Gangwon
-0.493
60.141
23.536
2.769
23.365
0.466
0.126
1.044
-0.719
14
Chungbuk
-0.041
53.121
29.938
8.152
22.951
0.709
0.100
2.692
-0.417
11
Chungnam
0.534
64.770
39.610
4.509
22.290
0.787
0.114
3.749
-0.422
12
Jeonbuk
-1.138
62.409
21.136
4.341
20.954
0.810
0.143
3.048
-0.787
15
Jeonnam
-1.540
78.054
17.034
4.509
18.144
0.720
0.095
2.800
-1.172
16
Gyeongbuk
-0.736
68.618
24.608
9.772
23.158
0.608
0.091
1.966
-0.533
13
0.498
46.803
33.203
10.943
23.435
0.882
0.104
3.013
-0.157
0.596
42.025
36.761
1.533
24.233
1.592
0.115
3.182
-0.384
10
city
metropolitan
city
Province
Gyeongnam
Jeju
Note: Gijang County belongs to Busan Metropolitan City; Dalseong County to Daegu Metropolitan City; Ganghwa County and
Ongjin County to Incheon Metropolitan City; and Ulju County to Ulsan Metropolitan City.
112
Table 4-11
Cities and Provinces Ranking in Regional Development Index

No. of
Increase
Ratio of
No. of
registered
rate of
people in
Road
Region
doctors
registered
manufa-
ratio
per
cturing
Financial
self-
Development
ratio
reliance
Index
index
cars per
residents
Urban
land use
Aging
passenger
person
person
Special city
Seoul
11
13
14
15
10
12
Gwangju
10
10
Daejeon
14
13
Gyeonggi
Gangwon
12
15
16
12
16
14
14
Chungbuk
14
14
11
14
12
11
Chungnam
11
11
11
11
14
12
Jeonbuk
15
13
12
14
13
11
15
15
Jeonnam
16
12
13
16
15
16
13
16
16
Gyeongbuk
13
15
16
15
15
13
13
Gyeongnam
10
12
10
12
11
Jeju
16
10
10
10
10
Busan
(Gijang County)
Daegu
(Dalseong
County)
Metropolitan city
Incheon
(Ganghwa,
Ongjin County)
Ulsan
(Ulju County)
Province
Note: Gijang County belongs to Busan Metropolitan City; Dalseong County to Daegu Metropolitan City; Ganghwa County and
Ongjin County to Incheon Metropolitan City; and Ulju County to Ulsan Metropolitan City.
Policy Analysis
113
Table 4-12
Cities and Counties Regional Development Index and Ranking

Population
Metro-
Economy
Popula-
Aging
Finan-
politan
City,
tion
index
cial self people in registered
city,
county
increase
province
Special city
Metropolitan city
Metropolitan city
Metropolitan city
Metropolitan city
Metropolitan city
Metropolitan city
Busan
Daegu
Incheon
Incheon
Reliance
ratio
Ratio of
manuf-
Composite
Infrastructure
No. of
Road
No. of
Urban
ratio
doctors
land use
passenger
ratio
Regional Regional
devel-
devel-
opment
opment
index
ranking
acturing
cars
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Seoul
-0.148
38.815
98.958
4.600
21.458
13.011
0.205
39.920
2.862
Busan
-0.878
46.202
75.157
5.346
19.069
4.443
0.154
21.257
1.320
14
Daegu
-0.138
37.437
78.238
5.389
24.796
3.906
0.160
19.440
1.517
Incheon
0.555
28.725
76.963
9.068
22.034
5.287
0.117
22.179
1.633
Gwangju
0.473
29.204
59.780
4.943
22.763
2.684
0.181
14.136
0.979
21
Daejeon
1.010
30.171
78.504
3.236
26.479
2.982
0.176
13.456
1.395
11
Ulsan
0.898
19.288
71.859
11.533
26.895
3.256
0.107
19.181
1.556
1.547
58.257
38.937
11.968
21.886
1.094
0.066
3.754
0.327
53
0.500
36.969
31.631
17.459
25.077
0.802
0.051
3.628
0.364
49
-0.482
129.223
16.916
1.903
19.509
0.728
0.055
3.236
-0.495
115
2.294
117.637
33.224
0.439
17.842
1.069
0.038
1.872
-0.220
81
Gijang
County
Dalseong
County
Ganghwa
County
Ongjin
County
Ulsan
Ulju County
1.239
36.410
48.735
19.666
26.515
0.765
0.067
3.788
0.781
31
Gyeonggi
Suwon
2.0f63
21.896
58.006
4.827
25.059
5.732
0.148
26.536
1.535
1.345
31.279
73.221
4.064
24.375
3.367
0.166
15.307
1.326
13
2.213
32.011
50.007
1.341
20.209
3.898
0.335
12.086
0.890
23
Gyeonggi
Gyeonggi
114
Seongnam
Uijeong-bu
Table 4-12
Continued
Population
Economy
Infrastructure
Composite
Metropolitan
city,
Popula-
Aging
tion
index
Finan-
Ratio of
No. of
Road
No. of
Urban
ratio
doctors
land use
Regional Regional
City, county
developincrease
province
cial self- people in registered

reliance
rate
manufac
-turing
passenger
develop-
ratio
ment
ment
index
ranking
cars
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Gyeonggi
Anyang
1.524
27.420
61.406
5.486
22.643
5.697
0.163
24.348
1.469
Gyeonggi
Bucheon
2.032
25.933
64.447
8.354
20.421
9.624
0.145
38.886
2.102
-0.547
29.835
47.156
3.743
18.907
4.225
0.224
18.041
0.814
30
11.500
26.856
60.204
8.662
28.530
0.820
0.017
6.689
1.199
15
1.728
35.182
43.114
16.472
26.833
1.265
0.130
7.947
0.828
28
1.946
47.769
21.471
5.160
19.956
1.086
0.636
5.625
0.378
48
3.835
19.055
60.194
15.466
23.623
5.824
0.063
20.626
1.615
-3.179
31.810
44.021
1.768
24.882
1.505
0.513
7.958
0.655
36
2.592
26.148
47.741
1.652
21.250
4.163
0.079
12.505
0.721
33
4.696
30.870
42.477
4.359
21.777
0.627
0.074
3.654
0.329
52
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gwangmyeong
Yongin
Pyeongtaek
Dongducheon
Ansan
Gyeonggi Gwache-on
Gyeonggi
Guri
Gyeonggi Namyang-ju
Gyeonggi
Osan
4.207
18.654
45.270
7.791
25.080
3.122
0.204
16.239
1.102
18
Gyeonggi
Paju
6.462
45.951
41.131
12.671
25.469
0.673
0.036
4.062
0.624
37
Gyeonggi
Siheung
4.209
17.733
55.259
20.425
24.827
3.573
0.054
13.466
1.365
12
Gyeonggi
Gunpo
0.666
25.889
52.911
10.349
22.590
3.981
0.058
17.962
1.048
19
Gyeonggi
Uiwang
3.756
28.645
46.302
6.305
23.816
2.598
0.099
8.232
0.727
32
Gyeonggi
Hannam
1.629
38.152
43.590
5.779
21.509
0.744
0.130
4.500
0.330
51
Policy Analysis
115
Table 4-12
Continued
Population
Popula
Aging
City,
-tion
index
county
increa-
Metropolitan city,
province
Economy
Finan-
No. of
Road
No. of
registered
ratio
doctors land use
Urban Region- Region
reliance
manufac
passenger
-turing
cars
ratio
al
-al
devel-
devel-
opment opment
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
index
ranking
Gyeonggi
Icheon
1.019
35.983
43.659
15.447
25.681
0.496
0.058
4.586
0.567
39
Gyeonggi
Goyang
2.582
29.356
59.926
2.821
24.929
2.606
0.028
10.046
0.857
25
Gyeonggi
Anseong
3.018
51.583
29.369
15.918
25.012
0.784
0.053
4.122
0.380
47
Gyeonggi
Gimpo
5.228
34.797
40.264
20.599
26.364
0.774
0.050
7.225
0.854
26
Gyeonggi
Yangju
6.591
34.054
36.996
18.055
22.608
1.226
0.087
5.853
0.709
34
Gyeonggi
Yeoju
0.242
61.849
32.917
6.221
24.149
0.699
0.049
3.022
0.076
66
Gyeonggi
Hwaseong
9.271
35.351
57.567
37.656
27.405
0.676
0.040
6.164
1.626
Gyeonggi
Gwangju
8.950
31.333
47.457
15.022
27.242
0.804
0.038
4.185
0.946
22
-2.094
88.799
21.309
4.430
20.539
0.423
0.130
1.202
-0.363
93
Gyeonggi
Yeoncheon
Gyeonggi
Pocheon
1.850
49.054
30.378
18.419
22.506
0.565
0.029
3.092
0.271
56
Gyeonggi
Gapyeong
-0.317
88.734
24.504
2.099
20.583
0.361
0.031
1.219
-0.382
96
0.751
93.744
16.973
1.534
23.309
0.484
0.037
1.870
-0.371
95
0.351
50.959
33.378
1.688
26.298
0.779
0.183
1.844
0.166
60
1.368
42.234
36.958
4.698
24.641
0.821
0.190
2.734
0.304
55
-0.716
55.343
29.259
2.436
25.652
0.596
0.168
1.898
0.027
70
Gyeonggi
Gangwon
Gangwon
Gangwon
116
Composite
cial self- people in
se rate
Ratio of
Infrastructure
Yangpyeong
Chuncheon
Wonju
Gangneung
Gangwon
Donghae
-0.954
47.932
25.381
2.611
24.156
1.069
0.095
5.672
-0.032
73
Gangwon
Taebaek
-1.625
62.360
18.218
1.838
22.532
0.638
0.110
1.405
-0.363
94
Gangwon
Sokcho
-0.589
43.140
32.670
1.467
22.697
1.312
0.091
5.980
0.057
68
Gangwon
Samcheok
-2.269
86.300
18.176
2.086
20.823
0.531
0.063
0.745
-0.517
117
Gangwon
Hongcheon
-0.908
85.316
19.735
2.639
19.475
0.339
0.101
0.691
-0.457
105
Gangwon
Hoengseong
-0.962
114.842
17.790
7.313
19.502
0.404
0.036
1.028
-0.461
107
Table 4-12
Continued
Population
Metropolitan city,
province
Economy
Infrastructure
Popula
Aging
Finan
Ratio of
No. of
Road
No. of
-tion
index
-cial
people in
register
ratio
doctors land use
self-
manufac-
-ed
reli-
turing
passen
City, county increase

rate
ance
Composite
Urban
ratio
-ger cars
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Regional Regional
devel-
devel-
opment
opment
index
ranking
Gangwon
Yeongwol
-2.955
113.813
14.052
3.241
19.324
0.402
0.077
0.802
-0.652
133
Gangwon
Pyeong chang
-0.852
95.389
17.405
2.160
21.387
0.337
0.024
0.637
-0.517
118
Gangwon
Jeong seon
-2.626
98.800
24.377
1.766
20.206
0.372
0.068
0.624
-0.472
109
Gangwon
Cheorwon
-1.625
62.828
13.625
2.245
20.107
0.425
0.065
0.963
-0.573
123
Gangwon
Hwa cheon
-1.153
71.841
11.870
1.192
19.444
0.413
0.084
0.439
-0.632
132
Gangwon
Yanggu
-1.637
68.733
24.704
1.802
19.212
0.426
0.042
0.514
-0.460
106
Gangwon
Inje
-0.428
61.655
16.910
1.637
20.836
0.265
0.052
0.374
-0.500
116
Gangwon
Goseong
-1.958
99.137
18.741
2.372
19.063
0.493
0.022
0.840
-0.593
126
Gangwon
Yangyang
-0.568
102.541
23.710
3.377
22.799
0.430
0.044
0.920
-0.308
90
Chungbuk
Cheongju
1.682
26.635
51.108
4.821
25.138
4.072
0.130
19.281
1.118
17
Chungbuk
Chungju
-1.028
57.720
23.414
4.471
22.343
0.855
0.115
2.719
-0.156
76
Chungbuk
Jecheon
-1.308
61.115
23.559
3.123
22.077
0.645
0.088
1.735
-0.262
86
Chungbuk
Cheong-won
-0.599
81.332
30.077
20.174
22.994
0.665
0.027
4.238
0.237
58
Chungbuk
Boeun
-2.906
152.896
16.713
5.154
16.540
0.617
0.064
1.603
-0.665
135
Chungbuk
Jincheon
0.325
62.020
29.665
28.745
23.583
0.749
0.063
3.596
0.494
45
Chungbuk
Goesan
-1.955
108.790
16.619
6.979
19.102
0.545
0.054
1.804
-0.488
113
Chungbuk
Eum-seong
-0.208
66.779
28.438
21.920
22.363
0.729
0.098
4.661
0.324
54
Chungbuk
Danyang
-3.079
112.924
19.913
6.875
18.591
0.442
0.049
0.984
-0.523
119
Chungnam
Cheonan
3.983
26.841
52.651
12.810
26.339
1.425
0.176
7.358
1.019
20
Chungnam
Gongju
-0.801
83.482
20.494
4.327
20.790
0.768
0.108
2.382
-0.290
87
Chungnam
Boryeong
-1.775
81.823
25.902
3.396
19.807
0.690
0.087
3.051
-0.291
88
Chungnam
Asan
2.295
50.629
46.210
21.957
24.223
1.046
0.075
6.095
0.815
29
Policy Analysis
117
Table 4-12
Continued
Population
Metro-
Popula-
Aging
tion
index
politan city, City, county increase

province
Economy
Finan-
Composite
No. of
Road
No. of
cial self- people in register
ratio
doctors land use Regional
reliance
rate
Ratio of
Infrastructure
manufac
-ed
-turing
passen
Urban
ratio
-ger cars
118
(0.089)
(0.044)
(0.291)
(0.131)
(0.124) (0.117) (0.063)
Regional
devel-
devel-
opment
opment
index
ranking
(0.142)
Chungnam
Seosan
0.127
56.449
32.668
6.062
22.436
0.947
0.079
3.589
0.069
67
Chungnam
Nonsan
-0.088
69.573
22.048
4.587
21.117
0.897
0.102
4.491
-0.163
77
Chungnam
Geumsan
-1.866
125.766
19.282
10.819
19.348
0.519
0.120
2.111
-0.307
89
Chungnam
Yeongi
1.094
74.547
27.303
13.823
21.998
0.717
0.080
4.629
0.150
62
Chungnam
Buyeo
-2.520
129.725
17.082
4.288
16.492
0.651
0.097
3.012
-0.586
124
Chungnam
Seocheon
-3.068
141.961
17.456
5.883
18.939
0.884
0.090
4.020
-0.465
108
Chungnam
Cheongyang
-3.128
166.077
18.362
5.699
16.523
0.703
0.100
2.130
-0.597
127
Chungnam
Hong-seong
-0.892
97.879
18.727
3.517
19.256
0.661
0.098
3.554
-0.390
98
Chungnam
Yesan
-2.123
115.596
19.151
5.777
19.755
0.564
0.061
3.395
-0.420
101
Chungnam
Taean
-1.418
104.555
34.708
0.980
18.858
0.593
0.078
2.498
-0.257
85
Chungnam
Dangjin
-0.131
78.772
31.946
7.684
21.968
0.614
0.071
4.436
0.036
69
Jeonbuk
Jeonju
0.050
32.797
39.459
2.001
24.034
1.951
0.196
15.132
0.585
38
Jeonbuk
Gunsan
-1.018
48.721
28.185
5.562
22.871
2.045
0.086
9.405
0.174
59
Jeonbuk
Iksan
-0.966
47.323
31.742
6.305
21.628
1.527
0.254
6.548
0.255
57
Jeonbuk
Jeongeup
-3.223
90.746
17.529
4.643
16.889
0.787
0.105
3.184
-0.531
121
Jeonbuk
Namwon
-1.960
89.384
13.505
3.907
17.022
0.687
0.113
2.040
-0.590
125
Jeonbuk
Gimje
-2.327
122.629
17.554
6.787
18.807
0.863
0.075
3.997
-0.422
102
Jeonbuk
Wanju
0.055
87.347
24.213
13.154
20.871
0.474
0.061
2.348
-0.079
74
Jeonbuk
Jinan
-1.427
159.596
12.046
3.147
15.501
0.546
0.058
1.039
-0.794
152
Jeonbuk
Muju
-2.365
149.819
17.297
1.570
16.140
0.382
0.038
0.919
-0.773
146
Jeonbuk
Jangsu
-3.801
156.500
9.755
2.982
14.876
0.660
0.032
1.107
-0.947
166
Jeonbuk
Imsil
-2.807
194.572
13.932
2.656
15.082
0.740
0.049
1.430
-0.847
159
Jeonbuk
Sunchang
-1.524
154.939
11.737
3.154
14.580
0.687
0.050
1.607
-0.813
154
Table 4-12
Continued
Population
Metropolitan city,
province
City,
county
Economy
Population
increase
rate
Aging
index
Finan- Ratio of
cial self- people
reliance
in
manufa
-cturing
(0.089)
(0.044)
(0.291)
Infrastructure
Composite
No. of
registered
passenger
cars
Road
ratio
No. of Urban
doctors land use Regional
ratio
development
index
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Regional
development
ranking
Jeonbuk
Gochang
-2.965
147.527
14.142
2.352
14.939
0.720
0.081
2.785
-0.767
145
Jeonbuk
Buan
-2.747
135.154
14.441
2.356
16.360
0.806
0.083
2.705
-0.693
140
Jeonnam
Mokpo
-0.160
33.630
33.418
1.646
20.213
6.678
0.137
26.366
0.873
24
Jeonnam
Yeosu
-1.394
45.598
31.597
5.785
19.533
1.322
0.084
6.891
0.010
71
Jeonnam
Sun-cheon
0.093
39.369
31.420
1.940
21.675
1.074
0.117
2.454
-0.031
72
Jeonnam
Naju
-1.964
117.495
15.845
5.612
17.111
0.796
0.116
3.631
-0.491
114
Jeonnam
GwangYang
0.091
30.628
47.337
9.043
25.069
1.186
0.050
6.042
0.524
43
Jeonnam
Dam-yang
-1.738
142.795
17.698
7.928
18.460
0.579
0.089
2.657
-0.441
103
Jeonnam
Gok-seong
-3.678
166.522
13.345
8.567
15.304
0.391
0.052
1.625
-0.754
143
Jeonnam
Guryeo
-2.514
144.547
15.654
1.438
15.845
0.445
0.057
1.522
-0.780
150
Jeonnam
Goheung
-3.695
193.910
11.431
3.300
12.116
0.687
0.099
2.024
-0.949
167
Jeonnam
Boseong
-2.840
177.794
16.829
3.181
14.547
0.592
0.086
2.146
-0.756
144
Jeonnam
Hwasun
-1.217
79.416
20.320
3.572
18.668
0.488
0.314
1.638
-0.249
84
Jeonnam
Jangheung
-3.121
148.246
13.441
2.323
14.463
0.519
0.087
1.865
-0.829
156
Jeonnam
Gangjin
-2.820
151.274
13.348
2.510
14.376
0.521
0.084
2.219
-0.817
155
Jeonnam
Haenam
-2.774
124.845
13.422
2.803
14.397
0.589
0.089
2.136
-0.779
149
Jeonnam
Yeongam
-0.822
90.377
16.011
19.444
18.070
0.629
0.056
4.049
-0.168
79
Jeonnam
Muan
-2.436
122.076
13.358
3.164
15.757
0.860
0.079
3.219
-0.682
139
Jeonnam
Hampyeong
-2.302
168.890
12.743
3.717
14.514
0.804
0.052
3.132
-0.782
151
Jeonnam
Yeonggwang
-3.344
106.697
23.876
3.216
16.139
0.623
0.130
3.623
-0.477
110
Policy Analysis
119
Table 4-12
Continued
Population
Metropolitan city,
province
Jeonnam
Jangseong
Infrastructure
FinanRatio of
No. of
reliance manufac passenger
-turing
cars
Road
ratio
Composite
Population
increase
rate
Aging
index
No. of Urban
Regional Regional
doctors land use
ratio develop- development
ment
index
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
-2.462
124.903
18.067
7.737
18.298
0.638
0.054
2.436
-0.485
111
Jeonnam
Wando
-2.531
136.165
14.432
4.021
12.181
0.651
0.049
2.544
-0.830
157
Jeonnam
Jindo
-2.863
153.328
13.848
1.461
14.315
0.724
0.055
1.714
-0.856
161
Jeonnam
Sinan
-2.670
205.192
12.485
1.567
10.149
0.582
0.026
1.615
-1.082
168
Gyeongbuk
Pohang
-0.316
38.057
47.518
7.454
26.499
0.759
0.111
4.286
0.504
44
Gyeongbuk
Gyeong-ju
-0.959
63.688
31.489
10.323
24.636
0.738
0.118
2.807
0.165
61
Gyeongbuk
Gim-cheon
-1.090
83.587
24.892
7.538
21.040
0.841
0.083
1.986
-0.178
80
Gyeongbuk
Andong
-1.357
84.530
18.950
1.869
21.020
0.617
0.134
1.445
-0.388
97
Gyeongbuk
Gumi
2.088
20.294
57.653
24.180
27.003
0.799
0.110
5.466
1.155
16
Gyeongbuk
Yeongju
-1.863
84.910
18.619
3.241
20.126
0.726
0.060
2.146
-0.451
104
-2.096
107.434
19.872
10.394
21.722
0.550
0.097
2.081
-0.242
83
-2.377
131.916
15.732
3.029
18.190
0.577
0.072
1.799
-0.629
131
-2.771
122.402
15.954
2.843
18.109
0.637
0.089
1.630
-0.622
129
1.364
43.661
32.864
11.005
25.658
1.886
0.101
5.963
0.466
46
Gyeongbuk
Gyeongbuk
Gyeongbuk
Gyeongbuk
120
City,
county
Economy
Yeongcheon
Sangju
Mungyeong
Gyeongsan
Gyeongbuk
Gunwi
-3.202
234.615
15.750
6.161
18.578
0.408
0.036
1.163
-0.719
141
Gyeongbuk
Uiseong
-3.318
241.741
11.797
2.868
16.335
0.431
0.052
1.331
-0.914
163
Table 4-12
Continued
Population
Metropolitan city,
province
City,
county
Population
increase
rate
Economy
Infrastructure
Aging
index
(0.089)
Ratio of
No. of
Road
Finanpeople in registered ratio
cial selfmanufac passenger
reliance
-turing
cars
(0.291)
(0.044)
(0.131)
(0.124) (0.117)
No. of
doctors
(0.063)
Composite
Urban
land use Regional Regional
develop- developratio
ment
ment
index
ranking
(0.142)
Gyeongbuk
Cheongsong
-3.077
176.797
15.798
1.415
17.714
0.433
0.065
0.814
-0.774
147
Gyeongbuk
Yeongyang
-2.621
204.525
11.219
1.185
16.303
0.438
0.025
0.536
-0.945
165
Gyeongbuk
Yeongdeok
-2.492
174.335
11.583
3.145
15.652
0.523
0.058
1.063
-0.847
160
-2.230
210.263
14.725
3.423
19.090
0.521
0.070
1.496
-0.678
137
-1.679
135.925
18.963
17.298
23.069
0.497
0.043
2.055
-0.131
75
Gyeongbuk Cheong-do
Gyeongbuk
Gorye
-ong
Gyeongbuk
Seongju
-1.586
145.156
15.700
9.198
21.228
0.535
0.048
1.867
-0.411
99
Gyeongbuk
Chilgok
0.862
43.341
33.089
22.482
27.389
0.653
0.067
3.028
0.563
40
-3.166
205.087
13.884
2.359
15.998
0.584
0.049
1.978
-0.844
158
-3.119
191.615
11.479
3.590
15.012
0.400
0.035
0.715
-0.930
164
Gyeongbuk
Gyeongbuk
Yecheon
Bonghwa
Gyeongbuk
Uljin
-3.066
109.896
24.700
1.918
18.888
0.406
0.060
0.946
-0.527
120
Gyeongbuk
Ulleung
-1.407
111.966
15.625
4.607
15.487
1.051
0.000
1.339
-0.673
136
-0.568
18.420
66.234
19.691
30.696
2.365
0.079
11.788
1.456
10
Gyeongnam
Changwon
Gyeongnam
Masan
-0.324
40.390
38.500
4.723
23.497
1.659
0.151
5.906
0.331
50
Gyeongnam
Jinju
-0.283
44.819
31.058
3.965
22.780
0.904
0.213
3.463
0.113
64
Gyeongnam
Jinhae
3.292
37.243
32.391
6.886
25.410
2.164
0.088
11.362
0.562
41
-0.545
53.408
21.935
5.883
17.680
1.558
0.070
4.432
-0.233
82
Gyeongnam
Tongyeong
Policy Analysis
121
Table 4-12
Continued
Population
Metropolitan city,
province
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeong-nam
122
City,
county
Sacheon
Gimhae
Milyang
Geoje
Yangsan
Uiryeong
Haman
Changnyeong
Goseong
Namhae
Hadong
Sancheong
Hamyang
Geochang
Hapcheon
Economy
Infrastructure
Road
ratio
Composite
Population
increase
rate
Aging
index
Finan- Ratio of
No. of
reliance manufac passenger
-turing
cars
No. of
Urban
doctors land use Regional Regional
ment
ment
index
ranking
(0.063) (0.142)
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
-1.316
68.918
20.617
8.941
20.702
1.173
0.079
3.863
-0.167
78
5.141
22.631
42.983
15.518
24.867
1.458
0.091
7.433
0.842
27
-1.776
97.918
18.738
4.249
19.882
0.790
0.087
2.222
-0.415
100
2.502
27.277
32.431
20.322
24.097
1.100
0.073
4.280
0.535
42
2.914
28.972
44.911
18.177
23.322
1.262
0.085
3.751
0.698
35
-2.003
211.768
14.535
5.820
17.430
0.836
0.057
1.790
-0.661
134
-0.941
98.785
23.182
20.816
22.784
0.828
0.064
3.554
0.131
63
-2.330
140.504
15.863
5.977
19.538
0.588
0.098
2.635
-0.487
112
-2.377
141.558
17.278
6.705
17.120
0.976
0.062
2.414
-0.537
122
-2.802
194.596
12.927
1.556
13.914
0.794
0.065
2.671
-0.879
162
-2.257
142.842
17.169
1.931
17.121
0.628
0.056
1.678
-0.678
138
-2.364
198.799
14.252
2.803
17.002
0.512
0.030
1.187
-0.802
153
-2.196
157.701
18.061
4.052
14.584
0.488
0.058
1.201
-0.730
142
-1.470
108.853
14.671
2.793
17.988
0.468
0.072
1.298
-0.626
130
-0.983
174.458
13.463
2.566
15.694
0.551
0.044
1.282
-0.778
148
Table 4-12
Continued
Population
Metropolitan city,
province
City,
county
Population
increase
rate
(0.089)
Economy
Infrastructure
Aging
index
Ratio of
No. of
Road
Finanpeople in registered ratio
cial selfmanufac passenger
reliance
-turing
cars
(0.291)
(0.044)
(0.131)
(0.124) (0.117)
No. of
doctors
(0.063)
Composite
Urban
Regional Regional
land use
ment
ment
index
ranking
(0.142)
Jeju
Jeju
1.166
36.757
24.567
1.653
24.990
2.055
0.129
3.535
0.097
65
Jeju
Seogwi-po
-0.790
57.442
16.846
1.226
22.300
1.072
0.072
2.786
-0.345
91
Note: 1) The indices are calculated as follows:

Population increase rate = Annual average increase rate between 2000 and 2005
Aging index = (No. of people 65 years old or older/no. people 0 to 14 years old)100
Degree of financial self-reliance = (Local taxnon-tax revenue)/budget under general accounting, three years from
2003 to 2005 combined.
Ratio of people engaged in manufacturing = Monthly average no. of people in manufacturing/population (as of 2005)
No. of registered passenger cars = (No. of registered passenger cars/population)100 (as of 2005)
Road ratio = Total length of roads (km) /area of administrative districts (km2) (as of 2005). The total length of roads
does not include the lengths of highways and high-speed national roads.
No. of doctors = (No. of doctors/population)100 (as of 2005).
Urban land use ratio = [(Building lotfactory lotschool lot)/area of administrative districts]100 (as of 2005).
2) The non-tax revenue items, which are used for calculation of the degree of financial self-reliance, have changed.
Therefore, among the items comprising a local governments budget under the budget allocation guidelines for local
governments, the fund to mitigate fiscal imbalance among administrative districts, which used to be part of non-tax
revenues (subsidies from collections), became part of dependent financial resources in 2001.
3) Statistics on metropolitan cities do not include statistics on the counties belonging to them.
4) The Jeungpyeong branch in Chungbuk is included in Goesan County.
5) The Gyeryong branch in Chungnam is included in Nonsan County.
6) North Jeju County is now part of Jeju City.
7) South Jeju County is now part of Seogwipo City.
8) The figures in the parentheses in the first row of every table are the relative weights of the eight indices resulting from
AHP analysis.
9) The regional development index is calculated by standardizing eight index values, multiplying them by the weights in the
parentheses, and adding them together. Still, as the aging index has a negative (-) relationship with the level of regional
development, it is multiplied by -1.
Policy Analysis
123
Table 4-13
Cities and Counties Ranking in Regional Development Index

Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Financial selfreliance
rate
Infrastructure
Composite
Ratio of
No. of
Road
No. of
people in
register-
ratio
doctors land use
Urban
manufac-
ed
turing
passen-
ratio
including the
bottom 50
ger cars
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
No. of indices
Regional
development
ranking
(0.117) (0.063) (0.142)
Special city
Seoul
59
44
85
73
Metropolitan city
Busan
79
54
74
110
20
14
Metropolitan city
Daegu
58
41
73
31
13
19
Metropolitan city
Incheon
45
18
38
64
35
Metropolitan city
Gwangju
47
20
14
78
52
20
13
17
21
Metropolitan city
Daejeon
40
23
109
11
19
15
19
11
Metropolitan city
Ulsan
41
31
17
43
11
Busan
Gijang
County
31
68
42
30
67
43
100
63
53
Daegu
Dalseong
County
46
39
59
18
22
67
134
67
49
Incheon
Ganghwa County
67
127
122
144
100
84
123
76
115
Incheon
Ongjin
County
21
119
49
168
126
48
150
116
81
Ulsan
Ulju County
36
37
23
13
77
99
62
31
Gyeonggi
Suwon
24
15
79
24
22
35
26
93
34
16
17
15
13
22
29
22
163
89
14
21
23
SeongGyeonggi
Gyeonggi
124
nam
Uijeong-bu
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Ratio of

reliance
rate
Infrastructure
Composite
No. of
Road
No. of
register-
ratio
doctors land use
manufac-
ed
turing
passen-
Urban
ratio
(0.044)
(0.291)
(0.131)
(0.124)
including the
bottom 50
ger cars
(0.089)
No. of indices
Regional
development
ranking
(0.117) (0.063) (0.142)
Gyeonggi
Anyang
32
16
10
72
54
18
Gyeonggi
Bucheon
25
10
44
87
23
69
22
28
98
113
12
30
14
11
41
63
167
33
15
28
34
36
20
37
28
28
28
26
56
88
75
93
44
43
48
12
12
23
41
107
161
28
33
148
28
32
27
36
17
11
24
152
75
10
80
20
33
25
38
89
68
110
89
65
52
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gwangmyeong
Yongin
Pyeongtaek
Dongducheon
Ansan
Gwacheon
Guri
Namyangju
Gyeonggi
Osan
10
31
46
21
18
14
18
Gyeonggi
Paju
53
39
29
18
96
154
57
37
Gyeonggi
Siheung
18
30
15
127
18
12
Gyeonggi
Gunpo
44
19
35
56
12
115
13
19
Gyeonggi
Uiwang
13
17
29
57
40
22
49
26
32
Gyeonggi
Hanam
30
43
35
67
72
80
29
48
51
Policy Analysis
125
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Ratio of

reliance
rate
Infrastructure
Composite
No. of
Road
No. of
register-
ratio
doctors land use
manufac-
ed
turing
passen-
Urban
ratio
No. of indices
including the
bottom 50
ger cars
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Regional
development
ranking
Gyeonggi
Icheon
39
36
34
24
15
140
116
47
39
Gyeonggi
Goyang
18
21
13
121
27
21
161
24
25
15
62
67
21
25
73
129
56
47
AnGyeonggi
seong
Gyeonggi
Gimpo
33
40
12
75
136
31
26
Gyeonggi
Yangju
32
44
17
55
39
68
41
34
Gyeonggi
Yeoju
50
71
51
59
37
90
139
83
66
35
17
95
148
35
27
26
25
65
151
55
22
118
94
89
88
86
155
27
144
93
27
59
64
15
58
124
160
80
56
64
93
78
138
85
165
158
143
96
43
98
121
158
45
144
152
117
95
48
61
48
150
14
74
12
120
60
33
47
45
82
32
62
11
88
55
74
64
68
130
17
115
16
115
70
83
57
73
127
36
47
56
42
73
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gyeonggi
Gangwon
Gangwon
Gangwon
Gangwon
126
Hwaseong
Gwangju
Yeoncheon
Pocheon
Gapyeong
Yangpyeong
Chuncheon
Wonju
Gangneung
Donghae
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Ratio of

reliance
rate
Infrastructure
Composite
No. of
Road
No. of
register-
ratio
doctors land use
manufac-
ed
turing
passen-
Urban
ratio
Gangwon
Gangwon
Gangwon
Gangwon
Taebaek
Sokcho
Samcheok
Hongcheon
Hoengseong
Gangwon Yeong-wol
Gangwon
Gangwon
Pyeongchang
Jeongseon
Gangwon Cheor-won
Gangwon
Hwacheon
including the
bottom 50
ger cars
Gangwon
No. of indices
Regional
development
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
103
73
106
146
57
105
40
137
94
72
48
53
159
53
36
58
38
68
124
91
107
139
82
132
108
160
117
81
90
95
126
102
166
47
162
105
85
116
110
51
101
159
153
151
107
151
115
145
108
105
160
85
159
133
78
99
115
137
74
167
165
163
118
140
103
79
149
90
164
97
164
109
104
74
149
136
92
154
102
153
123
91
80
161
165
103
156
74
167
132
Gangwon
Yanggu
105
77
75
147
107
153
147
166
106
Gangwon
Inje
66
70
123
154
81
168
133
168
116
114
104
101
131
111
141
166
157
126
71
105
82
105
49
152
145
155
90
29
12
21
80
20
11
26
10
17
GoGangwon
seong
Yang-
Gangwon
yang
Chungbuk Cheong-ju
Policy Analysis
127
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Ratio of

reliance
rate
Infrastructure
Composite
No. of
Road
No. of
register-
ratio
doctors land use
manufac-
ed
turing
passen-
Urban
ratio
Chungbuk
Chungbuk
Chungbuk
Chungbuk
Chungbuk
Chungbuk
Chungbuk
Chungbuk
Chungbuk
Chungbuk
ju
Jecheon
Cheongwon
Boeun
Okcheon
Yeongdong
Jincheon
Goesan
Eumseong
Dan-
including the
bottom 50
ger cars
Chung-
No. of indices
Regional
development
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
89
67
84
87
61
58
37
89
76
93
69
83
116
63
103
63
124
86
73
84
65
11
47
97
162
54
58
150
144
126
76
137
113
105
132
135
107
108
96
43
97
104
88
111
92
130
126
116
77
129
131
128
142
128
49
72
66
42
79
106
69
45
113
110
127
52
108
129
125
121
113
61
76
69
60
83
51
45
54
156
114
93
54
118
148
138
152
119
11
13
20
28
13
34
14
30
20
76
86
91
90
83
76
42
99
87
109
85
72
104
95
91
66
81
88
yang
Chungnam
Chungnam
Chungnam
Cheonan
Gongju
Boryeong
Chungnam
Asan
20
60
30
35
50
87
36
29
Chungnam
Seosan
51
65
54
61
59
52
81
70
67
128
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Composite
No. of
Road
No. of
register-
ratio
doctors land use
reliance manufac-
ed
rate
Ratio of
Infrastructure
turing
Urban
ratio
passen-
Chungnam
Nonsan
Geumsan
including the
bottom 50
ger cars
Chungnam
No. of indices
Regional
development
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
56
79
86
86
77
54
45
49
77
112
125
97
33
104
136
32
107
89
Chungnam
Yeongi
38
81
71
26
65
88
78
46
62
Chungnam
Buyeo
137
128
120
91
139
102
55
84
124
154
135
114
64
112
55
59
59
108
159
150
105
69
138
89
48
106
127
80
100
103
102
106
98
52
72
98
Chungnam
Chungnam
Chungnam
Seocheon
Cheongyang
Hongseong
Chungnam
Yesan
120
117
98
68
96
125
111
75
101
Chungnam
Taean
98
106
46
167
115
116
84
95
85
Chungnam
Dangjin
57
82
57
48
66
114
94
50
69
Jeonbuk
Jeonju
55
30
41
140
39
27
10
16
38
Jeonbuk
Gunsan
88
58
70
71
48
26
69
25
59
Jeonbuk
Iksan
86
55
58
58
71
31
34
57
163
97
113
83
136
72
44
78
121
115
95
150
97
134
94
38
110
125
Jeonbuk
Jeonbuk
Jeongeup
Namwon
Jeonbuk
Gimje
126
122
112
55
116
56
86
60
102
Jeonbuk
Wanju
54
92
80
27
80
145
110
100
74
Policy Analysis
129
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Financial selfreliance
rate
Infrastructure
Composite
Ratio of
No. of
Road
No. of
people in
register-
ratio
doctors land use
Urban
manufac-
ed
turing
passen-
ratio
including the
bottom 50
ger cars
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Regional
development
ranking
Jeonbuk
Gimje
126
122
112
55
116
56
86
60
102
Jeonbuk
Wanju
54
92
80
27
80
145
110
100
74
Jeonbuk
Jinan
99
149
160
114
150
128
114
150
152
Jeonbuk
Muju
129
142
117
155
143
163
149
156
146
Jeonbuk
Jangsu
168
147
168
118
156
99
157
148
166
Jeonbuk
Imsil
146
159
146
125
153
81
141
136
159
101
146
163
113
158
93
137
131
154
152
140
144
134
155
87
77
87
145
Jeonbuk
Jeonbuk
Sunchang
Gochang
Jeonbuk
Buan
142
130
141
133
140
64
75
90
140
Jeonnam
Mokpo
60
31
47
153
88
24
24
Jeonnam
Yeosu
96
52
60
66
99
35
73
32
71
52
45
62
141
70
45
34
96
72
116
118
131
70
133
69
36
66
114
53
24
27
39
23
40
135
37
43
108
136
111
45
120
122
62
92
103
166
151
156
42
152
162
130
129
143
Jeonnam
Jeonnam
Jeonnam
Jeonnam
Jeonnam
130
(0.089)
No. of indices
Suncheon
Naju
Gwangyang
Damyang
Gokseong
Table 4-13
Continued
Population
Metropolitan city,
City,
province
county
Popula-
Aging
tion
index
increase
Economy
FinanRatio of
reliance manufac-
rate
turing
Infrastructure
Composite
No. of
Road
No. of
register-
ratio
doctors land use
ed
Urban
ratio
No. of indices
including the
passen-
bottom 50
ger cars
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
Regional
development
ranking
Jeonnam
Gurye
136
138
136
161
146
147
120
133
150
Jeonnam
Goheung
167
158
166
106
167
92
50
112
167
Jeonnam
Boseong
148
156
125
111
159
117
70
104
144
Jeonnam
Hwasun
92
83
92
101
117
142
127
84
158
141
152
135
161
137
67
119
156
Jeonnam
Jangheung
Jeonnam
Gangjin
147
143
155
129
163
134
72
102
155
Jeonnam
Haenam
144
123
153
123
162
118
61
105
149
Jeonnam
Yeongam
77
96
128
14
124
108
122
58
79
Jeonnam
Muan
133
120
154
112
147
57
83
77
139
125
152
158
99
160
66
132
79
151
165
107
81
110
144
111
30
68
110
134
124
108
47
121
106
126
97
111
Jeonnam
Jeonnam
Jeonnam
Hampyeong
Yeonggwang
Jangseong
Jeonnam
Wando
138
132
142
95
166
101
140
94
157
Jeonnam
Jindo
149
145
148
160
164
86
124
125
161
Jeonnam
Sinan
141
164
159
156
168
121
163
130
168
Gyeong-buk
Pohang
63
42
25
50
10
78
39
52
44
84
75
61
36
33
82
33
85
61
Gyeong-buk Gyeongju
Policy Analysis
131
Table 4-13
Continued
Population
Metropolitan city,
City,
province
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Composite
No. of
Road
No. of
register-
ratio
doctors land use
reliance manufac-
ed
rate
Ratio of
Infrastructure
turing
Urban
ratio
passen-
Gimcheon
including the
bottom 50
ger cars
Gyeong-buk
No. of indices
Regional
development
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
90
87
74
49
78
59
76
113
80
Gyeong-buk
Andong
95
88
100
145
79
112
25
135
97
Gyeong-buk
Gumi
23
16
68
41
44
16
Gyeong-buk
Yeongju
111
89
104
107
91
85
112
103
104
119
109
94
34
69
127
54
108
83
131
129
134
117
122
123
92
122
131
143
121
129
120
123
107
60
128
129
34
50
52
32
16
28
46
39
46
Gyeong-buk
Gyeong-buk
Gyeong-buk
Gyeong-buk
Yeongcheon
Sangju
Mungyeong
Gyeongsan
Gyeong-buk
Gunwi
162
167
133
60
119
157
155
147
141
Gyeong-buk
Uiseong
164
168
162
119
141
151
131
139
163
155
155
132
162
127
150
103
158
147
139
162
167
166
142
149
164
165
165
135
153
164
115
149
133
118
149
160
122
165
138
103
109
135
95
134
137
106
131
99
19
46
139
146
109
75
Gyeong-buk
Gyeong-buk
Gyeong-buk
Cheongsong
Yeongyang
Yeongdeok
Gyeong-buk Cheong-do
Gyeong-buk
Goryeong
Gyeong-buk
Seongju
102
139
135
37
76
130
143
118
99
Gyeong-buk
Chilgok
42
49
50
100
98
82
40
132
Table 4-13
Continued
Population
Metropolitan city,
province
City,
county
Popula-
Aging
tion
index
increase
Economy
Finan-
Composite
No. of
Road
No. of
register-
ratio
doctors land use
reliance manufac-
ed
rate
Ratio of
Infrastructure
turing
Urban
ratio
passen-
Gyeong-buk
Yecheon
Bonghwa
including the
bottom 50
ger cars
Gyeong-buk
No. of indices
Regional
development
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
160
163
147
132
145
120
142
114
158
157
157
165
100
154
161
156
161
164
Gyeong-buk
Uljin
153
112
76
143
114
158
113
154
120
Gyeong-buk
Ulleung
97
113
137
84
151
49
168
138
136
Chang-won
70
12
23
79
22
10
Masan
65
46
43
81
43
29
21
40
50
Jinju
62
51
63
96
51
53
74
64
Jinhae
14
40
56
53
19
24
64
23
41
68
63
87
63
128
30
96
51
82
Sacheon
94
78
90
40
84
41
82
61
78
Gimhae
37
22
29
33
57
29
27
Miryang
110
101
102
92
94
71
65
101
100
Geoje
19
15
55
10
38
42
90
53
42
Yangsan
16
19
32
16
44
38
71
64
35
117
166
140
65
130
60
119
123
134
82
102
85
50
61
104
71
63
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeong-
Tong-
nam
yeong
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeongnam
Gyeong-
Ui-
nam
ryeong
Gyeongnam
Haman
Policy Analysis
133
Table 4-13
Continued
Population
Metropo-
Popula-
Aging
litan city,
City,
tion
index
county
increase
province
Economy
Finan-
Ratio of

reliance
rate
Infrastructure
Composite
No. of
Road
No. of
register-
ratio
doctors land use
manufac-
ed
turing
passen-
Urban
ratio
No. of indices
including the
bottom 50
ger cars
Regional
development
ranking
(0.089)
(0.044)
(0.291)
(0.131)
(0.124)
(0.117)
(0.063)
(0.142)
127
133
130
62
98
119
53
93
112
Gyeong-
Chang-
nam
nyeong
Gyeongnam
Goseong
132
134
118
56
132
51
109
98
122
Gyeongnam
Namhae
145
160
157
157
165
70
101
91
162
Gyeongnam
Hadong
123
137
119
142
131
109
121
126
138
Gyeongnam
Sancheong
128
161
143
122
135
138
159
146
153
Gyeongnam
Hamyang
121
148
109
94
157
143
117
145
142
Gyeongnam
Geochang
100
111
139
124
125
146
91
140
130
Gyeongnam
Hapcheon
87
154
151
128
148
126
144
141
148
Jeju
Jeju
37
38
77
151
26
25
31
73
65
Jeju
Seogwi-po
75
66
124
164
62
46
93
86
91
Note: 1) The ranking by index for 168 local governments is from higher to lower figures of each index. Nevertheless, the higher
the ranking in the aging index, the lower the level of development. Thus, the ranking is from lower to higher figures.
2) The composite ranking of regional development is based on the regional development index in Table 4-12 calculated by
standardizing the eight indices, multiplying by the weights, and adding them together.
134
B. Ripple Effects on the Regional Economy

Ripple effects on the regional economy are the quantified figures of increases in
production volume, added value, employment, etc. resulting from projects. To
measure ripple effects on the regional economy, the previous guidelines developed
and used the KDI MRIO (Multi-Regional Input-Output) Model. This analysis model
is applied to multiple projects to ensure consistency in the evaluation of ripple
effects and to remove the inefficiency of spending so much in resources on building
separate models for each individual project.
The KDI MRIO model is a table that, based on the Bank of Korea (BOK)s 1995
national input-output table, divides the nation into 15 regions (Seoul special city, five
metropolitan cities, and nine provinces) and classifies industries into 37 to have 555555
endogenous sectors. Since most preliminary feasibility studies are about large-scale
public construction projects, the KDI MRIO model subdivided the civil engineering and
construction sector into 12 industries to measure the ripple effects of each area.
After the creation of the KDI MRIO, the BOK updated its IO table in 2000, so a
new MRIO model needed to be built based on the more recent data. The Presidential
Committee on Regional Development (PCRD) and the Presidential Committee on
Northeast Asian Cooperation Initiative (PCNACI) devised an MRIO model based on
the 2000 table to provide technical coefficients and trade coefficients among regions.
These General Guidelines used the MRIO model built by the PCRD to analyze
ripple effects on the regional economy.
The PCRDPCNACI MRIO, a Chenery & Moses-type, competitive-type multiregional input-output model, is similar to the KDI MRIO in the making, so it is
believed that some degree of continuity can be guaranteed in the results. As it can
also save a great deal of time and money, the PCRDPCNACI MRIO is to be used
in preliminary feasibility studies.
Compared to the KDI MRIO, the PCRDPCNACI MRIO is based on the 2000
data and separated Ulsan, which became a metropolitan city independent of
Gyeongnam Province in 1997, to reflect a more recent industrial structure and
expand target regions. However, regarding industrial classification, while the KDI
MRIO subdivides the construction industry into 12 industries, the PCRDPCNACI
MRIO deals with it as one.
This is because the PCRDPCNACI MRIO is designed to analyze specialized
regional industries and subdivided other industries. Nevertheless, it is possible to
Policy Analysis
135
analyze ripple effects into subdivisions of the construction sector as in the KDI
MRIO. There is only a modest increase in the number of analysis steps. Ripple
effects on the regional economy used in preliminary feasibility studies refer to
effects to vitalize the regional economy. Using the PCRDPCNACI MRIO is
acceptable as focus is on regions, not on industries.
Interpretation of the induced effects of GRDP (Gross Regional Domestic
Product), added value, employment, wages, etc., suggested as a result of MRIO
model analysis of ripple effects on the regional economy, involves limitations as
follows:
First, such effects do not directly translate into economic benefits. To convert
economic ripple effects from an MRIO model into national economic benefits, the
following conditions should be met: economic effects do not occur if the
concerned project is not implemented; production factors inputted in the project
are not used for other purposes if the project is not implemented; and
implementation of this project does not replace other economic activities43. It is
believed that there are not many government-financed projects that can satisfy these
conditions in Korea, where the unemployment rate is not high and land use is
intensive. Nevertheless, as policy makers consider government-financed projects
ripple effects on the economy of underdeveloped regions, they are not reflected as
economic benefits but considered in policy analysis.
Second, ripple effects on the regional economy from an MRIO model are limited
to effects caused by project implementation. They only reflect direct effects and
relevant effects that occur when government investment, an exogenous shock, is
added in a demand-driven ripple effect model. For instance, induced effects of added
value resulting from implementation of a road project only reflect effects occurring
when total project costs to conduct the project are inputted in the concerned region.
They do not reflect ex post facto effects resulting from laying of the road. To
describe the economic induced effects through an MRIO model as ripple effects on
the regional economy would be to apply an overly broad definition of these ripple
effects, but the term is still used because induced effects analyzed through an MRIO
model have been used to describe the induced effects on the regional economy.
Accordingly, if it is believed that indirect economic ripple effects from project
43
136
Adler, Hans A.(1987), Economic Appraisal of Transport Projects: A Manual with Case Studies,
Revised and Expanded Edition, the World Bank, pp.33~37.
implementation are evident, the effects should be separately analyzed by a

quantitative or qualitative approach. For instance, if a road project has noticeable
effects like changing patterns of land use in the vicinity, increased regional
investment, or revitalization of the tourism industry thanks to improved accessibility,
separate evaluation items should be defined to be reflected in comprehensive
evaluation.
a. Outline of the PCRDPCNACI MRIO Model
Since the launch of the participatory government, a series of policies has been
put into practice to develop Korea as the center of the Northeast Asian economy.
Policies will likely be far less effective if they are worked out without considering
the economic structure of regions and ripple effects inside and outside of them. As
one way to maximize the effectiveness of policies to make Korea the economic
center of Northeast Asia, the PCRD and PCNACI proposed to build an analysis
model of ripple effects of policies and evaluate and reflect such effects in advance.
The PCRD and PCNACI provided an MRIO model, a general balanced
statistical system built through model study, to the other areas of the public sector to
help establish policy. The following looks at the structure, industrial classification,
target regions, writing of input and trade coefficients, etc. of the PCRDPCNACI
MRIO model, major items that determine the characteristics of this model.
1) Model Structure
The PCRDPCNACI MRIO model can be considered the most recent MRIO
model as it is based on the 2000 national IO table announced by the BOK in the
latter half of 2003.
An MRIO model is built by writing and combining estimates like regional
technical coefficients, added value by region and industry, final demand by region,
and regional trade coefficients. Table 4-14 is a simple example of two regions (L, M)
and three industries (1, 2, 3).
Policy Analysis
137
Table 4-14
Example of an MRIO Structure (Two Regions, Three Industries, & Competitive Input Type)
Intermediate Demand
Output
Region L
Final Demand
Total
Region M
Consum-
Input
Industry Industry
Industry Industry
ption,
etc.
Industry
Industry
1 2 3
1 2 3
deEx-
mand
Import
Net
Total
goods
out-
receipt
put
-25
150
port
Re-
Industry 1
10 15 20
5 10 15
40
15
130
Inter-
gion
Industry 2
20 10 40
15 25 20
50
35
215
10
200
medi-
Industry 3
20 25 10
10 35 15
85
45
245
-10
250
ate
Re-
Industry 1
5 20 10
40 50 30
80
95
330
25
300
input
gion
Industry 2
25 10 30
70 30 90
70
30
355
10
-5
350
Industry 3
10 35 30
60 80 80
100
25
420
10
10
400
Added value
60 85 110
100 120 150
Total input
150 200 250
300 350 400
Note: 1) Net goods receipt = Goods receipt goods issued

2) Import and net goods receipt are deductions (A negative value means goods issued is bigger. When combined with total
demand, total input by industry equals total output by industry).
2) Regional and Industrial Classification under the PCRDPCNACI MRIO Model

The PCRDPCNACI MRIO model covers the 16 regions of Seoul special city,
six metropolitan cities, and nine provinces as in Table 4-15. In the model, each
regional economy functions independently, affects the others, and is connected with
the others through trade.
It is a competitive-type multi-regional input-output model with 34 industries as
in Table 4-16, and the number of endogenous sectors is 544544. The PCRD
PCNACI MRIO models industrial classification is based on that of the BOKs 2000
IO table. It changed the IO tables classification to indicate 34 industries to measure
the effects of regional strategic industries. Its classification added fine chemistry
(including bioindustry) (no.9), machinery (including mechatronics) (no.12),
precision instruments (including optical electronics) (no. 16), and culture (including
tourism and IT software) (no. 28), etc.
138
Table 4-15
Regional Classification
Classification
Special City
Region
Seoul
Busan
Daegu
Metropolitan City
Incheon
Gwangju
Daejeon
Ulsan
Gyeonggi
Gangwon
Chungbuk
Chungnam
Province
Jeonbuk
Jeonnam
Gyeongbuk
Gyeongnam
Jeju
Table 4-16
Comparison between the PCRDPCNACI MRIO Model and National IO Table

Trial Balance Classification
BOK IO Code (404)
Agriculture, forestry, & fishing industry
1101-1144
Mining
2101-2137
Food & beverages, tobacco
3101-3191
Textiles
3201-3219, 3231-3233
Clothing
3221-3226, 3241-3243, 3246
Footwear
3244-3245
Lumber & paper
3301-3319
Petrochemistry, rubber
3501-3604, 3621-3622, 3671-3683
Fine chemistry (including bioindustry)
3611-3612, 3631-3668
10
Non-metallic minerals
3701-3736
11
Primary metals and metals (steel)
3801-3911
12
Machinery (including mechatronics)
4001-4029
13
Electricity & home appliances
4101-4108, 4141-4145
14
Semiconductors
4113-4114
15
Information & communications devices
4111-4112, 4115-4132
Policy Analysis
139
Table 4-16
Continued
Trial Balance Classification
BOK IO Code (404)
16
Precision instruments (including optical electronics)
4201-4206
17
Automobiles
4301-4307
18
Shipbuilding
4311-4313
19
Aerospace
4322
20
Other transportation equipment
4321, 4323-4324
21
Furniture and other manufacturing industries
4401-4417
22
Electricity, gas, and water supply
5101-5113
23
Construction
5201-5222
24
Wholesale & retail
6101-6102
25
Restaurant and lodging industry
6201-6202
26
Logistics
6301-6304, 6307-6308, 6310, 6312-6313
27
Seaborne logistics
6305-6306, 6309, 6311
28
Culture (including tourism and IT software)
3401-3404, 6404-6405, 6901-6906
29
Information & communications service
6401-6403
30
Finance and insurance
6501-6505
31
Real estate and industrial service
6601-6620
32
Public administration and defense
6701-6702
33
Education & social security
6801-6817
34
Social and other services
6911-6918
3) Characteristics of Estimation Methods

(1) Regional Technical Coefficients
Estimation of regional technical coefficients usually entails approaches like
product mix, LQ (location quotient), RAS (bi-proportional adjustment), fabrication
effects, etc. The PCRDPCNACI MRIO model was written with the fabrication
effects, LQ, and RAS approaches.
The product mix approach uses more segmentalized information by region and
industry, but the difference among regions industrial structures is determined only
by the share of production volume of their downstream industries. Namely, the IO
tables intermediate input rate of the downstream industries is applied to all regions,
so the added value of the downstream industries uniformly applies to all regions.
The LQ approach has the problem of disproportionality adjustment. The RAS
approach is possible only with the intermediate input and demand data by regional
industry, but as there is usually no available data on intermediate demand by
140
regional industry, the credibility of the entire model greatly depends on that of
estimated intermediate demand data. The fabrication effects approach reflects the
added value of each regional industry, but this greatly depends on the quality of
added value data.
The PCRDPCNACI MRIO model first applies the fabrication effects approach
to reflect the difference in the added value ratio of each regional industry; then, the
LQ approach to estimate the intermediate demand; and then the RAS approach to
estimate technical coefficients for adjustment.
Estimation of regional technical coefficients depends largely on the availability
of regional data. It is not an exaggeration to say that the evolution of the estimation
methods has been determined by the availability of data, and for this reason, the
credibility of a model likely depends on the quantity of regional data used, but not
on the estimation method.
Use of more regional data, however, does not guarantee greater accuracy
because the regional data is not trusted in Korea. This is because objective
comparison and evaluation is difficult without an MRIO table resulting from direct
investigation by a government institution with public confidence like the BOK.
As the model reflects the added value ratio by regional industry, it better suits the
original goal of an MRIO table than the regional product mix approach, but the
degree to which the fabrication effects approach is rectified by the RAS approach is
unclear. In other words, the fabrication effects approach reflects the difference in the
added value ratio among regions and thereby recognizes the difference in the
productivity among regions. However, all intermediate inputs uniformly increase in
the industries with a low added value ratio while all of them uniformly decrease in
those with a high ratio. By estimating the initial intermediate demand amount by the
LQ approach, the intermediate demand amount is underestimated in regional
industries where its share is lower than the national average while it becomes the
same as the national average in regional industries where its share is high. This gives
rise to the problem of disproportionality adjustment. It is not clear how much this
distortion is corrected in the RAS adjustment process.
The PCRDPCNACI MRIO model has the merits of different methods, but their
demerits become inherent in the model as well. It is significant as a new attempt, but
it is too early to assess its usefulness. This matter requires more in-depth study.
In conclusion, we cannot know when building a model which methods can better
explain the reality with regard to estimation of regional technical coefficients. Even
so, the PCRDPCNACI MRIO is very useful in that an MRIO table is written to
ascertain the difference in the production structure of different regions, though this
applies only when the data on the added value of each regional industry is credible.
Policy Analysis
141
(2) Regional Trade Coefficient

Trade coefficients among regions are the key to building an MRIO model.
However, the data to learn about trade among regions is very limited and researchers
choose different estimation methods.
The sectors of agriculture, forestry, fishing, and manufacturing use the Korea
Transport Institute (KOTI)s data on the quantity of goods transported for estimation,
and the service sector depends on various methods for estimation. Existing models
used KOTIs data from 1997 for the agriculture, forestry, fishing, and manufacturing
sectors, and the simple LQ method, gravity model, entropy maximization model, etc.
for the service sector.
The PCRDPCNACI MRIO model used the entropy maximization model across all
industries.
The major variables comprising the entropy model include production and
demand by region and industry, transport cost per unit among regions, etc. Transport
costs by product depend on researchers arbitrariness. Total transport costs function
like a budget constraint. An equilibrium solution that optimizes trade among regions
is looked for within the scope of total transport costs. Data on production and
demand by region and industry is earned through certain methods based on existing
statistics, leaving almost no room for researchers arbitrariness to intervene.
However, transport costs among regions are calculated through various assumptions
about distances among regions and transport costs by product, so each researcher
will likely calculate a different figure. The entropy maximization model has been
used for estimation of recent product transactions and transportation demand among
regions, etc. It is regarded as the most developed model to learn about interregional
trade. However, there are questions as to whether trade results among regions from
the entropy model are realistic for the service industry. For instance, interregional
trade happens in industrial service, etc., but it is difficult to know whether education,
culture service and the like move among regions in a short time, even when their
supply in a region is lacking.
In conclusion, it is very difficult to determine the relative superiority of any
method without an actual survey due to the limited availability of data on
interregional trade. Estimation by existing models is actual survey data but has
limits in terms of interregional trade as well as the LQ methods general problem
with regard to estimation of the service industry. In comparison, the entropy model
is a theoretical model that induces optimization of interregional trade under the
restrictions like production, demand, and transaction costs. It is a generally used and
verified model.
142
(3) Model Validity

It can be said that the PCRDPCNACI MRIO model has the integrity of an
entire model in that it estimates and distributes the BOKs national IO table by the
intermediate demand and final demand of each regional industry so that the total of
regional IO tables equals the national IO table.
It also contains a relatively large amount of regional information with the estimation of final
demand items like private consumption and fixed capital formation, allowing for more
extensive use.
4) Analysis Methods for the Sub-Sectors of Construction
As explained above, the PCRDPCNACI MRIO model has only one
classification for the construction industry, which does not allow direct analysis by
sub-sector of construction like buildings, roads, railroads, ports, and airports as in
the KDI MRIO model.
This can be solved by an indirect method of using the intermediate input
structure by sub-sector of construction under the BOK IO table and distributing
investment expenditures into each industry.44 Though this method adds one more
step of analysis, it can subdivide the construction industry into 17 sub-sectors of
Table 4-17 for analysis. This model is suitable for general use of regional IO tables,
but it is also useful for more detailed analysis since its primary goal is the estimation
of the ripple effects of public investment on the regional economy.
Investment expenditures in a road project, for example, are divided into each
industry (34 industries here) according to the road facilities intermediate input ratio
by sub-sector (percentage based on total intermediate inputs being 1) under the BOK
IO table for treatment as if exogenous demand increases so that the analysis process
remains the same as before.
Table 4-17
Classification of the Construction Industry under the BOK IO Table
Large-Sized
Medium-Sized
(77 sectors)
Small-Sized
(168 sectors)
Construction
Construction & repair
Housing construction
Basic
(404 sectors)
Reinforced concrete/steel houses
Other houses
44
Refer to the distribution table of investment expenditures by industry when investing 100 billion
won in the road sector in Table 4-18.
Policy Analysis
143
Table 4-17
Large-Sized
Continued
Medium-Sized
(77 sectors)
Small-Sized
(168 sectors)
Construction &
Non-housing Construction
Basic
(404 sectors)
Non-reinforced concrete/steel houses
Buildings other than houses
Repair
Repair
Repair
Road facilities
Railroad facilities
Transportation Facility
Subway facilities
Construction
Port facilities
Airport facilities
Road facilities
Railroad facilities
Construction
Transportation Facility
Civil Engineering &
Subway facilities
Construction
Port facilities
Construction
Airport facilities
River anti-erosion work
Water & sewage facilities
Other types of civil
Public works for agriculture, forestry, & fishing
engineering &
Urban civil engineering
construction
Electrical power facilities

Communications facilities
Other construction types
Table
4-18 Distribution of Investment Costs by Industry when Investing 100 billion won in the Road
Sector
(Unit: 100 billion won)
144
Classification
Investment Costs
Agriculture, forestry, & fishing industry
7.0
Mining
12.8
Food & beverages, tobacco
0.0
Textiles
0.5
Table 4-18 Continued
(Unit: 100 billion won)

Classification
Investment costs
Clothing
0.7
Footwear
0.3
Lumber & paper
14.0
Petrochemistry
36.4
Fine chemistry
5.9
10
Non-metallic minerals
303.4
11
Primary metals
242.0
12
Machinery
10.9
13
Electricity & home appliances
13.4
14
Semiconductors
0.0
15
Communications devices
0.7
16
Precision instruments
2.8
17
Automobiles
5.6
18
Shipbuilding
0.0
19
Aerospace
0.0
20
Other transportation equipment
0.0
21
Furniture and other manufacturing industries
0.4
22
Electricity and water supply
4.2
23
Construction
0.2
24
Wholesale & retail
31.0
25
Restaurant and lodging industry
0.0
26
Logistics
15.5
27
Seaborne logistics
2.1
28
Culture
2.7
29
Information communications
6.1
30
Finance & insurance
37.8
31
Industrial service
208.8
32
Public administration and defense
0.0
33
Education & social security
9.2
34
Social and other services
25.6
Total
1,000
Policy Analysis
145
b. Multiplier for analysis of ripple effects on the regional economy

IO analysis is to measure the direct and indirect ripple effects of change in final
demand (consumption or investment) on the production activities of each industry.
Economic ripple effects due to change in final demand are generally understood in
three respects; effects on production inducement, effects on added value inducement,
and effects on salaried employment & total employment inducement. Effects on
added value inducement are divided into the induced effects of each item that
comprises added value.
Here, each inducement coefficient will be explained to measure induced effects
on wages, from among the production, added value, salaried employment & total
employment, and added value items. Also looked at are ripple effects inside and
outside regions.
1) Production Inducement Coefficient
(1) Ripple Effects in the Exogenous Area (Final Demand)
Inducement coefficients, namely the multiplier, vary according to the analysis
purpose and the form of an IO table. An MRIO model is a competitive-type multiregional IO model that does not distinguish between domestic products and import
products. Its basic structure is shown in formula (4-1), and the production inducement
coefficient is ( I - CA) -1 , which is formula (4-1) without Y on the right. This form
multiplies the general production inducement coefficient ( I - CA) -1 by a C matrix,
where C distributes the final demand Y by region.
X = ( I - CA) -1 C Y
(4-1)
For instance, on the presumption of two regions ( L , M ) and two industries (1, 2)
and the self-sufficiency rate of 70% in industry 1 of region L ,45 C Y in this formula
means that, if final demand of 10 billion won occurs in industry 1 of region L , 70%
goes into industry 1 of region L and 30% into industry 1 of region M . Ripple effects
are, therefore, measured by distributing in advance the final demand of 7 billion won in
industry 1 of region L and 3 billion won in industry 1 of region M .
45
146
This means 0.7 unit is supplied in region L and 0.3 unit in region M for one unit production in
industry 1 of region L .
However, if new demand is limited to one region, C Y should be Y and the

production inducement coefficient should be ( I - CA) -1 as in formula (4-2).
X = ( I - CA) -1 Y
(4-2)
The production inducement coefficient can use both formulas (4-1) and (4-2).
Formula (4-1) distributes change in the final demand of a specific region through an
input coefficient to not only the region but also all regions and all industries and then
measures effects on production inducement. Formula (4-2) distributes the final demand
change of a specific region only to all the industries of the region using an input
coefficient to measure effects on production inducement. As such, if formula (4-1) is
used as a production inducement coefficient, the final demand change of a specific
region is distributed to the industries of other regions, so ripple effects within the region
become markedly lower than in formula (4-2). To measure ripple effects on the regional
economy, a production inducement coefficient as in formula (4-2) is generally used.
(2) Ripple effects in the endogenous sector (intermediate demand)

Multiplier to measure ripple effects in the endogenous sector is different from the
case of final demand. For instance, when measuring ripple effects among industries due
to investment into a specific area, the inducement coefficient is as follows:
X = ( I - CA) -1 Ah Y
(4-3)
Ah here is the intermediate input coefficient vector of a specific area.
Instead of the inverse matrix of the inducement coefficient ( I - CA) -1 in formula (43), an inverse matrix that excludes a specific industry can be used.46 This only considers
the effects of a specific industry on other industries, and as the effects on its own
industry are excluded, the ripple effects can be underestimated.
2) Added Value Inducement Coefficient

Increases in final demand create added value through production activities. The
46
About this method, refer to p121~124 in the BOKs IO analysis explanation - principles and
practice (1987).
Policy Analysis
147
added value inducement coefficient is to ascertain the functional relationship

between change in final demand and added value using an IO model.
Added value belongs to gross production. When the coefficient matrix that
diagonalizes the added value of each region is AV (nn diagonal matrix) and the
gross production is X , the added value vector becomes V = AV X . Substituting
formula (4-1) into this formula produces formula (4-4), and the added value
inducement coefficient is AV ( I - CA) -1 .
V = AV ( I - CA) -1 C Y
(4-4)
The added value inducement coefficient becomes 1 in a model that does not
distinguish between domestic and overseas areas. This is because the gross
production X is as seen below from the perspective of supply and, when
multiplying both sides by AV , the added value becomes as in formula (IV-5).
X = (1 - CA) -1 CY
(4-5)
AV X = AV (1 - CA) -1 CY
From the perspective of input, the gross production X is defined as in the first
row: It becomes as in the second and third rows when written based on AV :
X = CAX + AV X
AV X = ( I - CA) X
AV = ( I - CA)
(4-6)
Substitution of formula (4-6) into formula (4-5) produces:
AV X = ( I - CA) ( I - CA) -1 CY
(4-7)
AV X = CY
Substitution of formula (4-7) into formula (4-5) produces AV ( I - CA) -1 = I .
The sum of regional added values does not become 1 in a non-competitive-type
MRIO model that distinguishes domestic products and import products. In this case,
148
the sum of the regional import inducement coefficient and the regional added value
inducement coefficient becomes 1. This means some of the effect on production
inducement resulting from change in regional final demand is regional imports and
the rest is represented as regional added value.47
The added value items include remuneration for the employed (wages),
operating surplus, consumption of fixed capital, indirect taxes, etc. To come up with
an inducement coefficient for each of them, AV of the added value inducement
coefficient is replaced with each items diagonal matrix.
3) Salaried Employment & Total Employment Multiplier
Production activity is basically made possible by combining intermediary goods
with primary factors of production like capital and labor. As the production activity
of relevant industries due to increased demand is accompanied by demand for labor,
measuring labors industrial ripple effects can provide important data for predicting
labor demand and establishing relevant plans.
The salaried employment inducement coefficient is basically calculated by the
same method as the added value inducement coefficient. Namely, it can be
calculated by combining the production inducement coefficient and the labor
coefficient. When the diagonal matrix of the labor coefficient is 1, l ( I - CA) -1 in
the formula below is the labor inducement coefficient.
l X = l ( I - CA) -1 Y
(4-8)
The labor coefficient is a coefficient that divides the amount of labor inputted in
production for a certain period (one year here) by gross production volume. As it
means the amount of labor spent to produce one unit (one million won here), it is in
a reciprocal relationship to labor productivity.
The labor coefficient can be divided into the salaried employment coefficient
and total employment coefficient according to the scope of the amount of labor
included. The salaried employment coefficient only covers salaried workers, and the
total employment coefficient covers both the employed and the self-employed and
unpaid family workers.
47
Refer to p.30~31 of the BOKs 1990 IO table (making report) (December 1993).
Policy Analysis
149
4) Multiplier of Ripple Effects Inside and Outside Regions

When demand occurs in a specific region, the production of regional industries
causes production not only in the industries of the concerned region but also in those of
other regions through goods receipt and goods issued. Overall induced effects can be
divided into ripple effects within the industries of the concerned region and ripple effects
outside the region.
Ripple effects inside and outside the region in an MRIO model can be known with
the multiplier of all the areas like production, added value, wages, and employment. For
instance, a production inducement coefficient matrix in two regions ( L , M ) and three
industries is assumed as follows:
( I - CA )
-1
LL
a
=
a ML
1.126
0.628
0.512
=
0.L625
0.237
0.472
LM
a
a
MM
0.323
0.247
0.217
0.167
1.232
0.447 0.300 M 0.479 0.418 0.153

1.317 0.606 M 0.552 1.115
0.526 1.100 M 0.335 0.470
L
0.369 0.250 M 1.223 0.455

0.384 0.205 M 0.278 0.649
0.444 0.589 M 0.594 0.529
Here a LL refers to a production inducement coefficient that affects region L s

industries when the final demand in region L s industries increases by one unit. When
it is added together by column, this refers to the ripple effect inside the region on each
industry of region L . When a vector (13) which adds up the a LL matrix (33) by
each column is O LL , the intra-regional ripple effect on each industry of region L is as
follows, and it is the same for ( a MM ) of region M .
O LL = [2.2262.2902.005] , O MM = [2.0941.6331.615]
150
a ML refers to effects on production inducement in region M brought about by final

demand increasing by one unit in region L s industries. Namely, it means ripple effects
outside the region (or interregional ripple effects) and a LM is the opposite.
O ML = [1.3341.1971.043] , O LM = [1.3652.0030.724]
When the overall effect on production inducement by increased demand for end
goods in region L is O L and that in region M is O M , the total effect on production
inducement inside and outside the regions is as follows:
O L = O LL + O ML = [3.5993.4873.048]
O M = O MM + O LM = [3.4593.6362.339]
c. Limits of Analysis Models and Cautions to note when Interpreting Them
It is true that an MRIO model provides useful information with regard to
regional economic analysis, but it has its own limits, and the process of establishing
a model and interpretation of estimation results also has many limits.
Two criticisms can be raised due to a models own limits. First, it can be stated
that an MRIO model faces the limit of the basic assumption of an IO table for the
stability of input coefficients that products are homogeneous, and there is no
economy of scale. However, this limit is inherent to IO analysis and is not unique to
this model. Moreover, the assumption that there is no qualitative variance among
products and no economy of scale is not unusual in economic analysis. In other
words, this first criticism is not a serious issue.
The second criticism is that MRIO analysis only analyzes positive ripple effects
from project costs and cannot consider together negative ripple effects from
financing. Spending requires financing, and finances that would be invested
somewhere else are inputted into the concerned project, limiting financing for other
investments. This is the crowding out effect. The criticism is that even though
opportunity costs occur, IO analysis fails to consider them. There is definitely a
crowding out effect. However, a model that completely considers crowding-out
effects is extremely rare, and to simultaneously analyze all ripple effects, a multiregional, multi-sector model needs to be established. As very little regional timeseries data is currently available, establishment of a multi-regional, multi-sector
model is a task to be accomplished step-by-step.
Policy Analysis
151
Also, issues related to the process of establishing a model can be cited.

Depending on the model used to estimate the trade coefficient of the interregional
service sector, the estimation results can greatly vary. For instance, the MRIO model
in this study used the entropy model but could have used the gravity model. It is a
major shortcoming of models that the estimation results of regional trade volume
depend on how a method to estimate interregional service trade is defined.
Nevertheless, this is not a problem unique to this model, and it is not easy to find a
better alternative when perfect regional data has yet to be developed to measure
interregional trade volume.
Taking account of the aforementioned, the following should always be borne in
mind when interpreting the estimation results of an MRIO table:
First, an MRIO model is to analyze indirect effects resulting from project
spending and not to estimate economic benefits occurring due to the concerned
project, namely ripple effects after project completion. Ripple effects on the regional
economy are different from economic benefits after project completion that are used
in cost-benefit analysis.
Second, related to the stability of input coefficients, the assumption is that input
coefficients are constant during the analysis period of project spending. It is,
therefore, impossible to learn about dynamic economic ripple effects that can occur
due to change in the industrial structure, production technology, etc. over time.
Analysis of dynamic ripple effects is possible only when dynamizing of the model
precedes.
Third, as an MRIO model only analyzes positive ripple effects from project
spending and does not consider together negative ripple effects from financing,
relative comparison of economic ripple effects from project spending among
projects is possible, but its usefulness is limited for absolute comparison among
different projects or determining the absolute magnitude of effects of a specific
project.
Even when comparing relative ripple effects among different projects, if the
purpose of comparison is to know the relative size of interregional ripple effects, it
should be borne in the mind that the difference of ripple effects is always inherent
due to the difference in the input structure and investment distribution structure
resulting from the different characteristics of projects, etc.
152
2. Consistency with Policy and Willingness to Pursue Projects

A. Consistency with Relevant Plans and Policy Directions
For large-scale government-financed projects to be selected for preliminary
feasibility studies, they undergo multiple steps of planning by the central
government or local governments. How systematically a responsible party pursues a
project can be evaluated until a concrete project plan is produced. Cases where a
responsible party establishes a plan and pursues a project alone in a short time are
exceptional. A series of preparations until a concrete project plan is produced is
reflected in high-level or relevant plans. As such, analysis on whether the concerned
project is reflected in high-level or relevant plans can help determine whether the
project has been pursued consistently with government policy.
As an example of relevant plans, there are plans of the corresponding sectors like
the national backbone transportation network plan in the Comprehensive Land
Development Plan that suggests development directions for all of national land.
Also, to review are the Basic Plan for Road Maintenance and Improvement for
road projects, Basic Plan for Nationwide Railroad Networks in the 21st Century
for railroad projects, and Second Mid-to-Long-Term Basic Plan for Airport
Development for port projects. Public sector plans held by the central government,
local government, and Korea Expressway Corporation, etc. should also be reviewed.
They may not be directly related to the concerned project but closely related to the
process of pursuing and operating it.
A projects consistency with the policy direction of the competent ministry
should be analyzed as well. Even when an explicit plan is in place, a policy goal set
by the ministry is material to determining whether to push ahead with individual
projects. On the contrary, the effectiveness of an existing long-term plan can
decrease as the policy direction changes over time. In comprehensive consideration
of this situation, consistency with relevant plans and policy directions is to be
reviewed.
B. Willingness to Pursue and Preference for Projects

When determining whether to pursue a government-financed project, the attitude
of the responsible ministry or local residents toward the project needs to be
Policy Analysis
153
considered for the following reasons: All government-financed projects have a

spatial location where they are implemented, and ripple effects from project
implementation can vary due to geographical proximity. Even when a project is
essential from the perspective of the central government, it may not be acceptable to
local residents. On the contrary, even if it has been long hoped for by local residents,
it may have a low priority to the central government, which has to conduct policy
across the nation.
If the target region or the responsible ministry objects to or is passive toward the
project, problems can occur in the process of pursuing it even when the preliminary
feasibility study finds it feasible. For instance, when a project opposed by local
residents is pursued with priority given to the central governments needs, the
project may become mired in social conflict in its implementation and come to a halt.
On the contrary, even when the central government thinks a project is of low priority,
it may still request a preliminary feasibility study in response to a petition by local
residents.
It will not be easy to objectively analyze the degree of preference or objection of
the parties interested in the project like the responsible ministry, local government,
and local residents. In particular, when a project is not concretized, it is difficult to
extensively investigate local residents preference merely with one or two visits to
the concerned region. It is possible to ascertain the authorities willingness to pursue
a project, but it is difficult to objectify it into an investigation report to be used to
help make a policy decision.
Nevertheless, some basis for judgment can be secured in the process of visiting
the responsible ministry and local government and hearing their opinions as part of a
preliminary feasibility study. To reflect the interested parties preference in the
project, the study team requests data that is as concrete as possible like official
documents that can be objectified to use as a basis for judgment. For instance, if a
concrete basis that can reflect a target regions and responsible ministrys preference
for and willingness to pursue a project is expressed in the form of a document like
election pledges, it can be quoted in a report and the study team can add their
opinions. If the interested parties show different attitudes toward the project, a
survey can be conducted of them to ascertain their preferences.
As part of the evaluation of the willingness to pursue and preference for projects,
the possibility of local residents complaints about environmental problems is
analyzed in environmental impact analysis. As local residents preference reflects
political feasibility, the possibility of conflict due to environmental problems can be
154
included as part the willingness to pursue and preference for projects. Since the
importance of environmental issues continues to rise, there is a need to analyze
environmental impact as a separate item. It will be difficult to separately judge the
impact of project implementation on the ecosystem and the resulting attitude of local
residents toward the project. Local residents objection to the project due to
environmental issues, etc. is, therefore, analyzed in environmental impact analysis
to be reflected in evaluation.
C. Level of Preparedness of Projects

The level of preparedness is about a projects concreteness. This concerns the
level of detail of a project plan and the specific input of human and financial
resources. In case of national road construction, once the decision is made to lay a
specific section of a road, there is not much to change about the project and a
regional construction management administration serves as a responsible party
throughout the project. In such case, the level of preparedness may not be an
important evaluation item. However, a concrete project plan is necessary in special
projects like one for construction of a cultural facility.
A project plan needs to suggest the location of the project, its purpose, expected
effects, strategy to pursue it, estimated project costs, ripple effects, etc. A higher
level of preparedness can be interpreted as an indication that the purpose of a project
and such are well aligned with policy and that the level of willingness to pursue is
strong.
3. Risks in Pursuing Projects

A. Possibility of Financing
Public projects are generally funded with public money, by issuing bonds or
attracting private investment. When the government is able to and willing to provide
sufficient funds, the responsible party is able to issue bonds in the market or a
private party willing to participate in the project can be found, financing is not a
significant concern. This is the case for most national road construction projects.
For projects where local governments put up some of the necessary funds and
Policy Analysis
155
projects that are partially or wholly financed by a private party, the possibility of
financing should be closely reviewed to ascertain whether they can proceed as
planned. If projects impose significant financial strains on local governments in
consideration of their fiscal condition, they can become delayed, suspended, or face
other such problems. In PPP projects where the profitability is low, selecting a
private investor and conducting negotiations can be time consuming. Even in the
case of projects funded by the government, the possibility of raising necessary funds
should be confirmed if the project costs are much higher than the given budget.
The evaluation of financing plans in the General Guidelines (fifth edition)
excludes analysis on the suitability of government support which was conducted in
the General Guidelines (fourth edition). This is because, in most projects subject
to preliminary feasibility studies, the responsible ministry requesting the study
suggests a legal and administrative basis for pursuing them, thereby justifying
government support at least for the time being and rendering confirmation of every
project for suitability of government support of little use. Also, such suitability is
different in nature from the mid-level classification of risk factors in pursuing
projects, which can cause a problem in the evaluation structure.
For projects where the suitability of government support is raised as an issue due
to their nature, this should be set as a project-specific evaluation item and be
analyzed separately from a financing plan.
B. Environmental Nature
Environmental impact analysis roughly evaluates impact from project
implementation. Environmental impact analysis does not have to be conducted for
every project. In preliminary feasibility studies, environmental impact analysis is to
ascertain in advance whether an environmental issue will occur in any step after
preliminary feasibility studies and decide whether to pursue a project accordingly,
and at the same time to raise the possibility of an environmental issue in the
following steps and encourage more in-depth analysis.
For projects with potential environmental issues, the impact of project
implementation is to be qualitatively and quantitatively evaluated through separate
consultation with specialists, prior discussion, etc.
Also, as mentioned above, the possibility of local civil complaints due to an
environmental issue when the project is implemented should be analyzed not in the
156
willingness to pursue and preference for projects item, but in the environmental
impact analysis item.
4. Project-Specific Evaluation Items

Unlike basic evaluation items, project-specific evaluation items are those that
should be put into special consideration in the evaluation of projects. This renders
defining and suggesting project-specific evaluation items in advance difficult.
Nevertheless, categorizing project-specific evaluation items suggested in existing
preliminary feasibility studies is helpful to select policy analysis items in future
preliminary feasibility studies.
As the existing guidelines adopted a structure of basic evaluation items vs.
project-specific evaluation items, the project-specific evaluation items suggested in
the existing preliminary feasibility studies include those that fall under the mid-level
classifications like balanced regional development, consistency with policy and
willingness to pursue projects, and risk factors in pursuing projects.
Table 4-19 shows project-specific evaluation items from existing preliminary
feasibility studies under new mid-level categories.
Table 4-19
Mid-Level
Classification
Political Economy of Structural Reform Case Studies

Evaluation Items
Example
Increased fairness between Yeongnam and Honam regions,
Balanced regional
development
Fairness
development of border areas, investment equity in the Seoul

metropolitan area, interregional fairness about the same
section, etc.
Consistency with policy

and willingness to
pursue projects
Providing stable settlement conditions, security of water

resources, etc.
Suitability of site selection, need to adjust project contents,

Risk factors in pursuing
Propriety in methods of
suitability of the scale, problems with the responsible party and
projects
planning and implementing
relevant ministries, issues of purchasing exhibits, possibility of

pursuing relevant projects, etc.
Policy Analysis
157
Table 4-19
Continued
Mid-Level
Classification
Evaluation Items
Example
Possibility of technically difficult sections occurring, possibility of
Technical feasibility
bottlenecks occurring due to project implementation,

realizability, etc.
Risk factors in pursuing

projects
Risks like civil complaints,
diplomacy, national defence
Suitability of government
support
Civil complaints, preservation of cultural assets, diplomatic

issues, cooperation system with the military, opposition by the
corresponding local government, etc.
Suitability of government support, access roads meeting the
purpose, etc.
Reduced disruption of railroad service: When flood damage is
Evaluation of projects
special characteristics
Unquantifiable
benefits/additional effects
prevented, disruption of railroad service due to rockslides,

roadbed loss, etc. is also prevented, leading to road congestion
prevention and efficient use of cargo by securing timeliness of
cargo shipment.
158
Overlapping investments with other projects, etc.
CHAPTER 5
. Multi-Criteria Analysis and AHP
1. Need for Multi-Criteria Analysis

The two major parts of preliminary feasibility study before this step are
economic feasibility analysis and policy analysis. Economic feasibility analysis
entails cost-benefit analysis as the basic methodology to estimate demand, benefits
and costs, and then economic feasibility. Policy analysis entails analysis of basic
evaluation items (estimation of ripple effects on the regional economy, evaluation of
the level of regional development, evaluation of the possibility of financing,
evaluation of consistency with relevant plans and policies, willingness to pursue and
preference for projects, etc.) and analysis of project-specific evaluation items to
reflect projects specialty into evaluation.
The final step of preliminary feasibility study is synthesizing the results of
economic feasibility analysis and policy analysis to make a final decision on
whether to implement projects. Synthesizing the results of the two analyses involves
the following difficulties:
The first difficulty is combining the results of the two analyses. The results of
economic feasibility analysis are quantitatively represented by such figures as a
BCR, NPV of net benefits, and IRR. Many evaluation items included in policy
analysis are hard to quantify, including a regions willingness to pursue a project,
possibility of getting fiscal support from the government, and consistency with
relevant plans, and are, therefore, expressed qualitatively. For instance, it is not easy
to comprehensively evaluate the feasibility of a project which has a high BCR but is
not consistent with high-level plans.
The second difficulty is about combining the same qualitative analysis items
when they have different scales. For instance, if the BCR in a government-financed
project is 0.9, which is less than 1.0, but the project can generate a significant
number of jobs, say 2,000 jobs, it is difficult to decide whether to go ahead with the
project or cancel it and by which standards.
The third difficulty is to both ensure consistent evaluation and reflect a projects
specialty. Among projects subject to preliminary feasibility studies are national
strategy projects, cultural asset protection projects, and the like where special
evaluation items, not quantified within the framework of economic feasibility
analysis, are much more important. Policy analysis in preliminary feasibility studies
reflects such specialty in the framework of evaluation. There is, however, the risk
that consistency in evaluation with other projects may decline if the special nature of
a project assumes too much weight in comprehensive evaluation. For the
preliminary feasibility study framework to retain its value as a general analysis
framework, the impact that the special nature of a project has on determining
whether to pursue it should be objectively evaluated.
The fourth difficulty is to collect and reconcile the opinions of multiple
evaluators participating in comprehensive evaluation and draw a final conclusion.
When there is only one evaluator performing comprehensive evaluation, only the
feasibility of such judgment matters. But when putting together several peoples
opinions, issues arise such as how to come up with a representative comprehensive
judgment and how to reach a final decision when individual researchers have
opposing opinions on whether to pursue a project.
Multi-criteria analysis is suggested to overcome these difficulties. This is a
decision-making method that considers multiple attributes to devise an optimal
alternative that satisfies multiple objectives. The comprehensive evaluation of
preliminary feasibility studies also considers multiple quantitative and qualitative
evaluation items to distinguish projects that are feasible in terms of both economy
and policy.
To find the most suitable methodology for comprehensive evaluation as part of
preliminary feasibility studies, KDI compared and evaluated various methods of multicriteria analysis, and adopted the Analytic Hierarchy Process (AHP) method. It has
adjusted and applied the AHP method in a way that suits preliminary feasibility studies.
160
2. Outline of the AHP Method

The AHP method is one of the decision-making methods that help systematically
evaluate alternatives with different levels of preference48 when there are multiple
decision-making goals or evaluation criteria.49 It was developed by Thomas Saaty in
the early 1970s and has been widely used for qualitative, multi-criteria decisionmaking. The AHP method gathers together evaluation attributes considered in
decision-making as a homogeneous group, stratifies them into multiple levels, and
analyzes and puts them together by each level to come to a final decision.
The most salient characteristic of the AHP method is that it divides and stratifies
various evaluation items that comprise an issue into main items and detailed items,
and performs pair-wise comparison of the items by stratum to know their relative
level of importance. This method is recognized for its usefulness in that it breaks
down and structuralizes issues in a way similar to human thinking and measures on a
ratio scale the level of relative importance among evaluation items and preference
for alternatives to come up with quantitative results. Despite the simplicity of its
application, it is also well regarded theoretically as it uses techniques adopted by
other various methods used in scale selection, weight calculation, and sensitivity
analysis through empirical analysis and thorough mathematical verification. Thanks
to these merits, the AHP method has been widely used in the transportation system
design in Sudan carried out by Saaty in 1997 and in other areas like new technology
selection, hospital service system design, and political issue resolution.50
The AHP method reflects qualitative characteristics of government-financed
projects in evaluation and properly induces professional judgment by researchers
participating in evaluation. Considering that a preliminary feasibility study is a step
prior to a regular feasibility study and carried out in a short time with a small budget,
the AHP method is significant in that it is simple and helps systematically analyze
issues where decision-making is complex. The significance of the AHP method in
conducting comprehensive evaluation in preliminary feasibility studies can be
defined as follows:
First, it helps build social consensus and clarifies such process. By
structuralizing a decision-making process, it can objectively collect socially48
49
50
This term represents how alternatives are evaluated according to the evaluation criteria and is called
alternatives preference, performance, attractiveness, etc. according to the need.
This term represents the subject by which the preference of alternatives is compared and is called
criteria, attributes, elements, etc. according to the need.
Cases using the AHP method around the world can be found on the web site of Expert Choice at
http://www.expertchoice.com/ and domestic cases at http://www.expertchoice.co.kr/.
161
recognized values about government-financed projects to come up with social

consensus. It also clarifies the process to put together study results by evaluation
item and come to a final decision and a basis for it so that a third party can evaluate
the rationality and feasibility of the comprehensive judgment.
Second, it secures reliability for a decision to invest in the public sector. There
has been criticism that government-financed projects are conducted according to
political considerations or evaluators arbitrary judgment. The government has
invited such criticism against it to some degree due to its authoritative way of
performing administrative works in the past. There were also no consistent standards
for decision-making for government-financed projects. To overcome this criticism,
consistent standards should be applied to many projects for a long time to increase
confidence in decisions to invest in the public sector.
Third, it helps reduce evaluation errors among projects. In comprehensive
evaluation, each evaluator engages in decision-making considering not only the
characteristics of the concerned project but also basic standards for judgment
common with other projects. For instance, the BCR is used as an important standard
for judgment in most projects, and if the same BCR is differently interpreted among
projects, there is the risk of a bigger evaluation error among them. In consideration
of this, multi-criteria analysis suggests objective standards that can minimize
evaluation errors among projects so that inconsistency in project evaluation due to
different interpretation of the same standards can be reduced.
Fourth, it is used as data for evaluation of subsequent projects. Once a standard
draft is suggested through a multi-criteria analysis model, it has the status of a kind
of null hypothesis. In principle, this standard draft is to be applied to all projects, and
unless specialty of a region or project is proven to change this standard, the same
standard is to always be applied. This helps solve the problem of different evaluation
results of similar projects when they are evaluated at different times.
In general, the AHP method entails the following steps:51
51
162
Conceptualizing evaluation (conceptualizing)

Finalizing evaluation standards and setting up a hierarchy structure (structuring)
Measuring the weights of the evaluation standards (weighting)
Measuring the preference of alternatives (scoring)
Calculating a weighted sum (synthesizing)
Refer to the AHP analysis process under Section 2 of this chapter for the detailed guidelines on how
to conduct each step.
Feedback
Drawing a comprehensive decision and policy suggestions (concluding)
3. Evaluator Selection
A preliminary feasibility study team consists of a project manager and multiple
specialists, and their opinions are reflected in comprehensive evaluation to have
group decision-making characteristics. The AHP method is a proper methodology
not only for individuals decision-making but also as an aid to group decisionmaking to put together group members opinions and come to a final decision.
In group decision-making, the selection of group members directly impacts the
decisions made, so evaluators should be carefully selected to comprehensively
evaluate preliminary feasibility by the AHP method. Evaluators to perform
comprehensive evaluation of preliminary feasibility should satisfy the following two
conditions:
First, evaluators should be specialists with sufficient knowledge about the
concerned project. They should be knowledgeable about the purpose of the project,
requirements to meet the purpose, project details, relevant areas, etc. and be in a
position to predict the projects socio-economic and policy ripple effects.
Second, they should have objectivity to evaluate government-financed projects
from the perspective of the public interest. Even when one has specialized
knowledge, thereby meeting the first condition, he may distort the decision-making
if he has a personal interest in the project, with the result that the ultimate decision
does not maximize the public interest.
Parties involved in government-financed projects can be divided into the
following four groups: The first is the group of public officials, which includes those
of the ministry of the central government responsible for the concerned project; the
budget authorities that mediate different interests among ministries and set priorities
among projects to assign a budget; and the local government of the city and province
or the city, county, and gu district in the region where the project will be
implemented. The second is the group of researchers in charge of governmentfinanced projects, which includes those at the KDI performing preliminary
feasibility studies; professors or researchers of research institutes in the concerned
field; researchers of the KDI PIMAC (Public and Private Infrastructure Investment
Management Center) responsible for preliminary feasibility studies; and researchers
of private companies like engineering companies performing technical research and
163
consultation, etc. The third is local residents living in the region affected by the
implementation of the project. The fourth is interest groups with interests in the
project.
Among these, those who best satisfy the professionality and objectivity
conditions required of evaluators of AHP-based comprehensive evaluation are
central government officials responsible for budgets, projects managers of the KDI,
researchers of the KDI PIMAC, professors in relevant fields, etc. Ultimately, these
Guidelines excluded public officials responsible for budgets and included as
evaluators researchers of private companies responsible for the technical part of
preliminary feasibility studies. Public officials responsible for budgets are excluded
because the comprehensive opinion of preliminary feasibility studies is that of
participating researchers, and the budget authorities that decide the preliminary
feasibility of projects have an opportunity to finally and directly reflect their opinion.
Researchers of private companies in relevant fields like engineering are included to
reflect the fact they are not only part of preliminary feasibility studies but also
participate in social decision-making in various forms. Interested parties affected by
government-financed projects like local residents and interest groups are excluded as
they are believed not to be in a position to objectively judge the interests of all of
society. Nevertheless, the various voices of interested parties in a diverse society are
reflected in the decision-making process through various channels, which affects the
political feasibility of project implementation. In consideration of this reality,
evaluators in comprehensive evaluation are required through the AHP method to
comprehensively evaluate the impact of project implementation on regional
development to reflect the concerned regions opinions. They must consider, for
example, the importance of regional development on the feasibility of a project; the
demand of local residents and local governments for project implementation; ripple
effects on the regional economy from project implementation; and development of
less developed regions.
To reflect this, preliminary feasibility studies usually had three or four evaluators
participate in AHP analysis for individual projects. However, this was cited as
problematic in that one evaluator in such a small group could unduly bias the overall
decision-making. These Guidelines, therefore, call for a group of seven or eight
researchers to include more KDI evaluators and separate reviewers in AHP
evaluation. The highest and lowest scores given by any two evaluators are excluded,
and the results from the remaining five or six evaluators are used to come up with a
weighted sum.
164
. AHP Analysis Process52
1. Conceptualizing
The first step of AHP analysis is conceptualization to form a conceptual
framework about evaluation including its goal, evaluation items, alternatives,
restrictions, evaluators, and interested parties. This conceptualization process allows
evaluators to better understand the overall project like its characteristics and issues
and to share information and critical thinking about the project. This step should be
carried out at the early stage of a preliminary feasibility study to ensure clear
understanding of the project along with the rest of the study.
Brainstorming is often done for efficient and effective conceptualization. It is a
group creativity technique to uncritically enumerate as many considerations as
possible about the concerned project and consider them one by one.
Preliminary feasibility studies entail the two following steps of brainstorming:
The first step is brainstorming at the level of individual projects to increase the
understanding of them and know about their characteristics through meetings among
the project manager and joint research teams, visits to the responsible ministry and
involved agencies, and visits to the concerned region. The second step is
brainstorming at the level of all the projects of the corresponding type. The KDI
preliminary feasibility study management team discusses the research results of the
project with all the researchers participating in projects of the same type to find
issues that are not found at the level of individual projects. This provides an
opportunity to hear expert opinions from researchers performing preliminary
feasibility studies on relevant or similar projects to ensure exchange of valuable
information.
This two-step brainstorming allows the project manager to obtain information to
comprehensively understand projects. The first type of brainstorming is conducted
through official and unofficial procedures under the supervision of the project
manager. The second type is performed under the supervision of the KDI
preliminary feasibility study management team that comprehensively coordinates
and manages preliminary feasibility studies.
52
For details on AHP analysis, refer to the Study to Supplement Comprehensive Evaluation Using
AHP of the General Guidelines for Preliminary Feasibility Studies (fourth edition).
165
2. Structuring
Next is structuring to review evaluation items identified at the conceptualization
step and finalize evaluation standards, gather them into homogeneous groups, and
hierarchize these groups at an appropriate level.
Evaluation items identified at the conceptualization step can vary in terms of
importance and scope, ranging from the trivial to the important and from the detailed
to the comprehensive. Also, as no terms were precisely defined in advance,
evaluators may have different understandings of the same terms. For instance,
economic feasibility analysis can mean cost-benefit analysis, and in some cases, can
include aspects like ripple effects on the regional economy. As such, to finalize
evaluation standards, the meaning of identified evaluation items should be clearly
defined first to minimize potential for confusion and misunderstanding.
Once evaluation items for comprehensive evaluation are finalized, it is time to
gather items with different levels of importance and scopes into homogeneous groups
and stratify these groups at an appropriate level. In general, the items at a low level
become detailed evaluation standards that concretize high-level items. At the highest
stratum is comprehensive evaluation of preliminary feasibility, the final goal of
decision-making. Preliminary feasibility is evaluated based on the results of economic
feasibility analysis and policy analysis. Policy analysis involves basic evaluation items
and project-specific evaluation items: basic evaluation items are those included in any
preliminary feasibility study, and project-specific evaluation items are those which
should be given due consideration in evaluating the concerned project.
These Guidelines define the basic structure of AHP analysis in preliminary
feasibility studies as in Figure 5-1. The final goal of AHP analysis is to evaluate the
feasibility of projects. The first stratum consists of economic feasibility analysis,
policy analysis, and balanced regional development analysis. The second stratum is
of consistency with policy and willingness to pursue projects; risk factors in
pursuing projects; and evaluation of projects special characteristics (mid-level
classification) comprising policy analysis. The third stratum is of the detailed
evaluation items under the mid-level classification of policy analysis, and those
under balanced regional development analysis.
These Guidelines partially changed the stratification system of the basic AHP
structure in preliminary feasibility studies from the previous General Guidelines
(fourth edition). Balanced regional development analysis, which had been included
in policy analysis in the previous guidelines, was moved to the first stratum. It was
first applied to preliminary feasibility projects in 2007 due to change to the 2006
166
Operating Guidelines for Preliminary Feasibility Studies and was reflected in these
Guidelines.53
The AHP structure separates items of which evaluation is connected, and this may
render focusing on evaluation items difficult for evaluators who are unfamiliar with AHP
analysis. Therefore, the previous guidelines set up an AHP structure with the evaluation
items of three mid-level classifications and project-specific evaluation items according
to evaluation details. These Guidelines adopted the meaning and operation of projectspecific evaluation items without change from the previous guidelines.
Figure 5-1
Basic AHP Structure of Preliminary Feasibility Studies

Preliminary Feasibility
First
Stratum
Economic feasibility
analysis
Consistency with
Second
Stratum
policy and
Risk factors in
determination to
pursuing project
pursue project
characteristics
Additional evaluation items ( optional)
Ripple effects on the regional economy
Level of regional development
Evaluation item 2 ( optional)
Implementation of a project
Evaluation of
projects Special
Evaluation item 1 ( optional)
Environmental impact analysis
Possibility of financing
Projects preparedness
53
Relevancy with high-level plans
Evaluation
Alternative
Determination to pursue projects
Third
Stratum
Balanced regional
development analysis
Policy analysis
Non-implementation of a project
In case of R&D projects, the first stratum includes technical analysis items instead of balanced
regional development, and balanced regional development is placed under policy analysis of the first
stratum.
167
When setting up project-specific evaluation items in a structure survey and

defining an AHP structure, the following two AHP axioms should be satisfied.54
The first is the axiom of homogeneity and it should be possible to express the level
of importance by a bounded scale within a limited scope. In other words, thirdstratum evaluation items under a second-stratum mid-classification should have the
homogeneity of a level that allows comparison. The second is the axiom of
dependency, which means items under one stratum should be subordinate to those of
an adjacent higher-level stratum. This, nevertheless, does not mean that there should
be independence among all items within an adjacent low-level stratum with regard
to all the items of a high-level stratum.55
In the structure survey process of preliminary feasibility studies, the study team
should suggest an AHP structure in the structure survey questionnaire and
concretely describe evaluation items, contents, etc. in a way that fits the form of
Table 5-1. This is to clarify the meaning of identified evaluation items so that
evaluators have the same understanding of them.
Table
5-1 Evaluation Items in a Structure Survey Questionnaire (e.g. Project to Improve a

Railroad in a Mountainous Area)
Project-Specific Evaluation
Items
Evaluation
Item
1
Improving driving
safety
Evaluation Details
Sections with less than a 400m curve radius exist intermittently along the
railroad of which design standard is fourth grade. Even sections with a 250m
radius span 10.5km, making improvement of driving safety urgent.
Reducing losses
When flood damage is prevented, disruption of railroad service is also prevented
due to service
due to rockslides, roadbed loss, etc., which in turn prevents road congestion and
disruption
allows efficient use of cargo by securing timeliness of cargo shipment.
The KDI preliminary feasibility study management team reviews whether the
structure and evaluation items set by the study team are proper and suggests possible
additional evaluation items to the study team.
54
55
168
There are also other AHP axioms like reciprocality and expectation. Under the reciprocal axiom,
decision makers should be able to pair and compare two items within the same stratum and express
the strength of preference. This strength of preference should satisfy the reciprocal condition. For
instance, if A is regarded to be x times as important as B, it means B is 1/x times as important as A.
The expectation axiom is based on the assumption that the stratums should comprehensively include
matters about the goal of decision-making.
Jo, Geuntae, Jo, Yonghyeon, and Hyeonsu Kang, 2003, Analytical Hierarchy Decision-Making,
Donghyeon Publishing Company, Seoul, Korea, p.4
The lowest stratum of the AHP hierarchy is divided into an alternative to

implement a project and an alternative not to implement a project. Project
proposals of which implementation is determined at this step are those judged to be
the best from among multiple alternatives presented for preliminary feasibility study.
This means the final goal of decision-making is that researchers participating in
preliminary feasibility study decide whether to implement an optimal alternative of
their choice.
3. Weighting
This step is where the level of relative importance is determined among
evaluation items at each stratum of the hierarchy structure. Evaluators repeatedly
answer questions that compare the relative importance (or preference) between
evaluation items regarding all the pairs of two evaluation items belonging to the
same group and stratum. This pair-wise comparison process represents evaluators
judgment as verbal expressions and grants quantified scores corresponding to such
expressions. Relative evaluation through pair-wise comparison requires a credible
evaluation scale. This scale should be set in a scope that can reflect the maximum
differences that humans tend to sense. The AHP method uses a scale of nine points
as a basic type based on research results in the cognitive psychology area.
Table 5-2
Scale of Importance used for Pair-Wise Comparison

Verbal judgment
Quantitative scoring
Extreme preference
Between extreme preference and very strong preference
Very strong preference
Between very strong preference and strong preference
Strong preference
Between strong preference and weak preference
Weak preference
Between weak preference and equal preference
Equal preference
Note: Saaty and Vargas, 1982.
169
As the weights of economic feasibility analysis and policy analysis at the highest
stratum have a big impact on the weighted sum, the previous guidelines set the
scope of preliminary weights (45%-56%) for economic feasibility analysis to reduce
motivational bias in case of road and railroad projects.
These Guidelines set the calculation scope of weights for different analysis areas
as in Table 5-3 according to the change in the 2009 Operating Guidelines for
Preliminary Feasibility Studies:
Table 5-3
Scope of Preliminary Weight Calculation
Classification
Economic
feasibility
Technical
feasibility
Policy
feasibility
Balanced
regional
development
25~35%
15~30%
Construction project
40~50%
R&Dinformatization
30~50%
Other non-investment finance areas
25~50%
50~70%
-
50~75%
For the weights of low-level evaluation items, Saatys nine-point scale is used to
measure the relative importance between two items through pair-wise comparison
and ultimately estimate the relative weights among the items. When an evaluator
performs a pair-wise comparison a total of n C 2 times for n number of evaluation
items in one level, he can know the actual relative weights, and using these,
compose the following pair-wise comparison matrix Ann :
w1 / w1
w / w
A = aij = 2 1
M
wn / w1
[ ]
w1 / w2 L w1 / wn
w2 / w2 L w2 / wn
M
wn / w2 L wn / wn
(5-1)
where aij that comprises matrix A is the estimate of wi / w j , the relative weight
of element i to element j . Matrix A is a reciprocal matrix where the element
values of the principal diagonal all become 1 (a ji = 1 / aij ) .
When multiplying matrix A by column vector w = (w1 , w2 ,LL, wn )T , the
weight that represents the level of relative importance among evaluation items, it
becomes formula (5-2).
170
w1 / w1
w / w
2 1
M
wn / w1
w1 / w2 L w1 / wn w1 nw1
w2 / w2 L w2 / wn w2 nw2
=
M M M

wn / w2 L wn / wn wn nwn
A w = n w
(5-2)
(5-3)
Here n is the maximum eigenvalue of matrix A and the number of rows (or
columns). Formula (5-3) is an eigenvalue problem to calculate a non-zero value
from a series of n number of simultaneous equations. The w value calculated
from formula (5-3) is used as a weight vector by evaluation item.
Matrix A is calculated based on pair-wise comparison by determining the relative
importance of elements above the diagonal, using the level of importance of elements in
each row as 1. If the original aij of matrix A obtained from pair-wise comparison has
the value of wi / w j , cardinal consistency should obtain. In other words, aij a jk = aik
should be valid. The meaning of aij a jk = aik is that if i is thought to be x times as
important as j and j is thought to be y times as important as k , i is evaluated to
be x y times as important as k . However, it is difficult to maintain such consistency
completely in actual answers, so there is a need to verify the cardinal consistency of
matrix A . If answers to pair-wise comparison do not maintain complete consistency,
their credibility can be questioned.
In AHP analysis, the degree of consistency in answers is represented as an
inconsistency ratio. An inconsistency ratio of zero means the answerers keep
perfect consistency in pair-wise comparison. According to Saaty, if the
inconsistency ratio is less than 0.1, pair-wise comparison is judged to have rational
consistency, and if it is less than 0.2, an acceptable level of inconsistency is
recognized. If the ratio is 0.2 or higher, consistency is lacking, suggesting the need
for re-study. These Guidelines set the maximum allowable inconsistency ratio at
0.15, and answerers who exceed the 0.15 ratio are to increase consistency through
feedback.
4. Scoring
This step is to score preferences for alternatives based on each evaluation item.
Table 5-4 shows scoring standards for preliminary feasibility studies. From among
171
evaluation items chosen in advance, economic feasibility analysis and balanced

regional development analysis (level of regional development, ripple effects on the
regional economy), etc. use quantitative indices like the BCR, regional development
index, and index of ripple effects on the regional economy. Other evaluation items
are qualitatively evaluated based on information collected in the study process.
Table 5-4
Evaluation Item
Evaluation Description and Scoring Standards for AHP Evaluation Items

Evaluation Description
Scoring Standards
Economic feasibility n Project feasibility from an

analysis
economic aspect
n BCR, NPV, IRR, etc. resulting from

analysis
Remarks
n The higher the BCR, the higher
the project implementation
score.
Balanced regional development analysis

Level of regional
development
n Need for the project from the

aspect of balanced regional
development
n Regional development index and

ranking (Based on the level of
development of the representative city
county if the project spans over
multiple citiescounties)
n The less developed the region,

the higher the project
implementation score; and the
more developed the region, the
lower the project implementation
score.
Ripple effects on
the regional
economy
n Ripple effects on the regional

economy resulting from
implementation of the project
n Amount of added value within region
n The greater their share and the

stronger the effects, the higher
score.
GRDP
and information collected in the study

process is used for qualitative
evaluation
Policy analysis
Consistency with policy and willingness to pursue projects

Consistency with
relevant plans
and policy
directions
n Reflection of high-level and

relevant plans
n Consistency with policy
directions pursued by the
competent ministry
n Qualitative evaluation of information

collected in the study process
n The more concretely they are

reflected and the higher the
consistency, the higher the
project implementation score.
Determination to
pursue projects
and preference
n Central government, local

government, and local
residents willingness to
pursue, preference for and
level of long-standing demand
for the project

n The greater the determination,

implementation score; and the
greater the opposition, the lower
score.
Projects
preparedness
n A projects concreteness such n Qualitative evaluation of information

as a concrete plan, input of
human and financial resources,
etc.
n The greater the preparedness,

implementation score.
Risk factors in pursuing projects

Possibility of
financing
Environmental
nature
n Realizability of the financing

plan

n Rough evaluation of the

projects impact on the
surrounding environment and
the possibility of environmental
issues occurring when the
project is implemented
n Possibility of local conflicts due
to environmental issues
172
n When there is no problem with

financing, the AHP score is 1, and
if there is a problem, the project
implementation score declines.
n When there is no problem with
the environment, the AHP score
is 1, and if there is a problem,
the project implementation score
declines.
During the scoring process, special care should be taken to ensure that scoring of
specific evaluation items is independent from that of others. For instance, a general
attitude toward project feasibility should not be reflected in the scoring of individual
evaluation items. The evaluation items of regional development and ripple effects on
the regional economy have different scoring standards, but their scoring is often
connected because they belong to the same mid-level classification: balanced
regional development. One of the strengths of the AHP method is increasing
information processing ability of humans in that it determines whether to pursue a
project based on one characteristic by evaluation item.
As in the step of setting up weights, AHP analysis in preliminary feasibility
studies is done to learn the relative suitability between an alternative to implement a
project and an alternative not to implement a project through pair-wise comparison
based on each evaluation item, and perform scoring. In principle, Sattys 9-point
scale is used as a scoring scale here too. Nevertheless, the following two
considerations should be made in scoring.
First, a problem arises in evaluating the relative suitability of an alternative to
implement a project and an alternative not to implement a project when scoring the
evaluation items of possibility of financing and environmental nature, which are
not problematic in most projects. For instance, it should be determined whether to
give a score of 9 points for the suitability of an alternative to implement a project in
terms of environmental nature if there is no environmental issue when the project is
implemented, or give 1 point to be neutral with an alternative not to implement a
project. In the case of a project to lay a short national road with no problem of
financing, there can be a problem with evaluation of the suitability of an alternative
to implement the project. The AHP analysis of preliminary feasibility studies sets
the maximum score of possibility of financing and environmental nature at 1 in both
cases. This means that the fact there is no problem with environmental nature or
financing does not facilitate implementation of the project but does not negatively
impact its implementation.
Second, standard scores are granted to quantified evaluation items to ensure
consistency in the evaluation of different projects. These Guidelines have standard
score conversion formulas for economic feasibility analysis and the regional
development index where consistent evaluation is especially required. Economic
feasibility analysis uses cost-benefit analysis in all preliminary feasibility studies to
resolve the issue of researchers making different judgments about the same BCR.
The following standard score conversion formulas are used for the BCR and
regional development index:
173
Standard score conversion formula for the BCR:

BCR Standard Score =
5.11532 ln( B / C ) + i
B / C 1 i = 1,
(5-4)
B / C < 1 i = -1
Standard score conversion formula for the regional development index:
Standard score of the regional development index = a + i
(5-5)
a = 0.81220 + 2.23298 LIR - 0.29626 LIR 2 + 0.74302 LIR 3 + 0.32728 MIR 2
a 0 i = 1,
a < 0 i = -1
LIR is the standardized value of the ranks of citiescounties in terms of
the level of regional development

MIR is the standardized value of the ranks of citiesprovinces in terms
of the level of regional development
One of the important goals of preliminary feasibility studies is to increase the
objectivity of decision-making about public investments by applying consistent
evaluation standards to various government-financed projects. As such, it is
desirable to ensure consistency in the evaluation of comparable, quantified indices
calculated based on common standards.
5. Synthesizing
This step entails calculating the weighted sum of each alternative by multiplying
the weight of each evaluation standard by the score of alternatives for each standard.
An alternative with the highest weighted sum from among alternatives compared is
chosen by the AHP model.
As mentioned in the discussion of evaluator selection, comprehensive evaluation
of preliminary feasibility by the AHP method has a group decision-making
characteristic. As such, a process is necessary to combine the weights of evaluation
items, scores of alternatives, and weighted sums used and given by individual
evaluators into the evaluator groups common weights, scores, and weighted sums.
174
The first way to combine individual evaluators evaluation is to convert the

results of all pair-wise comparison matrixes determined by individuals into the
groups pair-wise comparison matrixes using a geometric mean, and then apply the
eigenvector calculation method. The second is to apply the eigenvector calculation
method to individuals pair-wise comparison matrices to come up with priority
vectors for weights and scores, and then determine a geometric mean on these vector
values. These Guidelines adopted the second way because it is more appropriate for
reflecting comprehensive judgment by an expert group.
6. Feedback
Feedback is another feature of AHP analysis that renders it more useful. This
review process provides respondents with low consistency in their answers with
information on inconsistency and allows them to perform decision-making again to
reduce inconsistency in decision-making. If a decision-maker fails to properly
answer formalized questions, the AHP hierarchy structure should be reconsidered.
This is also true when the definition and explanation of any element comprising the
AHP hierarchy structure is wrong. If the degree of inconsistency is severe and
consistency does not improve in the feedback process, the hierarchy structure of
evaluation items needs to be reorganized or the concepts of stratums and elements
need to be defined or explained again before an AHP survey is conducted again.
In preliminary feasibility studies, data for AHP analysis is collected through two
structuralized questionnaires: the structure questionnaire and answer questionnaire.
This data collection method involves risk that a deviation may occur depending on the
evaluators level of understanding of the AHP method, evaluation items, prior attitude
toward the projects, etc. Of course, the KDI preliminary feasibility study team explains
the AHP method in detail to all team members and has in-depth discussions to build up
an AHP structure. Nevertheless, it is true that the AHP method entails restrictions in
communication for decision-making, as a tool that supports decision-making by experts,
compared to direct AHP analysis by researchers
When consistency is high in decision-making as a result of AHP analysis, for
instance, when all evaluators judge that it is appropriate to go ahead with or reject a
project, it is not difficult to draw a conclusion on the feasibility of a project despite
the above limitations of the AHP method. There are cases, however, where the AHP
score of one evaluator is very high and adversely affects the overall scoring results,
despite the fact that the evaluators are split 2:2 or 1:3. In such cases and other cases
where the robustness of decision-making is low, there is a need for an additional
175
procedure where the evaluators discuss evaluation results.

When the opinions of evaluators do not coincide in a group decision-making
process and thereby conflicts occur, it is desirable to use a group dynamics
management technique. The assumption behind group dynamics is that a small
group has interactions where its members affect each other in a process to resolve
issues or make decisions, and to manage this is to maximize the process gains and
minimize the process losses that occur as a result of the interactions. A group
decision can be achieved through consensus building, negotiation, voting, etc. If
comprehensive evaluation is drawn merely by combining individual evaluations,
which is a form of voting, without an effort to build a stronger consensus, a single
uniform conclusion is produced, but the evaluators may not accept that their
opinions are duly reflected.
A project manager of a preliminary feasibility study should use a group
dynamics technique to draw a comprehensive opinion by consensus. Specifically, if
the results of decision-making drawn from AHP analysis are not robust, all
evaluators can get together and explain the basis for their evaluation through
discussion and debate to build a stronger consensus. Also, AHP analysis can be
conducted again in the process of discussion and debate to narrow differences in
evaluators opinions.
7. Concluding
The last step of the AHP method is to choose between an alternative to
implement a project and an alternative not to implement a project based on weighted
sums drawn from feedback, and to come up with policy suggestions.
The final deliverable from AHP analysis is the weighted sum of an alternative to
implement a project and an alternative not to implement a project, each calculated
by multiplying the weight of each evaluation standard by the scores of the
alternatives for each standard. Under the previous guidelines, if the project
implementation alternative receives a higher weighted sum (higher than 0.5) than
the alternative not to implement a project, the project was considered feasible. This
mechanical way of drawing a conclusion was instituted because the final results of a
preliminary feasibility study are basic data to be used for a binary decision as to
whether or not to allocate a budget to pursue a project.
However, there are limitations as follows when judging whether to implement a
project based on AHP analysis results: the first is when evaluators opinions do not
coincide. In particular, when their opinions are divided into 2:2, though the weighted
176
sum of AHP analysis produces a score indicating whether or not to implement a project,
it is difficult to conclusively determine whether or not to pursue the project without
consensus among the evaluators. In such case, rather than making a binary decision, it is
desirable to state each evaluators opinion and the reasons therefor in the report.
The second is when the difference between the alternative to implement a project
and the alternative not to implement a project based on their weighted sums is
insignificant, with the result that there is no robustness in decision-making. Often
asked when deciding whether or not to implement a project based on an AHP
weighted sum is whether the difference between AHP weighted sums of 0.51 and
0.49 is big enough to make a binary decision about a projects feasibility. The
previous guidelines required a binary decision despite the fact that this question
cannot be stated with confidence because the ultimate goal of preliminary feasibility
studies is to ascertain whether or not the project is feasible. Nevertheless, the
previous guidelines tend to rely excessively on AHP analysis results despite the
limits of AHP analysis.
In consideration of this, these Guidelines establish a grey area as follows to
ensure a cautious approach in making a final decision:
0.5 - 0.05 < AHP weighted sum < 0.5 + 0.05,
Namely, 0.45 < AHP weighted sum < 0.55
The grey area refers to an area where the weighted sum may change if the
researchers change. If the AHP score falls in a grey area, the researchers need to take
a cautious approach in making a comprehensive conclusion through AHP analysis.
There is also a need to change this grey area according to the level of
consistency among evaluators opinions. We can assume some level of confidence
because coincidence in the opinions of the evaluators means that the evaluators
population mean is not very different from the sample mean. However, when their
opinions do not coincide, their population mean can be very different from the
weighted sum. Accordingly, it is necessary to establish a wider grey area if the
consistency among evaluators opinions is lower. In consideration of all this, a grey
area is to be applied according to the following principles:
First, when all of four evaluators agree, their opinions are combined to come up with
a comprehensive opinion depending on whether the AHP score is higher than 0.5.
Second, if they are divided by 3:1, a confidence interval of 84% is to be applied.
If the sample mean is higher than 0.55, the project is considered to be feasible, and if
the AHP score is lower than 0.45, the project is considered to be unfeasible. If the
177
AHP score is no lower than 0.45 and lower than 0.55, the interpretation is that it falls
in the grey area.
Third, if they are divided by 2:2, a confidence interval of 95% is to be applied. If
the AHP score is higher than 0.58, the project is considered to be feasible, and if the
AHP score is lower than 0.42, the project is considered to be unfeasible. If the AHP
score is in between, the tone of results should be brought down and a grey area
acknowledged, and a conclusion should be drawn cautiously.
If the ratio of evaluators for and against project implementation is 3:1 and the
AHP score of the alternative to implement the project is lower than 0.45, or the ratio
is 1:3 and the AHP score of the alternative to implement is higher than 0.55, then
one evaluators judgment throws excessive weight. This cannot be seen as decisionmaking where a consensus was established through sufficient discussion. In this case,
the feedback process should be performed so that evaluators achieve a consensus
through group dynamics management. If the same result occurs even after feedback,
a conclusion should be cautiously drawn.
Table 5-5
Opinion Consistency among Evaluators and Conclusion According to AHP Scores
Weighted Sum
Implementation:
Non-Implementation
AHP < 0.45
0.45 AHP <0.5
0.5 AHP <0.55
0.55 AHP
4:0
Feasible
Feasible
3:1
Feedback
Very cautious
Slightly cautious
Feasible
AHP<0.42
2:2
Not feasible
AHP>0.42
AHP>0.58
Cautious
Cautious
Slightly cautious
Feasible
AHP<0.58
Slightly cautious
1:3
Not feasible
Slightly cautious
Very cautious
Feedback
0:4
Not feasible
Not feasible
Note: 1) Implementation: non-implementation refers to a ratio of evaluators deciding to implement a project to those deciding not
to do so (based on four persons).
2) AHP refers to the AHP weighted sum of the project implementation alternative
3) The - means that nothing is applicable.
In the end, a conclusion differs depending on the consistency of opinions among

evaluators and whether the weighted sum is within or outside the grey area. If the
score is outside the grey area, a comprehensive conclusion can be more clearly made
on whether or not to implement the project. If not, the researchers should make it
178
clear that the score falls in the grey area and use a reduced tone or be cautious when
making a conclusion. The more divided the opinions, the more cautious the
conclusion should be.
. Matrix Tables Summarizing Preliminary Feasibility

Study Results
The last step in a preliminary feasibility study is to write summary tables of the
study, include them in a preliminary feasibility study report, and submit relevant
files to the KDI preliminary feasibility study management team. The summary tables
can show all the contents of the study in a condensed and concise way. Having the
tables consistent with the input formats of the preliminary feasibility study database
which has been built since 2004 can facilitate the construction of the database. The
summary tables to be included in a preliminary feasibility study report and computer
data to be submitted to the KDI preliminary feasibility study management team are
as follows:
1. Summary Tables to be Included in a Preliminary Feasibility

Study Report
Summary tables to be included in a preliminary feasibility study report are as
follows:
n
n
n
n
n
n
<Summary 1> Comprehensive summary of Preliminary Feasibility Study

<Summary 2> Request for Preliminary Feasibility Study
<Summary 3> Summary of assumptions of Economic Feasibility Analysis
<Summary 4> Summary of main issues of Preliminary Feasibility Study
<Summary 5> Summary of Policy Analysis
<Summary 6> AHP Analysis Results
- <Summary 6-1> Weights by Evaluator and Evaluation Item
- <Summary 6-2> AHP Scores by Evaluator
<Summary 7> Conclusion and Policy Suggestion
179
For convenience of explanation, the case of the Preliminary Feasibility Study

on a Mountainous Railroad Improvement Project published in 2006 is used.
Summary
1 Comprehensive Summary of Preliminary Feasibility Study for

Mountainous Railroad Improvement Project
Classification
Alternative
Alternative
n Line that goes via Yemi, Jungnyeom, and
n Line that goes via Yemi, Jungsan, and
Sabuk. It is a plan to improve the alignment by

closing the Jodong, Jamiwon, and Jungsan
stops and the existing Hambaek line and
directly connecting Yemi and Sabuk. The new
line will allow for horizontal alignment and
greatly reduce the length.
n The line is characterized as follows:
A signal station needs to be set up at
Jungnyeom for direct connection to the
Jeongseon line.
A double track for railroad and subway is
planned for the section from Jungnyeom to
Byeoreogok to prevent any disruption on
the Jeongseon line.
Horizontal alignment can be generally
achieved except for the Byeoreogok to
Sabuk section, where a 23% steep slope is
inevitable.
For direct connection with the Jeongseon
line, the Jungnyeom to Byeoreogok section
needs to be double tracked and 86% of the
entire length is tunnels, increasing project
costs.
With the closure of the Jungsan station,
opposition by the residents near the station
is expected.
Sabuk. It is a plan to improve the alignment

between Jungsan and Sabuk by closing the
Jodong and Jamiwon stops and the existing
Hambaek line and directly connecting Yemi
and Jungsan. The new line will allow for
horizontal alignment and greatly reduce the
length.
n The line is characterized as follows:
It will be generally a gentle slope
alignment, allowing for high driving
efficiency.
Unnecessary signal stations and stops
will be closed, increasing efficiency in the
operation and maintenance of the tracks.
Generally horizontal alignment except for
the R=600 section before Jungsan.
Single tracking for the entire line and
tunnels will account for 92% of the entire
length.
- There will be fewer local petitions
because the stations to be closed are not
heavily used.
Project
description &
scale summary
Railroad alignment improvement

(existing line length: km/length in this project: km)
Railroad alignment improvement

(existing line length: km/length in this project: km)
Project costs
372.112 billion won
Main contents
(within 2,000
letters)
33.200km
18.900km
33.200km
18.640km
288.126 billion won
BCR
0.34
0.47
NPV
-109.981 billion won
-62.426 billon won
IRR
Feasibility
No
No
Optimum
No
Yes
AHP score
0.452
Note: Regarding feasibility, it is the feasibility of an alternative comprehensively evaluated (economic feasibility, policy aspects,
etc.) by the study team, and there can be multiple feasible and infeasible alternatives. Regarding the optimum, it is an
alternative judged to be the best (even when it is not feasible) from among those considered by the study team, so there
should be only one alternative falling under this item.
180
Summary
2 Request for Preliminary Feasibility Study for Mountainous Railroad Improvement

Project
Classification
Description
Project region
Gangwon, North Gyeongsang Province
Sub region
Jeongseon County, Bonghwa County
Project description &

scale summary
Mountainous railroad improvement project (Taebaek & Yeongdong lines)

Taebaek line (Yemi to Sabuk) : 33.2km
Yeongdong line (Yeongju to Seokpo) : 76.8km
Responsible party
Government (Ministry of Land, Transport and Maritime Affairs)
Total project costs
550.9 billion won
Financing method
Entirely financed by the government

7 years
(3 years for design, 4 years for construction)
Project period
Project purpose
(within 500 letters)
2010
n Flood damage and disruptions to safe service occur every year due to the steep slopes
and curves of the mountainous region and deterioration of facilities like bridges.
n Disaster prevention can reduce restoration costs for flood damage and ensure safe
railroad operation.
Note: All the resulting amounts are calculated to the unit of 1 million won and recorded in the unit of 100 million won to the
second decimal place. For instance, 72.035 billion won is expressed as 720.35.
Summary
3 Summary of Assumptions of Economic Feasibility Analysis for Mountainous

Railroad Improvement project
Classification
Description
Base year
2004
Analysis period
30
Discount rate
6.5
Main
assumptions
(Within 4,000
letters)
n Demand is estimated and benefits are calculated until 2031, the final target year in the KTDB network
and O/D. The annual benefits outside the target years are calculated using the interpolation method,
and benefits and costs after 2031 are supposed to be the same as the values of 2031.
n As most of the line of this project will be tunnels, no cost to restore flood damage is assumed to
occur after the implementation of this project in the calculation of the benefit of flood damage
reduction.
n For benefits from reductions in maintenance and improvement costs, present value conversion is
done to calculate an average mean only in projects where no more spending will be required
when this project is implemented based on data on maintenance and improvement costs inputted
before (the detailed items do not overlap with maintenance costs calculated under the cost
estimation of Chapter IV).
n For benefits from sale of sites to be closed, tracks and streetcar tracks need to be removed, but
their main materials, rails, and steel will be sold along with wooden railroad ties. As a result,
separate removal costs are not considered.
181
Summary
4 Summary of Main Issues of Preliminary Feasibility Study for Mountainous Railroad

Improvement Project
Classification
Description
Main issues (Within 4,000 letters)
(Example omitted)
Summary 5
Summary of Policy Analysis for Mountainous Railroad Improvement Project
Policy Analysis Items
Analysis Description (within 2,000 letters, each)

(Example omitted)
Ripple effects on the regional

economy
(Example omitted)
Additional evaluation items
(Example omitted)
Consistency with policy and willingness to

pursue projects
Consistency with relevant plans and
policy directions
(Example omitted)
Willingness to pursue and preference

for projects
(Example omitted)

(Example omitted)
Environmental nature
(Example omitted)

n
Though the design standard of fourth grade is applied to the Taebaek

line, sections that do not meet the minimum curve radius of 400m
suggested in the Rule on National Railroad Construction for fourth-grade
railroads occur intermittently along the line. Even sections with a 250m
radius span 5.261km, making improvement of driving safety urgent.
When flood damage is prevented, disruption of railroad service is

also prevented due to rockslides, roadbed loss, etc., in turn
preventing road congestion and allowing efficient use of cargo by
ensuring timeliness of cargo shipment.
Improving driving safety
Reducing losses due

to service disruption
182
Summary 6
AHP Analysis Results for Mountainous Railroad Improvement Project
Summary 6-1
Weights by Evaluator and Evaluation Item

Comprehensive
Evaluator 1
Economic feasibility analysis
0.470
0.450
0.500
0.500
0.400
0.500
0.450
Policy analysis
0.317
0.300
0.250
0.350
0.350
0.350
0.300
Consistency with policy and willingness to

pursue projects
0.143
0.077
0.114
0.155
0.250
0.223
0.043
Consistency with high-level plans
0.114
0.058
0.095
0.103
0.219
0.186
0.032
Willingness to pursue projects
0.030
0.019
0.019
0.052
0.031
0.037
0.011
0.063
0.031
0.023
0.059
0.050
0.090
0.129
0.037
0.024
0.006
0.044
0.006
0.068
0.107
Environmental impact analysis
0.027
0.008
0.017
0.015
0.044
0.023
0.021
0.111
0.191
0.114
0.136
0.050
0.037
0.129
Improving driving safety
0.088
0.143
0.085
0.108
0.044
0.027
0.107
Reducing losses due to service disruption
0.022
0.048
0.028
0.027
0.006
0.009
0.021
0.213
0.250
0.250
0.150
0.250
0.150
0.250
0.142
0.167
0.167
0.100
0.167
0.100
0.167
Ripple effects on the regional economy
0.071
0.083
0.083
0.050
0.083
0.050
0.083
Inconsistency ratio
0.007
0.033
0.016
0.033
Evaluation Items
Note: When regional balance is separated, the weights of the level of regional development and ripple effects on the regional
economy under the classification of balanced regional development are set at 2:1.
Summary 6-2
AHP Scores by Evaluator
Evaluator
Decision to Implement
Decision not to Implement
Comprehensive
0.452
0.548
Evaluator 1
0.495
0.505
Evaluator 2
0.466
0.534
Evaluator 3
0.426
0.574
Evaluator 4
0.442
0.558
Evaluator 5
0.454
0.546
Evaluator 6
0.440
0.560
183
Summary 7 Conclusion and Policy Suggestion for Mountainous Railroad Improvement Project
Classification
Description
Conclusion (within 2,000 letters)
(Example omitted)
Policy suggestion (within 2,000 letters)
(Example omitted)
2. Computer Data to Submit to the KDI Preliminary Feasibility

Study Management Team
Computer data to submit to the KDI preliminary feasibility study management
team is as follows:
n
n
n
n
n
184
<Computer data 1> Annual cost-benefit flow (Excel format)

<Computer data 2> Financial feasibility analysis table (Excel format)
<Computer data 3> AHP analysis results (Excel format)
- <Computer data 3-1> Weights by evaluator and evaluation item
- <Computer data 3-2> AHP scores by evaluator
<Computer data 4> Survey results to review the possibility of attracting
private investment and financial feasibility analysis
<Computer data 5> Project region and alternative line map: in an image
file format that can be used on a PC (*.bmp, *.jpg, *.png, etc.)
<Computer data 6> Raw data to estimate total project costs (Excel format)
<Computer data 7> Raw data for transportation analysis
- O/D and network data
- Bank file
<Computer data 8> Meeting presentations
- <Computer data 8-1> Presentations, review opinions, and comparison
tables at progress reporting
tables for interim reporting at PIMAC
tables for interim reporting at MOSF
tables for final reporting at PIMAC
tables for final reporting at MOSF
<Computer data 9> Interim and final reports, and comprehensive
summary table
- <Computer data 9-1> Interim report

- <Computer data 9-2> Final report
- <Computer data 9-3> Comprehensive summary table
185
186
Acronyms
AHP
Analytical Hierarchy Process
BCR or B/C
Benefit-Cost Ratio
BOK
Bank of Korea
BOO
Build-Own-Operate
BOT
Build-Operate-Transfer
BTL
Build-Transfer-Lease
BTO
Build-Transfer-Operate
CAM
Conjoint Analysis Method
CAPM
Capital Asset Pricing Model
CCL
Civilian Control Line
CVM
Contingent Valuation Method
GRDP
Gross Regional Domestic Product
IRR
Internal Rate of Return
ITS
Intelligent Transportation System
KDI
Korea Development Institute
KOTI
Korea Transport Institute
KTDB
Korea Transport Database
KWRC
Korea Water Resources Corporation
LQ
Location Quotient
MEST
Ministry of Education, Science and Technology
MDL
Military Demarcation Line
MLTM
Ministry of Land, Transport, and Maritime Affairs
MOPAS
Ministry of Public Administration and Security
MOSF
Ministry of Strategy and Finance
MRIO
Multi-Regional Input-Output
NPV
Net Present Value
OMB
U.S. Office of Management and Budget
O/D
Origin/Destination
O&M
Operation & Management
P/A
Production-Attraction
PB
Payback Period
PCNACI
Presidential Committee on Northeast Asian Cooperation Initiative
PCRD
Presidential Committee on Regional Development
PFI
Private Finance Initiative
PFS
PI
Profitability Index
PIMAC
Public and Private Infrastructure Investment Management Center
PPP
Public-Private Partnerships
PSC
Public Sector Comparator
RFP
Request for Proposal
RSF
Reassessment Study of Feasibility
TAZ
Traffic Analysis Zone
TPC
Total Project Costs
VAT
Value Added Tax
VfM
Value for Money
WACC
Weighted Average Cost of Capital
WSS
Water Service Statistics
WTP
Willingness to Pay
YTM
Yield to Maturity
Acronyms
187
References
Adler, Hans A, Economic Appraisal of Transport Projects: A Manual with Case Studies, Revised and
Expanded Edition, the World Bank, pp.33-37, 1987.
Bank of Korea, IO Analysis Explanation - Principles and Practice pp121-124, 1987.
____________, 1990 IO table (making report) pp30-31, 1993.
Gollier, Christian., Discounting an Uncertain Future, Journal of Public Economics, Vol.85, pp.149166, 2002.
Jo, Geuntae, Jo, Yonghyeon, and Hyeonsu Kang, Analytical Hierarchy Decision-Making, Donghyeon
Publishing Company, Seoul, Korea, p.4, 2003.
KDI, Study to Revise and Supplement the Sectoral Guidelines for Preliminary Feasibility Studies for
Road and Railroad Projects (fifth edition), 2008.
____, Preliminary Feasibility Study on Projects to Build Three Bridges between Islands and between
Islands and the Mainland in Sinan County, 2003.
____, Study on the Sectoral Guidelines for Preliminary Feasibility Studies for Port Projects, 2000.
____ , Study on the Sectoral Guidelines for Preliminary Feasibility Studies for Airport Projects,
2000.
____, Study on the Methodologies of Preliminary Feasibility Studies for Health and Welfare Projects
____, Study on the Sectoral Guidelines for Preliminary Feasibility Studies for ICT Projects
____, Study to Amend and Supplement General Guidelines for Preliminary Feasibility Studies (fourth
edition), 2004.
____, Direction and Strategy of Regional Development Policy, 2008.
Kim, Donggeun, Cost-Benefit Analysis, Parkyoungsa, Seoul, Korea, 2008.
Ministry of Land, Transport and Maritime Affairs, Long-Term Comprehensive Plan on Water
Resources (Water Vision 2020), 2006.
_______________, Evaluation Guidelines for Transportation Infrastructure by MLTM, 2007.
_______________, Land Business Handbook, 2007.
_______________, Housing Business Handbook, 2008.
_______________, Investment Evaluation Guidelines for Transportation Facilities, 2007.
_______________, Work Guidelines for Regional Development Projects, 2003.
_______________, Work Guidelines for Regional Development Projects, 2006.
188
Ministry of Planning and Budget, Basic Plan for PPP Projects, 2004.
Ministry of Public Administration and Security, Development of Selection Indices of Less Developed
Regions, 2004.
_______________, Guidelines for Projects on Regions for Revitalization, 2004.
_______________, Basic Statistical Survey Guidelines for Designation of Remote Areas for
Development, 2005.
Ministry of Strategy & Finance, Basic Plan for PPP Projects, 2008.
_________________________, 2009 Operating Guidelines for Preliminary Feasibility Studies, 2009.
_________________________, 2006 Operating Guidelines for Preliminary Feasibility Studies, 2006.
OMB, Section 11 of Circular No. A-94.
Park, Hyeon, Gyeongjun Yu, and Seungjun Gwak, A Study on the Value Estimation of Culture and
Science Museum, Korea Development Institute, 2004.
Park Hyeon, et al, Study on Multi-Criteria Analysis for Preliminary Feasibility Studies (2), Korea
Development Institute, 2001.
Saaty and Vargas, The Logic of Priorities: Applications in Business, Energy, Health, and
Transportation, Kluwer Academic Publishers, 1982.
UNIDO, Guidelines for Project Evaluation, 1972.
Weitzman, Martin L., Why the Far Distant Future Should Be Discounted at Its Lowest Possible Rate,
Journal of Environmental Economics and Management, Vol. 36, pp.201-208, 1998.
__________________, Gamma Discounting, American Economic Review, Vol.91, No.1, 2001, pp.
260~271.
References
189
Appendix 1
Survey to Evaluate the Possibility of PPP Project at the
Preliminary Feasibility Study Step
(First-Step Checklist)
This survey is to comprehensively evaluate the possibility of private investment

for Project A at the step of its preliminary feasibility study. Please answer each
question from the perspective of a specialist.
Name: _______________
Organization: _______________
Position: _______________
Contact no.: __________ fax: __________e-mail:
A. How to Answer Survey Questions

1. This questionnaire is intended to preliminarily decide whether to pursue the
optimal alternative selected by the study team as a PPP project.
2. If the optimal alternative falls under each question, mark .
3. Please read the evaluation guidelines, structure, and details, and summary of the
study before answering the questions.
4. Examples of answers
Table
1 Checklist Evaluation (First-Step) at Preliminary Feasibility Study of Project A (example)
Evaluation
item
Feasibility in
terms of law
and policy
Survey question
Check box
Is this a facility subject to private investment under Article 2 of the Act on

Public-Private Partnerships in Infrastructure?
Yes
No
Does the project suit the governments mid- & long-term SOC plans,
policy directions, investment priories, etc.?
Yes
No
B. Evaluation Items
1. First-Step Evaluation Items
Table 2
Step
First-Step Checklist Evaluation Items at Preliminary Feasibility Study of Project A
Evaluation
How to
Evaluation item description
item
score
Remarks
Legal feasibility of the concerned project including whether it

is one of the 45 types of facilities subject to private investment
Feasibility in
under Article 2 of the Act on Public-Private Partnerships in
terms of law
Infrastructure
and policy
Step 1
Can move
Whether it suits mid- & long-term SOC plans, and the
Required
investment policy and priorities of the government or
items
competent authority.
PPP project
implementation method
to the next
step only if
yes is
selected
BTO or BTL according to whether users are willing to pay

higher usage fees and there is profitability, which are part of
the principles of selecting PPP projects
2. PPP Project Implementation Method

Table 3
PPP Project Implementation Method: BTO vs. BTL
Type
1. Core service
2. Usage fee
3. Profitability
X/
Case
Expressway, light
rail transit, port
Environment
treatment facility,
railroad
National
road,
sewer
system
School,
Theme park,
Museum,
military
public rental
science
facility,
housing
museum
welfare
facility
PPP project
implementation
BTO
BTL/BTO
BTL
BTL/BTO
BTL
BTL
method
Appendix
191
3. Study Results Summary

The following is the summary of analysis results of the optimal alternative in terms
of economic feasibility and policy. Please refer to the following to answer the questions.
Optimum alternative of this project:
Summary of the optimum alternative
Economic analysis results of the evaluation draft

- Total project costs (100 million won):
- BCR:
- IRR (%):
- NPV (100 million won):
4. Questions for Checklist Evaluation
The following questions are intended to determine whether this project can
be pursued as a PPP project.
- Please refer to the study results summary above.
- Please mark on Yes or No to the following questions:
192
a. Feasibility in Terms of Law and Policy

Evaluation
item
Survey questions
Check
box ()
Is this a facility subject to private investment specified under Article 2 of

1
Yes
No
Yes
No
the Act on Public-Private Partnerships in Infrastructure?
Feasibility in
terms of law
and policy
Does the project suit the governments mid- & long-term SOC plans,
2
policy directions, investment priories, etc.?
Can be a PPP project if all the answers are yes.
b. PPP Project Implementation Method

Evaluation
Survey questions
item
Check box
()
Can the private party provide infrastructure and service under its
1
PPP project
Yes
No
construction and operation of facilities?
implementation
method
responsibility without government support with regard to the
Can a usage fee be charged on facility use?
Yes
No
When charging a toll/usage fee, can users opt for alternatives?
Yes
No
It is a BTO project if all the answers are yes.
Appendix
193
Appendix 2
Survey to Evaluate the Possibility of PPP Project at the
Preliminary Feasibility Study Step
(Second-Step Checklist)
This survey is to comprehensively evaluate the possibility of private investment

for Project A at the step of its preliminary feasibility study. Please answer each
question from the perspective of a specialist.
Name: _______________
Organization: _______________
Position: _______________
Contact no.: __________ fax: __________e-mail:
A. How to Answer Survey Questions

Please perform qualitative evaluation of each item (projects economic
feasibility, ease of management, creativity and efficiency, risk distribution,
and public nature) in consideration of the results of economic and financial
feasibility analysis, basic data, issues identified, and cases of similar projects.
The competent project manager is to write a report that is as concrete as
possible about the basis for evaluation and comprehensive judgment by the
study team.
194
B. Evaluation Items
1. Second-Step Qualitative Evaluation Items
Table 1
Step
Second-Step Qualitative Evaluation Items at Preliminary Feasibility Study of Project A
Evaluation
item
Economic
feasibility
Ease of
management
Evaluation item description
Remarks
To determine feasibility as a PPP project, the possibility to secure

value for money in total project costs and whether the project is
economically feasible should be checked first.
Whether the concerned service can be independently provided and
the required level of performance can be met.
Write a concrete
Creativity &
Step 2
efficiency
Risk distribution
Whether the private sectors creativity is used to increase efficiency in

SOC construction and operation and competition with other public
report about the

basis for
investment facilities is facilitated to improve service quality.
evaluation and
Whether risks can be appropriately distributed when pursuing with
comprehensive
private capital, and the scale and facilities of the project have any
judgment
restriction in providing service, when seen from the governments

perspective
Whether participation by a private party can generate the ripple
Publicness
effects of improvement in technology, management skill, etc. in the

public sector
Appendix
195
Appendix 3
Guidelines for Writing an Analysis Table of Financial
Feasibility
Table 1
Detailed Table of Total Project Costs/Investment Costs
Classification
Total
First year
Second year
Remarks
Research cost
Design cost
Construction cost
Lot purchase cost
Incidental cost
Operating facility cost
Various taxes & charges
Operating reserve
Total project costs
Interest during construction
Contingency reserves for
price fluctuation
Contingencies
Total investment costs
Table 2
Summary of Financial Feasibility Analysis (e.g. Road Project)

Usage fees
Government
financial support
ratio
1.5 times the toll of the Korea

Expressway Corporation
2 times the toll of the Korea

Expressway Corporation
30% of construction costs
PI/FNPV/IRR
PI/FNPV/IRR
50% of construction costs
PI/FNPV/IRR
PI/FNPV/IRR
Financial support ratio
Financial support ratio
FNPV = 0
Note: Different rates of government financial support and usage fees are to be applied to different areas.
196
Table 3
Analysis Table of Profitability

Income
Cost
Total of
Total
Opera-
Year
Financial
Other
ting
support
revenues
revenue
Oper-
Cor-
ating
porate
costs
tax *
Total
present
Construction
Before
After
discount
discount
costs
Before
After
discount
discount
values
1st year
2008
of
construction
2009
2nd
2010
3rd
2011
4th
2012
5th
2013
6th
2014
7th
1st year
2015
operation
2016
2nd
2017
3rd
2018
4th
2019
5th
2020
6th
2041
27th
2042
28th
2043
29th
2044
30th
Total
Note: * Different from the corporate tax of the income statement.
Appendix
197
Different projects use different items for operating revenue and operating cost
(including cost of sales) as follows:
Table 4
Operating Revenue and Operating Cost (Including Cost of Sales)
Sector
Operating Revenue Items
Operating Cost Item (Cost of Sales)*
Road Project
Toll Income
Road Maintenance Cost
Railroad Project
Fare Income
Operating Cost
Usage fee of port facilities or of loading and
Operating Cost of Loading and Unloading
unloading service
Equipment or Facility Maintenance Cost
Lease Income
Facility Maintenance Cost, etc.
Port Project
Lease Project
Note: Whether there are other revenues like those of supplementary projects, operating costs to generate them should be added.
Table 5
Estimated Income Statement

Operating period
2015
2016
2017
2018
2019
2041
2042
2043
2044
1st
2nd
3rd
4th
5th
27th
28th
29th
30th
Sales (A=B+C)
Operating revenue (B)
Other revenues (C)
Cost of sales (D=E+F)
Amortization cost of operation rights (E)
Maintenance costs (F)
Gross profit (H=A-D)
Selling and general administrative costs (I)
Operating profit (J=H-I)
Interest income (K)
Paid interest (L)
Net profit before corporate tax (M=J+K-L)
Corporate taxes (N)
Current-term net profit (O=M-N)
198
Total
Table 6
Estimated Statement of Financial Position

Construction period
Operating period
2008
2009
2013
2014
1st
2nd
6th
7th
2015 2016
1st
2nd
2043
2044
29th
30th
Assets
Current assets
Cash and cash equivalents
Non-current assets
Construction-in-progress
Management and operation rights
Liabilities
Current liabilities
Short-term borrowings
Corporate tax payable
Current portion of long-term debts
Long-term liabilities
Long-term borrowings
Shareholders equity
Capital stock
Retained earnings/ accumulated deficits
(Current-term net profit)
Liabilities and shareholders equity
Appendix
199
Table 7
Estimated Statement of Cash Flows

Construction period
2008 2009
1st
2nd
Operating period
2013 2014 2015 2016

6th
7th
1st
Cash flows from operating activities

Incoming cash flows
Operating revenue
Other revenue
Interest income
Outgoing cash flows
Cost of sales (maintenance cost, etc.)
Selling and general administrative costs
Paid interest
Corporate taxes, etc.
Cash flows from investing activities
Incoming cash flows
Outgoing cash flows
Investment costs
(interest during construction included)
Purchase of tangible assets
Cash flows from financing activities
Incoming cash flows
Increase in capital stock
Increase in borrowings
Increase in government subsidies
Outgoing cash flows
Repayment of borrowings
Payment of dividends
Increase in cash
Cash at the beginning of the term
Cash at the end of the term
200
2nd
2043 2044
29th
30th
The following are guidelines to fill out the above tables. To draft an analysis
table of profitability and financial statements, the sheets of financial analysis
provided by the KDI are to be used.
A. Overall Order
The sheets of financial analysis include the analysis table of profitability,
statement of cash flows, income statement, and statement of financial
position. The analysis table of profitability is the basis, and the other three
sheets are to be automatically filled out.
The values of the analysis table of profitability and the inflation rate are used
to come up with values for the income, cost, government subsidy items in the
statement of cash flows and income statement.
Interest income and interest cost for accumulated borrowings are calculated
from the statement of cash flows.
Corporate tax from which a tax shield on the interest income and interest
cost computed from the income statement are removed is a current price. It
should be discounted by the inflation rate to convert it into a constant price.
This is to be used as corporate tax in the analysis table of profitability.
All the items of the analysis table of profitability are filled out as above, and
the FNPV is to be calculated at the time of analysis to come up with the PI,
NPV (FNPV), IRR (FIRR), payback period (PB), and discounted PB.
The statement of financial position is not directly related to the analysis table
of profitability. It is written to come up with operation rights by
accumulating construction costs and interest during construction, and divide
it by the free use (operating) period to calculate depreciation cost.
The items of the analysis sheets are used according to the type and
characteristics of the concerned project.
The unit of each analysis table is 100 million won.
B. How to fill out the Analysis Table of Profitability

For NPV analysis, income and cost items are filled out with values. The
fields to be filled in by the user (yellow cells) are the selling and general
administrative cost rate, government subsidy rate, income items (operating
revenue and other revenues), and cost items (construction costs, maintenance
costs, and selling and general administrative costs).
Appendix
201
The 2008 Basic Plan for PPP Projects is referred to in order to determine
the financing ratio of equity capital by the investor as no less than 25% of
total PPP costs.
First calculate the FNPV for a case where no government subsidy is paid
(government subsidy rate of 0%) and for a case where a certain level of
government subsidy is provided (e.g. 30% for a road project). Then, by trial
and error, calculate a rate of government subsidy that makes the FNPV zero.
This analysis sheet is composed in a way to automatically calculate the
government subsidy of the corresponding year of the construction period
according to the order of fund inputs (equity capitalgovernment
subsidyborrowings) once the subsidy rate is set for all construction costs.
The income items consist of operating revenue and other revenues generated
from ancillary projects or supplementary projects. Users are to directly enter
values they separately calculated into the corresponding item fields.
e.g. 1) Road Project
- Enter toll income into the operating revenue field. Multiply the traffic
volume of each transportation means estimated for the road section of
each year by the length of the section and then again by the toll per km.
- Reflect the differences in the toll rates and traffic volume between the
Korea Expressway Corporation and a private party as the responsible
party.
- For supplementary income, lease income from advertising boards and
convenience facilities can be considered.
e.g. 2) Railroad Project
- Deduct the number of free passengers from the net number of passengers
and multiply the resulting number by the toll (average toll of the section,
etc.) to come up with operating revenue.
The cost items consist of construction costs and operating costs (maintenance
costs + selling and general administrative costs + replacement costs of
tangible assets), and values from economic feasibility analysis are used.
-
202
Construction Costs (sum of research costs, design costs, construction

costs, lot purchase costs, incidental costs, operating facility costs, taxes
and charges, and operating reserve from among the details of total
investment costs) are distributed over the construction period according
to the rate of completion used in economic feasibility analysis.
Enter a value from economic feasibility analysis for the maintenance
costs. When computing operating costs by considering selling and
general administrative costs, replacement costs of tangible assets, etc. in

addition to maintenance costs in economic feasibility analysis, do not
distinguish among cost items and integrate them into operating costs as
one item.
When considering other revenues like that of supplementary projects for
operating revenue, corresponding operating costs must be factored in.
Additional costs and reinvestment costs should be reflected according to
the characteristics of other projects.
When the concerned project is exempted from VAT under the ValueAdded Tax Act and Restriction of Special Taxation Act, 10% VAT must
be included in calculation to use costs calculated from economic
feasibility analysis. Nevertheless, if a zero tax rate is applied as in urban
railroad construction projects, such should be considered.
Deduct a tax shield on interest income and cost from the corporate tax
computed in the income statement and apply the inflation rate to the resulting
corporate tax.
Come up with a PI, FNPV, and FIRR according to ~. For a PB and a
discounted PB, the user is to find years when the accumulated profit and
loss becomes zero and the net accumulated profit and loss becomes zero
by looking at the accumulated profit and loss and net accumulated profit
and loss rows.
C. How to fill out the Income Statement

The sales, maintenance costs under the costs of sales, and selling and general
administrative costs in the income statement are computed by increasing the
corresponding items of the analysis table of profitability by the inflation rate.
Calculate amortization cost of management and operation rights and
depreciation cost based on the acquisition costs of the target assets using the
straight-line method.
The depreciation base is computed based on the statement of financial
position.
The depreciation period is 30 years for transportation projects like roads,
railroads, ports, and airports; 50 years for water resource projects like dams;
and 30 years for formation projects of cultural and tourism complexes.
The interest income and paid interest (interest cost) are the same as the
corresponding values in the statement of cash flows. The base of interest
income is the amount calculated by deducting repaid borrowings from cash
Appendix
203
flows from operating activities + cash flows from investing activities + incoming
cash flows from financing activities - dividend payment under outgoing cash
flows from financing activities.
Paid interest is the same as the paid interest amount from the statement of
cash flows.
For corporate tax, apply 13% (14.3% when residence tax is included) for a
taxable amount of no more than 100 million won and apply 25% (27.5%) for
an amount exceeding 100 million won. For deficits carried forward, apply
the carryover of deficits for five years.
The net profit before corporate tax (ordinary profit) excluding the paid interest
and interest income of the analysis sheet is to calculate corporate tax to be used
in the analysis table of profitability by adding the paid interest to the net profit
before corporate tax and deducting the interest income. Apply a corporate tax
rate to this value to come up with a corporate tax for profitability analysis.
D. How to fill out the Statement of Financial Position

Cash and cash equivalents are the same as the cash amount at the end of the
term in the statement of cash flows.
Construction in progress is an amount calculated by deducting government
subsidies from the sum of investment costs and accumulated interest during
construction. Once the construction is completed, it is replaced with the
operation rights account.
- Construction in progress = Investment costs + accumulated interest
during construction - government subsidies
- The construction costs and government subsidies of each year in the
analysis table of profitability are increased by the inflation rate.
Calculation is made in the statement of cash flows.
- Accumulated interest during construction is based on the outgoing cash
flows under the cash flows from investing activities in the statement of cash
flows (balance at the end of the previous year and that of the current year).
- The value of assets that are replaced to the operation rights account at
the point of construction completion becomes the acquisition costs of
the assets, and this becomes the amount targeted for depreciation.
The acquisition cost of operation rights is what replaces when the
construction is completed. Operation rights are amortized during the free-ofcharge operating period with the direct (write-off) method (that deducts
204
depreciation cost from the acquisition cost of operation rights).

- In the analysis sheet, it is depreciated over 30 years by the straight-line
method. The salvage value is assumed to be zero.
- The depreciation period is 30 years for roads; 30 years for railroads, ports, and
airports, 50 years for dams; and 30 years for cultural and tourism complexes.
Borrowings are the financing amount of debt capital after deducting equity
capital and government subsidies from total construction costs according to
the order of fund inputs. They are accumulated from cash flows from
financing activities in the statement of cash flows.
Capital stock is accumulated from increases in capital stock among cash
flows from financing activities in the statement of cash flows. Namely, the
capital stock amount of the corresponding year is calculated by adding the
increased capital stock amount of the corresponding year to the ledger
amount at the end of the previous year.
Retained earnings/accumulated deficits are accumulated current-term net
profits/losses from the income statement. Namely, the ledger amount of retained
earnings/accumulated deficits of the corresponding year is the sum of the ledger
amount at the end of the previous year and the current-term net profits/losses of
the corresponding year.
The current-term net profits/losses are the amounts from the income
statement.
Check to ascertain whether the asset items on the debit side are the same as
the liabilities and shareholders equity items on the credit side in the statement
of financial position.
E. How to fill out the Statement of Cash Flows

The operating revenue and other revenues of the analysis table of
profitability are increased by the inflation rate.
Interest income is interest earned on retained earnings and is calculated by
applying an interest rate (e.g. time deposit interest rate of 3% in 2003).
Maintenance costs from among the operating costs in the analysis table of
profitability are increased by the inflation rate.
Selling and general administrative costs from among the operating costs in
the analysis table of profitability are increased by the inflation rate.
Purchase costs of tangible assets from among the operating costs in the
Appendix
205
206
analysis table of profitability are increased by the inflation rate.

Paid interest is interest paid on borrowings. Calculation is based on the
accumulated borrowings at the beginning of the year and an annual interest
rate of 6% is applied in consideration of the average interest rate on debt in
PPP projects as of 2004 (annual 7 to 8%) and YTM of the Korea Expressway
Corporations ten-year bonds (annual 5.2%).
The corporate tax, etc. in the statement of cash flows are calculated based on
the assumption that the corporate tax expense of the income statement is paid
the following year.
Investment costs are construction costs from the analysis table of
profitability increased by the inflation rate.
Capital stock and government subsidies are indicated in current prices by
increasing by the inflation rate the values derived according to the order of
financing from the analysis table of profitability. The assumption is that
investment costs are replenished in the order of equity capital, government
subsidies, and borrowings.
When the sum of cash flows from operating activities and cash flows from
investing activities is negative (-), the amount of borrowings increases. When
the sum is positive (+), repayment of borrowings increases. The assumption
is that the cash flows from operating and investing activities are all used to
repay borrowings until all the accumulated borrowings are repaid.
Increases in cash are the sum of cash flows from operating, investing, and
financing activities. Add cash at the beginning of the term to this to derive
cash at the end of the term.
Appendix
207

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General Guidelines for Preliminary

Public and Private Infrastructure

< Research Team >

Sanghoon Ahn, Fellow (Project Manager)

The research team of the 1999 General Guidelines for Preliminary

2. Water Resources Projects

2. Outline of the AHP Method

Table 1- 1 Preliminary Feasibility Studies by Project Type

Contents of Analysis of Water Supply and Demand

Categorization of Policy Analysis Items

Designation Standards for Less Developed Regions

Basic System of Preliminary Feasibility Studies

Flow to Calculate Total Project Costs for Road Construction

Basic AHP Structure of Preliminary Feasibility Studies

General Guidelines for

Public and Private Infrastructure

. Background and Purpose of Revising the General

1. Role of the General Guidelines

2. Background and Purpose of Revising the General Guidelines

Preliminary Feasibility Studies by Project Type

Looking at the numbers of preliminary feasibility studies by project type, the

General Guidelines for Preliminary Feasibility Studies (fifth edition)

. Guiding Directions and Major Contents

1. Composition and Directions of the General Guidelines

parts: Part 1: general guidelines for preliminary feasibility studies serves as a

2. Major Contents and Methodologies

A. Analysis of Economic Feasibility

General Guidelines for Preliminary Feasibility Studies (fifth edition)

in the evaluation of public investment projects, these handbooks were reviewed to

B. Study on Ways to Attract Private Investment

General Guidelines for Preliminary Feasibility Studies (fifth edition)

when conducting a preliminary feasibility study. To implement this regulation, there

C. Supplementation of the Guidelines for Financial Feasibility Analysis

D. Policy Analysis and Comprehensive Evaluation

E. Prospects for the Population and GRP in each Administrative District

General Guidelines for Preliminary Feasibility Studies (fifth edition)

General Guidelines for

General Guidelines for Preliminary Feasibility Studies (fifth edition)

As in the General Guidelines (fourth edition), the basic methodology to

General Guidelines for Preliminary Feasibility Studies

Basic System of Preliminary Feasibility Studies

Project Overview and Basic Data Analysis

l Consistency with Relevant

General Guidelines for Preliminary Feasibility Studies (fifth edition)

A Preliminary Feasibility Study is based on a project plan submitted to the

1. Background and Purpose of a Project

2. Project Selection Process and Implementation Agency

General Guidelines for Preliminary Feasibility Studies (fifth edition)

pursued by the central government or local government organizations. This is

Project Overview and Basic Data Analysis

4. Guidelines for Writing Project Plans for Candidate Projects

General Guidelines for Preliminary Feasibility Studies (fifth edition)

. Basic Data Analysis

The first thing to do when pursuing a public investment project or evaluating

Project Overview and Basic Data Analysis

1. Analysis of the Natural and Living Environments

2. Analysis of the Social and Economic Environments

General Guidelines for Preliminary Feasibility Studies (fifth edition)

lower-level local government organizations such as those of cities, counties, and gu