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Economic Analysis

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Welcoming the Unshackling of the Preliminary Feasibility Test

T he Korean government recently announced a series of new revisions to the 20 year old preliminary feasibility test (PFT), which has significantly put a strain on investments in infrastructure. PFT was adopted in 1999 under the Kim Dae-jung administration to preemptively prevent inefficient and reckless investments by the central and local governments. Indeed, many governments had a deep rooted tendency to initiate as many investment projects as possible just for political reasons to win over the minds of the people without careful calculation about their feasibility test, eventually fatally damaging their own fiscal integrity. Therefore, PFT was designed to enumerate economic feasibility, policy goals, and contribution to regional balance for each individual project, with flexible weights given (approximately one third each). PFT is mandatorily required for projects over KRW 50 billion when the government subscribes KRW 30 billion or more.

Although PTF has significantly contributed in improving fiscal soundness by rejecting about 35 percent of a total of 850 projects for the last 20 years, the government now believes that PTF has to be revised to efficiently adapt to the changing policy environment and social demands. More specifically, the government feels that the current system of evaluation, namely the benefit–cost (B/C) analysis and the analytical hierarch process (AHP) have been too stringent to be practical. Also, the government thinks that numerous highly demanded welfare projects such as educational or medical services under the scrutiny of PFT seems quite misplaced. In addition, the PFT process, which takes over 21 months on average, takes too long for it to be an effective tool to serve the purpose.

There are two main points of the PFT revision: for local projects, more weight is given to the balanced growth category to stimulate local investments, while the weight on the balanced growth category is stripped for the metropolitan area projects. The rationale for this action is quite clear: to give priority to local infrastructure investments over already-saturated metropolitan investments. The other important revision is to diversify the evaluating institution for PFTs. So far, the Korea Development Institute (KDI) was the sole entity to conduct the B/C and AHP tests, but the new system requires various professional institutions to perform AHP tests while KDI conducts the B/C test as before.

When news of the PFT revision broke out in the media in early April, there have been some political outcry, criticizing the potential risk of irresponsible populism by the ruling party, especially in respect of the coming general election in April 2020. It may be true that the ruling party is tempted to reinvigorate economy by launching a number of construction projects, especially local projects, by relaxing PFT. Opposition party leaders are determined to block the PFT revision by amending the national budget act.

Such political debates aside, it is true that many rural regions in Korea have long suffered under-development, deprivation and backwardness. The roads and towns are shabby, bridges and public buildings are rugged. Schools, government offices, hospitals, elderly centers, kindergartens and churches in rural areas are old, antiquated and outdated. Something has to be done immediately to save the rural areas, to revitalize the local economy and to modernize regional towns.

In that respect, PFT is expected to work suitably well for this purpose. New bridges, railroads, schools, hospitals, elderly centers, townhouses, and office buildings have to be remodeled to accommodate not just the residents but for a better Korea overall. City dwellers should be able to expect improved living conditions in their old hometowns. The younger generation should be able to dream about new careers and opportunities in the quiet and peaceful countryside. Just like Switzerland, Germany or the UK, rural areas in Korea should not be much different than the flourishing metro cities like Seoul or Busan in terms of convenience and safety. It may be the case that the B/C analysis of many of these regional development projects reveal to be less than one, turning down investment. However, the analysis is only based upon a nearsighted view, not giving consideration to the full long-term effect of the migration of younger populations and brighter spirits. Gradually, the rural areas will absorb the people and resources of the already overpopulated big cities. Migration of people will make metro cities less populated and more habitable, while making regional economies more active and revitalized.

Advocating the revision of PFT, however, should not be esteemed to welcome speculative land investment in the region as it has been the case in the past. The government should be extra careful to prevent advanced investment in land or structures of the regional areas. Also, the government should provide a long-term vision and plan for all regional development programs and be careful in executing fair and equitable regional development programs. The government should not treat one region differently by favoring it over other regions. If these provisions are fairly met, the revision of PFT will work to stimulate local infrastructure investments and contribute to making the laggard regions better, with balanced growth.

By Professor Se Don Shin
Dean, Sookmyung Women’s University

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA

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