English translation of the 2025 Annual Budget Review authored by Junghwan Kim, Senior Research Analyst, Special Committee on Budget and Accounts (na32@assembly.go.kr). The translation is faithful to the original Korean manuscript and organized for readability.
Original Version — pp.132–161

1. Introduction

1.A. Overview of Build-Transfer-Lease (BTL) Projects

Public–private partnership (PPP) projects under the Act on Public-Private Partnerships in Infrastructure mobilize private finance and expertise for infrastructure traditionally financed and managed by the public sector, such as roads, ports, railways, schools, and environmental facilities. Two primary models are recognized in Korea. Revenue-based PPPs (e.g., BTO, BOT, BOO) allow private investors to recover costs primarily through user fees, while lease-type PPPs (BTL) involve the transfer of ownership to the government upon completion, with subsequent recovery through lease payments covering both capital and operating expenditures.

Table 1. Revenue-Based vs Lease-Based PPP Models

Source: Ministry of Economy and Finance (MOEF)

1.B. 2025 Ceiling Allocation for BTL Projects

Articles 2(2) and 4 of the Act on Public-Private Partnerships in Infrastructure recognize BTL as a statutory PPP type. Article 7-2 requires the government to submit total, facility-specific, and contingency ceilings for approval by the National Assembly at least thirty days before the start of each fiscal year.

In 2025, the government proposed a total BTL ceiling of KRW 1.6431 trillion across eleven projects, of which six are national and five are subsidized local initiatives.

Table 2. BTL Ceiling by Facility, FY2025
Unit: KRW 100 million

Source: Ministry of Economy and Finance, 2025 BTL Ceiling Proposal.

2. Analytical Assessment

2.A. Inconsistencies in Cost Application Rates

A critical methodological weakness in current BTL evaluation lies in the inconsistent application of bid rates and cost application rates between the Public Sector Comparator (PSC) and the Private Finance Initiative (PFI) models. Under the 2018 KDI Guidelines for Feasibility and Eligibility Analysis of Private Investment Projects, PSC costs are derived from standardized bid ratios based on historical public procurement data. By contrast, the guidelines describe the PFI’s “application rate” only vaguely, stating that “the average application rate of recently concluded private investment projects may be used.”

The lack of a clear and uniform standard allows project sponsors and evaluators to adopt varying cost assumptions by facility type, often without robust justification. This methodological flexibility can significantly influence project outcomes by creating an appearance of cost efficiency for the PFI alternative.

For instance, in the Daegu Sewer Pipeline Improvement Project, which was privately proposed and later included in the 2025 BTL ceiling, the PSC construction cost was derived using a bid rate of 93.57 percent, while the PFI used a markedly lower application rate of 83.6 percent. This difference reduced the estimated construction cost of the PFI alternative by approximately KRW 46.1 billion, substantially improving its assessed VfM outcome.

Table 3. Comparative Cost Application in Daegu Sewer Pipeline Project
Unit: KRW million

Note: PSC bid ratios follow 2018 KDI standards; PFI rates are derived from recent private contracts.
Source: Ministry of Environment, Daegu Sewer Pipeline VfM Analysis.

The uniform application of public-sector bid rates to PSC estimates while allowing flexible, facility-specific application rates for PFI projects undermines the comparability and objectivity of VfM results. Moreover, the assumption that large cost reductions can automatically be achieved by transferring procurement responsibility from the public to the private sector raises questions about the professionalism of public project management. If such assumptions are institutionalized, systematic reforms in cost estimation and data transparency become necessary to maintain analytical integrity.

The Ministry of Economy and Finance has stated that its current bid-rate methodology is grounded in empirical studies by the Public Procurement Service covering turnkey and alternative design projects between 2001 and 2016, and that an updated analysis is underway. Nonetheless, the coexistence of rigid PSC standards and discretionary PFI adjustments continues to pose a structural bias favoring private investment models.

2.B. Inclusion of Ineligible Projects in Ceiling Proposals

A further issue concerns the inclusion of projects that failed VfM eligibility tests in the 2025 BTL ceiling proposal. Despite unfavorable analysis results by KDI, several projects—particularly those under the Ministry of National Defense—were incorporated into the ceiling submission to the National Assembly.

Table 4. Military BTL Projects in 2025 Ceiling Proposal
Unit: KRW 100 million

Source: Ministry of Economy and Finance, 2025 BTL Ceiling Proposal.

According to KDI’s VfM assessments, the present value of the total cost for the Gyeryong Officer Housing project was KRW 98.6 billion under the PSC scenario but KRW 99.4 billion under the PFI, indicating that the private model was less efficient. Similarly, for the Jangseong Education Facility (Phase 2), the PSC cost was KRW 94.8 billion, compared to KRW 95.6 billion under the PFI. Only the Jeungpyeong Barracks showed a marginal advantage for the private alternative.

Table 5. VfM Comparison by Facility
Unit: KRW million

Source: Korea Development Institute (KDI), Feasibility Analyses of Defense BTL Projects.

Including projects that fail to demonstrate positive VfM within the official ceiling proposal weakens fiscal discipline and distorts the policy intent of ex-ante evaluation. To ensure accountability, all BTL projects should undergo a transparent confirmation process verifying VfM eligibility prior to their inclusion in the ceiling submitted for legislative approval.

2.C. Overstatement of Ceilings and Divergent Cost Bases

The ceiling determination process also reveals inconsistencies in the cost bases used by ministries. Several BTL projects—most notably the Daegu, Samcheok, and Cheongdo sewer pipeline initiatives—were budgeted using PSC-based ceilings, even though their VfM analyses adopted PFI-based estimates demonstrating lower expected costs.

Table 6. 2025 BTL Ceiling for Sewer Infrastructure Projects
Unit: KRW 100 million

Source: Ministry of Environment, 2025 BTL Ceiling Proposal.

According to the detailed VfM analysis for Daegu, the total project cost under the PSC was KRW 578.9 billion, whereas the corresponding PFI estimate was KRW 539.7 billion—a difference of KRW 39.2 billion in favor of private financing. Despite this, the government ceiling request reflected the higher PSC figure, effectively inflating the reported fiscal requirement.

Table 7. Comparative Cost Estimates for Daegu Sewer Project
Unit: KRW million

Source: Ministry of Environment, Daegu BTL VfM Report.

Although the Ministry of Economy and Finance explained that PSC-based ceilings provide a safeguard against cost escalation, this rationale is insufficient. Article 7-2 of the PPP Act already authorizes contingency ceilings of up to 20 percent, which can be used to address post-contract adjustments. Using inflated PSC costs in baseline ceilings, rather than applying separate contingency provisions, undermines transparency and Parliament’s ability to assess real fiscal exposure.

In practice, ministries differ in their approaches: the Ministry of Environment reports using PFI-based ceilings for privately initiated projects, while the Ministry of Economy and Finance maintains PSC-based ceilings for nationally proposed ones. This inconsistency reinforces the perception of arbitrariness in cost determination and suggests the need for unified methodological standards across government agencies.

In summary, the evaluation and budgeting of BTL projects reveal structural asymmetries that systematically favor private financing models. Inconsistent cost application rates, the inclusion of ineligible projects, and inflated ceiling determinations all contribute to analytical bias and weaken fiscal oversight. A more coherent institutional framework—anchored in transparent cost methodology, standardized discounting, and pre-approval eligibility verification—is essential to restore confidence in Korea’s PPP evaluation process.

2.C. Post-Implementation Management of BTL Projects

This section examines downstream fiscal management issues that arise after BTL assets enter operation. Three areas merit attention: (i) the budgetary classification of government payments, (ii) compliance with statutory subsidy ratios in local co-financed BTLs, and (iii) the integrity of lease-payment execution when contracts are extended.

2.C.1 Government Payment Accounting

Reallocation of Sewer-BTL Lease Payments Across Budget Accounts

In the 2025 budget proposal, the Ministry of Environment (MOE) reclassified BTL sewer lease payments from the Environment Improvement Special Account to the Balanced Regional Development Special Account (Regional Support Division), despite annual obligations exceeding KRW 300 billion and without a clear analytical justification. The program in question—BTL Sewer Pipeline Improvement Lease Payments—supports efficiency-oriented rehabilitation of municipal sewer networks using private capital alongside public oversight.

Table 8. Account Reallocation for Sewer-BTL Lease Payments
Unit: KRW million

Source: Ministry of Environment (budget documents).

Two concerns arise. First, BTL lease payments are follow-on contractual obligations stemming from earlier investment decisions; reassigning them to a regional development account does not, in itself, expand regional support but merely shifts the locus of fiscal responsibility. Second, unlike the Environment Improvement account—funded by earmarked revenues (e.g., environmental charges)—the regional account lacks dedicated revenue streams. Moving sizeable, recurrent obligations to a generalist account weakens the link between funding and purpose, complicates oversight, and heightens the risk of opaque expansion of government payment commitments. On balance, the reallocation merits reconsideration, with a view to restoring program-purpose alignment and revenue adequacy.

2.C.2 Compliance with Statutory Subsidy Ratios

The MOE’s BTL sewer lease-payment program is implemented as a local subsidy under the Framework Act on the Management of Subsidies and its Enforcement Decree (Annex 1). Annual budgets are prepared using standard matching ratios applicable to each facility at the time of agreement. In practice, however, additional central transfers can unintentionally raise the effective national share beyond the legal ceiling.

Consider the Anseong (2009) BTL. The standard ratio (national:local) is 70:30. For 2025, planned support amounts to KRW 5,285 million (rent) and KRW 676 million (O&M), with a reported budget split of 68.8:31.2.

Table 9. Anseong BTL—Budget Split and Effective Subsidy
Unit: KRW million

Source: MOE, 2023 budget report (Anseong BTL).

Local reports indicate that part of the local matching share was financed by a central water-source management fund (KRW 788 million). Under Enforcement Decree Article 4, the standard national subsidy ratio is defined against the total project cost, inclusive of all central-government transfers. When this additional transfer from the fund is taken into account, the effective national share increases to 84.9%. To uphold the integrity of the matching framework, MOE should (i) consolidate all central transfers when computing the national share, (ii) disallow national funds from substituting the local match, and (iii) strengthen ex post ratio audits at the project level.

2.C.3 Execution Integrity When Contracts Are Extended

Contract extensions can introduce execution risks if lease payments are reprofiled or reclassified outside the original ceiling. The National Defense Broadband Integrated Network (BTL) illustrates the issue.

The network reached completion on April 7, 2011; lease payments—based on confirmed private investment of KRW 256.1 billion—were scheduled in equal installments over 2011–2020. In 2019, the Private Investment Review Committee approved a three-year extension to bridge to a successor project, preserving the existing operator. Lease outlays fell from KRW 24,836 million (2019) to KRW 11,054 million (2020) as payments were rescheduled.

Table 10. Reprofiling of Defense Broadband BTL Payments
Unit: KRW million; VAT excluded unless noted

Source: Ministry of National Defense, 2020–2024 BTL lease status.

In July 2023, a further nine-month extension was approved to avert service disruption. While this reprofiling is understandable operationally, part of the unspent 2023 lease appropriation (≈ KRW 1.62 billion) was reclassified as operating expenses and paid to the operator to address aging equipment. Because ownership of BTL assets rests with the government, maintenance and renewal should be planned and financed under appropriate budget lines (e.g., O&M or capital maintenance), not via ex post reclassification of lease payments. The reclassification risks violating the intended purpose of the appropriation, underscoring the need for clear rules that prohibit the diversion of lease appropriations.