2007 Study Report

SUMMARY OF STUDY ON

STANDARD FINANCIAL MODEL

FOR PUBLIC-PRIVATE

PARTNERSHIP PROJECTS

December 2007

Table of Contents

CHAPTER Ⅰ . OVERVIEW OF STUDY ················ ······················· ······················· 1

SECTION 1. Scope of Study ··························································································· 1

CHAPTER Ⅱ . DEFINITIONS & ASSUMPTIONS ·········· ······ ······ ······· ······ ······ ······ 3

SECTION 1. Definitions & Methods of Financial Feasibility Analysis ······························ 3

1. Definition of Terms ······························································································ 3

2. Profitability Measurement Method ······································································ 12

3. Nominal Value & Real Value ············································································ 15

Section 2. Key Assumptions in PPP Financial Model ····················································· 16

1. Beginning-of-Period Prices vs. End-of-Period Prices ············································ 16

2. Addition of Interest Income ················································································ 17

3. Nature of Incidental Financing Cost ···································································· 17

4. Accounting for Acquisition and Replacement of Operating Equipment ·················· 18

5. Calculation of Quarterly Interest Expenses ·························································· 18

6. Deduction of Interest Payments in Excess of Appropriate Level of Interest Rate ····· 19

7. Zero-rate VAT on Contributed-Acceptance Assets ·············································· 19

CHAPTER Ⅲ . STANDARD FINANCIAL MODEL CONSTRUCTION ······ ·· · · ·· · · 20

SECTION 1. Structure of Financial Model ····································································· 20

1. General Structure ····························································································· 20

2. Structure of Total Project Cost & Total Investment Cost ······································· 21

SECTION 2. Financial Model Sheets ············································································· 23

1. Assumptions Sheet ····························································································· 25

2. Sensitivity & Results Sheet ················································································· 27

3. Financing Conditions Sheet ················································································ 31

4. Index Sheet ········································································································ 35

5. Total Project Cost Summary Sheet ····································································· 37

6. Project Cost Investment Schedule Sheet ······························································· 38

7. Start-up Cost Sheet ···························································································· 39

8. Total Project Cost Sheet ······················································································ 39

9. Total Investment Cost Sheet ················································································ 40

10. Financing Sheet ································································································ 41

11. Operating Revenue Summary Sheet ··································································· 43

12. Operation Cost Sheet ························································································ 43

13. Real Cash Flow Statement (CF) Sheet ································································ 45

14. Cash Flow Statement (CF) Sheet ······································································· 46

15. IS, BS, RE, BS Supplementary Schedule Sheets ················································· 47

16. Project Cost Summary Sheet ············································································· 48

17. Survey Cost Sheet ···························································································· 49

18. Design cost ······································································································ 51

19. Construction Cost Sheet ···················································································· 52

20. Compensation Cost Sheet ················································································· 57

21. Incidental Cost Sheet ························································································ 58

22. Operating Equipment Cost Sheet ······································································· 64

23. Taxes & Public Charges Sheet ··········································································· 68

24. Operating Reserves Sheet ·················································································· 70

25. Operating Revenue Sheet ·················································································· 77

26. Traffic Volume Sheet ······················································································· 81

27. Personnel & General Costs Sheet ······································································· 83

28. Maintenance & Management Cost Sheet ···························································· 87

29. Insurance Premiums Sheet ················································································ 96

30. Tangible Assets Replacement Cost Sheet ··························································· 97

31. Forms ············································································································ 101

CHAPTER Ⅳ . KEY PROJECT FEASIBILITY INDICATORS ······ ··· ··· ··· ··· ··· ··· ·· 104

SECTION 1. Analysis of Project Feasibility ································································· 104

1. Key Indicators for Analysis of Project Feasibility ··············································· 104

2. Sensitivity & Scenario Analysis ········································································ 104

SECTION 2. Project Indicators ···················································································· 105

1. Net Present Value (NPV) ·················································································· 105

2. Real Return (Real IRR ) vs. Nominal Return ······················································ 105

SECTION 3. Indicators for Shareholders ······································································ 106

1. Return On Equity (ROE) ··················································································· 106

SECTION 4. Indicators for Lenders ············································································· 106

1. Debt Service Coverage Ratio (DSCR) ································································ 106

2. Short-term Borrowings (Temporary Shortage of Funds) ······································ 107

SECTION 5. Key Sensitivity Analysis Method ····························································· 108

1. Elements and Impacts of Key Sensitivity Analysis ·············································· 108

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CHAPTER I. OVERVIEW OF STUDY

SECTION 1. Scope of Study

This study proposes a standard financial model for road construction

public-private partnership. A standard financial model comprises the following:

A. Standard Forms

These are standardized forms for total project cost, financing plan,

government subsidy, annual operation cost, annual revenue, constant-price

statement of cash flow, and financial statements. They are generated based on

results of financial analyses.

B. Raw Data

Raw data are basic data needed for financial analyses. Details of project

cost, operation cost, operating revenue, and other information must be entered.

The project cost sheet is organized in such a way that key project cost

items such as survey cost, construction cost, design cost, and other incidental

cost can be entered using a given form. This allows users to see changes in

key items of each project stage and compare them to other projects.

C. Results Summary Table

The results summary lists period assumptions, results of key analyses,

results of investment cost and financing, and results of revenue and cost.

To help users better understand the model, a kind of users' manual is

provided along with explanation of the limitations of the standard financial

model, special notes to consider when using the model, and information on key

project feasibility indicators.

Major assumptions raised in the financial model of the already signed

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concession agreement are also addressed and their effects explained. They are

as follows:

◦ Assumption of end-of-period and beginning-of-period prices

◦ Controversy over whether interest income should be reflected

◦ Nature of incidental financing cost

◦ Accounting for acquisition and replacement of operating equipment

◦ Calculation of quarterly interest expenses

◦ Deduction of interest rate in excess of appropriate level of interest rate

◦ Zero-rate VAT on contributed-acceptance assets

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CHAPTER II. DEFINITIONS & ASSUMPTIONS

SECTION 1. Definitions & Methods of Financial Feasibility Analysis

To understand the financial analysis model, an understanding of the

following definition of terms and profitability measurement methods is needed.

1. Definition of Terms

□ Construction subsidy (Construction contribution, Government subsidy

during construction period)

Construction subsidy is subsidy without obligation of repayment under

Article 53 of the Act on Public-Private Partnerships in Infrastructure (PPP

Act). It is the share of the construction cost that the competent authority pays

to the project developer in accordance with the provisions of the concession

agreement. It is also called construction contribution or government subsidy.

□ Interest on construction loans

Interest on construction loans is the interest that the project developer must

pay to financial institutions for debt procured during the construction period in

accordance with the terms of borrowing.

□ Economic analysis

An economic analysis is performed to assess the economic value of a

project. It is an indispensable part of a feasibility and preliminary feasibility

study.

An economic analysis measures the economic efficiency of a project by

computing benefit-cost ratio (B/C ratio), net present value (NPV), and internal

rate of return (IRR). If necessary, a sensitivity analysis is also performed to

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gauge the impact of changes in key variables such as demand, unit price, and

discount rates on economic efficiency so that any errors in estimates can be

corrected.

□ Management and operation right

Management and operation right is the right for the project developer to

use, make a profit from, maintain and manage the commercial facilities free of

charge and to collect user fees from those using the facilities during the

free-use period according to the concession agreement. In accordance with the

PPP Act and the concession agreement, the right is established by the head of

the competent authority in favor of the project developer for all or part of the

commercial facilities after construction is complete.

□ Incidental financing cost

Incidental financing cost is all ancillary cost other than interest expenses

incurred to finance a project. In PPP projects, these costs are accounted for in

the incidental cost category of total project cost based on the PPP basic plan.

Incidental financial costs typically include the following:

◦ Management fee

Management fee is an expense other than interest to be paid to a lender for

debt. The fee is paid to the arranger bank (lead manager or management

group) for services rendered from negotiation to closing of a loan. Usually, the

fee is assessed as a percentage of the total borrowed amount but it may vary

depending on the credit of the borrower and market conditions. It is common

for the management fee to be paid in two installments: the first when the loan

agreement is signed and the second when the loan is withdrawn for the first

time.

◦ Commitment fee

Because the borrower retains the right to withdraw part or all of a loan

within a specified loan term, the lender must remain committed to providing

the remaining portion of the loan to the borrower. In compensation, the

borrower pays the lender a commitment fee. Usually, the commitment fee is

calculated as a percentage of unused balance.

◦ Agent fee

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A syndicated loan involves several group of banks. Since it is practically

impossible for each and every creditor to be in touch with the borrower, it is

common to appoint a lead bank (including custodian bank if issuing bonds).

The lead bank is in charge of managing the syndicated loan such as fund

withdrawal, liaising with and providing information to other lenders, and

managing security. The management of an escrow account for loan

disbursement and repayment of interest and principal is one of the key services

performed by a lead bank. An agent fee is paid to the lead bank for such

services. The fee is usually agreed and paid as a fixed annual amount.

□ Lender

Lender refers to a financial institution that extends credit in a syndicated

loan.

□ Standby line of credit (short-term borrowing agreement, stand-by debt

facility)

A standby line of credit is an agreed sum of money that can be drawn

down immediately from a credit granting institution to cover unexpected

short-term shortage of funds occurring during the construction or operation

periods.

□ Loan

A loan is money borrowed from a bank. To make a loan, a bank may

discount a promissory note where the loanee is the issuer and the bank the

beneficiary, make an IOU, or allow a check to be drawn in excess of a

checking account balance. Also in the category of loans are discounts on

commercial bill, payment guarantees, or call loans.

□ Loan commitment

A loan commitment is the obligation of a bank or a group of banks to

extend a credit to a borrower if the borrower has faithfully fulfilled the

prerequisite conditions of a loan.

□ Interest and principal payment

It is the sum of loan principal and interest incurred.

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□ Nominal return

Nominal return is the rate of return on an investment without adjusting for

the change in value of money arising from inflation. According to Fisher's

theory, nominal interest rate is the sum of real interest rate and expected

inflation rate. This is called Fisher Effect.

□ Free-use period

Free-use period is the period in which the developer of a PPP project is

given the right to use the facilities free of charge based on its management and

operation right.

□ Price index

A price index measures changes in the price level of goods. The price

index value of a base year is set to 100 and the price index of every other

year is expressed as a percentage of that base year. The index is a measure of

purchasing power and an economic indicator.

In Korea, the Bank of Korea publishes and announces the Producer

(Wholesale) Price Index (PPI) and the Statistics Korea publishes and announces

the Consumer Price Index every month. The base year is changed every five

years.

◦ Consumer Price Index (CPI): It is the price index of a given period

that is produced and announced by the Statistics Korea and published

in the Statistics Monthly of the Bank of Korea.

◦ Change in CPI: Change in CPI is the difference between the CPI value

of a constant-price base date that is set to 100 (price index of the

base point of time) and the CPI value announced on the date at

which money is to be disbursed or collected according to the

concession agreement or the base date for calculating the determined

user fee (price index to be compared).

◦ Price fluctuation cost (Price fluctuation reserve): It is the amount of

total project cost of the construction period adjusted by the expected

rate of price fluctuation arising from the constant-price base date

(date on which unit prices are applied) to the expected date of

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completion.

□ Ancillary project

An ancillary project is one that the competent authority allows the project

developer to run in conjunction with a PPP project in accordance with the PPP

Act and the request for proposal based on a decision that such ancillary project

is necessary for the developer to recoup its investment or ensure normal

operation of the project.

□ Debt-to-equity ratio

Debt-to-equity ratio is calculated by dividing total liabilities by stockholders'

equity. The lower the ratio, the stronger the financial standing of a business

and the higher the possibility to repay a loan.

□ Debt service coverage ratio (DSCR)

Debt service coverage ratio is a benchmark used to measure the possibility

to recover interest and principal of loans rendered. It measures the amount of

cash flow available to meet annual interest and principal payments. To

calculate DSCR, the cash available for debt servicing - calculated by adding

the annual amounts of dividend, interest and principal payments to the net cash

flow arising from operating, investing, and financing activities in the statement

of cash flow of a given year - is divided by the amount of annual interest and

principal payments.

○ Simple DSCR

Simple DSCR is annual cash flow available for debt servicing divided

by the sum of interest and principal. It is a benchmark to measure the

ability to repay interest and principal in a given year using the net cash

flow of that year.

○ Cumulative DSCR

To calculate cumulative DSCR, cumulative cash flow available for debt

financing is computed by adding cash at beginning of year to the simple

annual cash flow available for debt servicing. This is then divided by

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interest and principal payment of that year.

□ Allowance for debt repayment (Debt service reserve account, DSRA)

Allowance for debt repayment is an account in which the project developer

sets aside part of future interest and principal payment amounts so that it is

not used for any other purposes. A loan commitment letter provides that

several months' worth of interest and principal payment amount be set aside in

reserve to ensure that the promised interest and principal are paid even under

contingency circumstances.

□ Constant price, current price

Constant price is the price to purchase goods and services at the present

time. The price is assessed at the price of a base year. Current price of a

future year is the price of the same goods and services adjusted for all

inflation rates up to that year.

□ Constant-price base date

It is the date at which unit prices apply to total project cost, operation cost,

standard user fees, and all other price indices under a concession agreement.

For example, when computing initial user fees or disbursing construction

subsidy, inflation is computed from the constant-price base date up to the

relevant period.

□ Internal rate of return (IRR)

Internal rate of return is the appropriate level of return expected by a

project developer set at the time of signing a concession agreement. It is the

real rate of return applied in a functional formula to determine the rate of

return on the PPP Basic Plan and user fees. The IRR of an investment is the

discount rate at which the net present value of costs of the investment equals

the net present value of the benefits of the investment, or the discount rate at

which the net present value of cash inflows of an investment equals the present

value of cash outflows.

□ Concession agreement

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A concession agreement is signed between a competent authority and an

entity wishing to undertake a PPP project regarding the terms of the project in

accordance with the provisions of Article 13 of the PPP Act. Paragraph 2 of

Article 13 of the Act provides that the competent authority shall designate a

project development company through a concession agreement. The legal act of

signing a concession agreement thus constitutes a multiple administrative act

where contracting (there are opposing views on whether this is of public or

commercial nature) and the designation of project development company occur

at the same time.

□ Net present value

Net present value is defined as the sum of present values of future cash

inflows and outflows after fixing the required rate of return in a proposed

investment plan. All costs and benefits are adjusted to present value of the

base year by using discount factors and NPV is calculated by subtracting total

costs from total benefits. When a project's NPV is zero or more, the project is

considered to be economically feasible.

□ Term of agreement

It is the term specifying the period of withdrawal and repayment of

principal and interest payment in a loan commitment letter.

□ Reserve fund

Part of the total investment cost, reserve fund are usually the cost of

fluctuation in prices (in initial PPP projects, they also included the cost of

fluctuation in quantities). They differ from contingency reserves prepared by

the project developer through agreement with financial institutions.

□ Date of commencement of operation

This is the date at which a project developer commences operation of a

PPP facility after receiving a certificate of construction completion (including a

certificate of early construction completion) and the management and operation

right from the competent authority.

□ Equity capital

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Equity capital is paid-in capital paid by investors in a PPP project in

accordance with the capital investment schedule on the concession agreement.

□ Equity ratio

Equity ratio is owners' equity divided by total assets (or equity + liabilities).

In PPP projects, equity ratio is usually measured as the proportion of the total

private investment cost that are financed by shareholders and not creditors.

□ Return on equity (ROE)

Return on equity is the cash flow from shareholders' perspective. It is the

implied return calculated from cash inflow of capital payment and cash outflow

of dividends.

□ Refinancing

Refinancing is a project company's act of maximizing investors' expected

profits by changing the capital structure through increase of equity or

subordinated debt of the incorporated project company or making substantial

changes to the financing conditions of debt (such as interest on debt,

repayment period, allowance for debt repayment). When meeting certain

specified conditions, the competent authority may share any profits arising from

refinancing (investors' additional expected rate of return following refinancing).

□ Date of completion

It is the date of completion entered on the certificate of construction

completion that the project company receives from the competent authority

after fulfilling all the completion requirements established in the concession

agreement.

□ Total private project cost

Total private project cost is the total project cost calculated in accordance

with paragraph 1 of Article 22 of the Enforcement Decree of the PPP Act

minus construction subsidies to be borne by the government under the

concession agreement. It is the project cost to be borne by the project

development company.

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□ Total private investment cost

Total private investment cost is total private project cost plus the cost of

price fluctuations and interest payments to be made to financial institutions

syndicate during the period of construction in accordance with the terms of the

loan agreement. In PPP projects, total private investment cost matches the total

amount to be financed by the private sector if excluding any additional reserve

fund such as allowance for debt repayment in the early stage.

□ Total project cost

It is the total project cost calculated pursuant to Paragraph 1 of Article 22

of the Enforcement Decree of the PPP Act. It is the sum of total private

project cost and construction subsidy.

□ Initial user fee

Initial user fee is the determined user fee to be applied for collection of

user fees in the first year of operation in accordance with the provisions on

base user fee and determined user fee in the concession agreement.

□ Investor

Investors retain shareholders' status vis-a-vis the project company

(incorporated project company).

□ Termination payment

Termination payment is the amount of compensation to be made for capital

already invested or amount of guarantee for unrealized expected profit that the

competent authority promised to pay to the project company if termination of

concession agreement should occur.

□ Subordinated debt

In a liquidation, subordinated debt have a lesser claim than more senior

debt but higher claim than equity (common stock investment). In current PPP

projects, subordinated debt are not recognized as equity capital but as debt.

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2. Profitability Measurement Method

Methods to analyze the value of investment proposals are referred to as

economic analysis of investment proposals. In general, the following five

methods are most commonly used.

◦ Payback period method

◦ Accounting rate of return method

◦ Profitability index method

◦ Net present value method

◦ Internal rate of return method

The payback period method, the accounting rate of return method, and the

profitability index method do not take into account the time value of money,

while the net present value method and the internal rate of return method are

discounted cash flow methods that consider the time value of money.

A. Payback Period Method

The payback period represents the amount of time that it takes for a capital

budgeting project to recover the cost incurred at the time of investment. The

project with the quickest payback is preferred.

The advantages and disadvantages of the payback period method are as

follows:

□ Advantages

◦ It is easy to compute and easy to understand.

◦ It offers investment risk information to management.

◦ It indirectly shows liquidity based on cash held by a company

◦ Investment decisions based on short payback period reduce the risk of

facilities and products becoming out of date.

□ Disadvantages

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◦ It does not take into account cash flows after the payback period.

◦ It ignores the time value of money.

◦ The payback period benchmarks are chosen arbitrarily for independent

projects.

Discounted payback period method is sometimes used to compensate for the

payback period method's deficiencies of not taking into account the time value

of money, but it fails to resolve other disadvantages.

B. Accounting Rate of Return (ARR) Method

The accounting rate of return is computed by dividing expected annual net

income by average annual investment on the books and is used to evaluate the

profitability of a capital expenditure.

The advantages and disadvantages of the accounting rate of return method

are as follows:

□ Advantages

◦ It is easy to compute and easy to understand.

◦ It is based on accounting data.

□ Disadvantages

◦ It ignores the time value of money.

◦ It uses income on the books but not cash flows.

C. Profitability Index (PI) Method

The profitability index is calculated by dividing the present value of cash

inflows by the initial cash outflow. It measures the efficiency of every unit

amount of investment. A profitability index value greater than 1 is considered

acceptable.

The advantages and disadvantages of the PI method are as follows:

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□ Advantages

◦ It is useful in ranking projects.

◦ It is useful when a duplicate investment can be made as there are

enough investment proposals with similar performance on the market.

□ Disadvantages

◦ It is less useful when investment opportunities are limited.

◦ Though adequate for estimating the efficiency of every won spent, it

is not appropriate for increasing corporate value.

D. Net Present Value (NPV) Method

The NPV method is a way of evaluating investment proposals based on all

expected future cash flows discounted to their present value.

The net present value of cash flows is calculated by deducting the present

value of cash outflows from the present value of future cash inflows.

The advantages and disadvantages of the NPV method are as follows:

□ Advantages

◦ It takes into account all cash flows.

◦ It considers the time value of money.

◦ It allows for a selection of investment proposal that maximizes the value of

the company.

◦ The principle of value additivity applies. In other words, the NPVs of

individual projects A and B can simply be added; NPV(A) + NPV(B)

= NPV(A+B).

□ Disadvantage

◦ It is difficult to determine an appropriate discount rate.

E. Internal Rate of Return (IRR) Method

The internal rate of return is the discount rate that equates the present value

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(1+N)=(1+R)×(1+i)

of cash outflows with the present value of future cash inflows.

The advantages and disadvantages of the IRR method are as follows:

□ Advantages

◦ All cash flows are taken into account.

◦ It considers the time value of money.

◦ It is easier than the NPV method to apply in reality.

□ Disadvantages

◦ More than one IRR or no IRR may be generated.

◦ The principle of value additivity does not apply.

◦ The assumption that recovered funds are reinvested at a rate equal to

IRR is not reasonable.

3. Nominal Value & Real Value

A. Definition of Nominal Cash Flow & Real Cash Flow

Nominal cash flow refers to actual cash flow expected to occur in the

future to which expectations of inflation is reflected. Real cash flow is cash

flow appraised in purchasing power terms at the time of investment where

expected inflation is removed.

B. Relationship of Nominal and Real Discount Rates

The relationship between nominal discount rate (N) that reflects expected

inflation (i) and real discount rate (R) that does not reflect expected inflation

is shown in the following equation. This is called Fisher Effect.

C. Inflationary Consideration when Appraising Investment

- 16 -

Proposal

When appraising an investment proposal after reflecting inflation, the results

of analysis using either the nominal discount rate or the real discount rate turn

out the same due to Fisher Effect.

In the course of reflecting inflation, special attention must be given to

depreciation and residual value.

On the books, depreciation is shown as an expense item. Because

depreciation actually brings tax savings effect in the future, it is a nominal

cash flow. Residual value is real cash flow at the time of investment

Section 2. Key Assumptions in PPP Financial Model

This section is designed to assist with the use of the standard financial

model by addressing some of the various views raised regarding the design,

interpretation and application of this PPP financial model and to explain the

model's limitations.

It is to be noted that the following key assumptions and limitations are not

absolute standards for the authorities in charge, financial institutions, private

enterprises or any other parties concerned to follow in the actual design and

interpretation of a financial model. When designing and interpreting a financial

model, all parties concerned shall appropriately adjust key assumptions and

limitations by taking into account the characteristics of each PPP project.

1. Beginning-of-Period Prices vs. End-of-Period Prices

It is generally assumed that financial models designed to produce a project

proposal or sign a concession agreement are based on end-of-period prices.

However, in calculating construction subsidy payments for the construction

phase as well as user fees and minimum revenue guarantee for the operation

- 17 -

period, it is customary to apply the inflation rate of the previous quarter or of

the previous year.

To maintain consistency with end-of-quarter cash flows and financing plan

assumptions that reflect end-of-quarter prices during the construction period, it

is assumed that, for the period of operation, end-of-year prices apply according

to the same standards based on end-of-year cash flow assumptions.

This study allows for end-of-period prices and beginning-of-period prices to

be applied selectively in calculating project cost, government subsidies,

operating cost, operating revenue and such for the construction and operation

periods.

2. Addition of Interest Income

The financial model offers the option of adding interest income, which is

earned on surplus fund, to cash flows. Interest rates can be added directly by

the user.

When using this model, users must decide whether or not to add interest

income based on examples of past projects, and specific conditions of a

project.

3. Nature of Incidental Financing Cost

The financial model allows users to include incidental financing cost either

in the total project cost (incidental costs) or in the construction interest

expense.

When using this model, users must decide how they will account for

incidental financing cost based on examples of past projects, the PPP Basic

Plans, the RFPs for individual projects, related regulations, and the specific

conditions of a project.

- 18 -

4. Accounting for Acquisition and Replacement of Operating Equipment

A. Current Status

For PPP projects, it is found that operating equipments acquired for the first

time for the purpose of facilities operation are accounted for in one of the

following two options:

◦ Option 1: Operating equipment acquired during the construction period

are accounted for as construction in progress. After commencement of

operation, they are accounted for as management & operation right

and depreciated throughout the free-use period. Any operating

equipment purchased for replacement are accounted for separately and

depreciated over their useful life.

◦ Option 2: Operating equipment acquired during the construction period

are accounted for as assets other than construction in progress. After

commencement of operation, they are depreciated over their useful

life. Likewise, replacements are also accounted for as tangible assets

and depreciated over their useful life.

B. Application of Study & User Considerations

The financial model under this study allows for either Option 1 or Option

2 to be selected.

When using this model, users must decide how to account for incidental

financing cost based on examples of past projects, accounting treatment

guidelines and tax laws, the RFPs for individual projects, related regulations,

and each project's specific conditions.

5. Calculation of Quarterly Interest Expenses

When accounting for quarterly interest expenses on borrowing, it is

- 19 -

customary to compute interest rate by dividing the annual interest rate by four.

The proposed financial model is based on the assumption that interest is paid

on a quarterly basis throughout the term of borrowing, from the time a loan is

made out to its repayment. Quarterly interest can be calculated either by

dividing annual interest rate by 4 or by using the effective interest method.

When using this financial model, users must thus decide how they want to

treat interest rates based on examples of past projects and specific conditions

of each project.

6. Deduction of Interest Payments in Excess of Appropriate Level of Interest Rate

The financial model of this study allows interest payments in excess of the

appropriate rate (weighted average borrowing rate or overdraft lending rate) to

be tax deductible (expense) under tax laws or to have tax deduction denied by

rejection of unfair calculation under the Corporate Tax Act.

When using this financial model, users must thus decide whether they want

interest payments that are made in excess of appropriate interest rate to be tax

deductible based on examples of past projects, and related regulations on tax

laws.

7. Zero-rate VAT on Contributed-Acceptance Assets

The financial model offers the option of a zero-rate taxation on

contributed-acceptance assets and the option of a 10 percent taxation to be

applied in total project cost.

Unless the sunset clause on taxation on contributed-acceptance assets is

extended, VAT imposed on contributed acceptance of SOCs will be reflected in

the project cost and absorbed one way or another (e.g. through higher user

fees, higher minimum revenue guarantees, extension of free-use period). Users

must take this information and other relevant regulations in mind when making

an assumption for taxation of contributed-acceptance assets.

- 20 -

CHAPTER III. STANDARD FINANCIAL MODEL CONSTRUCTION

SECTION 1. Structure of Financial Model

1. General Structure

The standard financial model proposed in this study and other financial

models used in current PPP projects are constructed based on cash inflows and

outflows over the construction and operation periods. The general structure of

the financial model is shown on [Figure Ⅲ-1]. Using projected cash flow data,

the model generates a financial analysis output and performs a sensitivity

analysis of the project. The financial model can analyze both cash flows using

constant prices and cash flows using current prices, and all data are organized

in such a way that they are interrelated rather than isolated.

The following section explains the functions of the standard financial model

and gives instructions on how to use it.

- 21 -

[Figure Ⅲ-2] General Structure of the Financial Model

2. Structure of Total Project Cost & Total Investment Cost

Total project cost and total investment cost in [Figure Ⅲ-1] are broken

down as in [Figure Ⅲ-2].

- 22 -

[Figure Ⅲ-3] Structure of total project cost and total investment cost

- 23 -

SECTION 2. Financial Model Sheets

The standard financial model proposed in this study consists of several

sheets listed in <Table Ⅲ-1>. The sheets for total project cost summary,

project cost investment schedule, start-up cost, operating revenue, and operation

cost are connected to raw data sheets, from which raw data must be imported.

The other sheets use values of raw data calculated by financial analysis logic.

Financing conditions must be entered in the financing conditions sheet.

□ General Assumptions

The model computes taxes - income tax and public charges - in accordance

with the laws in effect at the time this report was written. Pursuant to the

Restriction of Special Taxation Act, contributed-acceptance assets from PPP

projects are subject to a zero-rate VAT taxation if accepted prior to December

31, 2009. Given the possibility of an extension of the zero-rate VAT

regulation, the financial model offers two VAT options.

VAT was excluded from analysis of revenues and costs for the periods of

construction and operation. Since VAT is refunded or paid, it has no relation

with the actual cash flows of the project itself. In the standard financial model

for roads, however, tolls are inclusive of VAT given the practice of calculating

the multiplier relative to the pricing of the Korea Expressway Corporation

("KEC") by including VAT.

Cells marked in yellow are those where users must enter values. If needed,

users may also enter values in cells containing a formula. In this case, users

should change the color or format of these cells to distinguish them from

others.

The construction period is presented on a quarterly basis considering that

the payment schedule of construction cost, which account for the largest share

of project cost, and borrowings and interest payments are executed at least on

a quarterly basis. The operation period is presented on a yearly basis, given

that the operation period is generally long term of around 30 years (for road

projects), adjustment of user fees are based on the rate of inflation of the

- 24 -

No. Sheet name Content

1 Assumptions Applicable assumption options

2 Sensitivity & results Key sensitivity, results and assumptions

3 Financing conditionsBorrowing conditions (interest rate, repayment conditions, restrictions on interest and dividend payments, etc)

4 Index Inflation rate, period index, etc

5Total project cost summary

Data to calculate total project cost

6Project cost investment schedule

Quarterly project cost investment schedule by item of cost

7 Start-up costQuarterly personnel cost, overhead cost, office fixtures cost for the construction period

8 Total project cost Total project cost by quarter and by year

9 Total investment cost Total investment cost by quarter and by year

10 FinancingGovernment subsidy, equity capital, debt by quarter and by year

11 Operating revenue Summary of operating revenue by year

12 Operation cost Summary of operation cost by year

13 Real CFReal cash flow statement, cash flows for determination of user fees

14 CF Cash flow statement by year

15(1) IS Income statement by year

15(2) BS Balance sheet by year

15(3) RE Statement of appropriations of retained earnings by year

15(4)BS supplementary schedule

Basis for calculating balance sheet

16 Project cost summary Summary of project cost

17 Survey cost Details of survey cost

18 Design cost Details of design cost

19 Construction cost Details of construction cost

20 Compensation cost Details of compensation cost

21 Incidental cost Details of incidental cost

<Table Ⅲ-1> Sheets - Road Project

previous year, and minimum revenue guarantees are also on a yearly basis.

Breakdown and calculation of project cost, operation cost, and other costs

may differ from project to project, so this financial model does not impose any

specific set of breakdown, calculation methods, or formulas.

The content of the sheets are shown on <Table Ⅲ-1>. In the following

pages, each sheet is explained in more detail with instructions on how to use

them.

- 25 -

22Operating equipment cost

Details of operating equipment cost

23Taxes & public charges

Details of taxes & public charges

24 Operating reservesOperating reserves from project cost (personnel cost, general cost, office fixtures cost)

25 Operating revenueCalculation of operating revenue by year (tolls by class of vehicle, distance, etc)

26 Traffic volume Traffic volume by year and class of vehicle

27Personnel & general costs

Number of personnel by year, personnel cost and general cost

28Maintenance & management cost

Monitoring cost, repair cost, electricity cost, substantial repair cost, etc by year

29 Insurance premiums Insurance premium raw data

30Tangible assets replacement cost

Office fixtures by year, operating equipment replacements

31 Forms Forms 1 through 13

1. Assumptions Sheet

The Assumption Sheet allows users to select the appropriate option for key

assumptions explained under '‘Chapter II, Section 2. Key Assumptions in PPP

Financial Model." As shown below in [Figure Ⅲ-3], the sheet offers options

for seven key assumptions.

- 26 -

[Figure Ⅲ-4] Assumptions sheet

For each item of [Figure Ⅲ-3], an option can be selected by checking the

appropriate check box. The boxes already checked do not imply that they are

more logical or reasonable. They only mean that the financial model and sheets

created for the purpose of this report are based on these selected options.

- 27 -

[Figure Ⅲ-5] Sensitivity & results sheet

2. Sensitivity & Results Sheet

The Sensitivity & Results Sheet gives an overview of all assumptions and

results of the financial model. Cells marked in yellow are those where values

must be entered. The details are as follows:

- 28 -

A. Sheet Structure

The sensitivity & results sheet consists of time period assumptions, results,

tests, details of total investment cost, government subsidy condition, financing

structure, revenue condition, and operation cost condition.

In the Period Assumptions section, enter information on key dates and

periods like constant-price base date, analysis start date, construction work start

date, construction period, and operation period. Enter the model start quarter,

constant-price base date, date of incorporation, construction work start date, and

operation period in the yellow cells. All other dates and periods are computed

by the model. The construction period is computed and displayed based on the

project cost investment schedule.

The Results section shows key output of feasibility analysis, including the

rates of return before and after taxes based on constant and current prices,

DSCR (see definition of terms) for senior debt, and temporary shortage of

funds during the analysis period.

The Tests section shows the results of financial model computation on the

balance sheet, cash flow statement, and financing. The computation is complete

and normal only when all cells show an OK value.

In the Assumptions section, enter assumptions on inflation rates, income tax

rate, weighted average borrowing rate, and the cost of issuing new shares.

The Total Investment Cost section gives an overview of total project cost

and total investment cost.

In the Government Subsidies Condition section, enter the percentage of total

project cost to be covered with government subsidies and the first year of

subsidy payment, if any. When doing so, show the amount of government

subsidies in both constant and current prices.

In the operation-related sections, fill out the conditions for revenue and

operation cost.

B. Detailed Explanation

1) Government Subsidy Condition

- 29 -

[Figure Ⅲ-6] Government subsidy condition

[Figure Ⅲ-7] Financing structure

Enter the percentage (0-100%) of total project cost to be covered with

government subsidies during the period of construction. The details thereof are

shown on [Figure Ⅲ-5].

2)　Financing Structure

For the five types of financing - Capital A (CI), Capital B (FI), Financial

institution loan A, Financial institution loan B, and Subordinated debt - enter

the hierarchical order of financing preferences and their respective shares in

total investment.

In the ranking, start with the number 1 for the most preferred type of

financing and enter the same value for same preferences. The percentages must

total 100%.

- 30 -

[Figure Ⅲ-9] Operation cost condition

[Figure Ⅲ-8] Revenue conditions

3)　Sensitivity of Operating Revenue

Enter the traffic volume application rate in percentage.

４）Sensitivity of Operation Cost

Enter the share of each item of operation cost except the cost of operating

equipment and of office fixtures, which are treated in another sheet. Click on

"Enter separately" to be directed to the operation cost sheet shown on [Figure

Ⅲ-8].

- 31 -

3. Financing Conditions Sheet

In the financing conditions sheet, enter the borrowing condition,

subordinated debt interest payment condition, dividend payment restriction, and

repayment condition. In the borrowing condition, enter the interest rate, loan

agreement date, and financial fee rate, as well as loan amount, loan start date

and end date, loan repayment start date and end date, grace period and

repayment period.

A) Borrowing Condition

Borrowings are divided into three types: financial institution loan A,

financial institution loan B, and subordinated debt. Enter the interest rate for

each type of borrowing. Interest rate is computed by adding the spread to the

base rate. Enter the base rate in the corporate bond AA- cell. A different

spread may be entered for the construction and operation periods. Enter the

loan agreement date for each type of loan in the form of YYYY-MM-DD. For

incidental financing cost, enter how many percentages of the total agreed loan

amount is to be paid as management fee at the time of agreement and at the

time of loan withdrawal. For commitment fee, enter how many percentages of

the unused credit of a scheduled annual loan amount (or total loan amount) is

to be paid each quarter. For agent fee, enter the annual amount to be paid in

hundreds of millions of won. It shall not be calculated on a monthly pro rata

basis.

- 32 -

[Figure Ⅲ-10] Borrowing condition

B) Subordinated Debt Interest Payment Condition

As a condition for subordinated debt interest payment, enter the debt-service

coverage ratio (DSCR) of senior debt. Both simple DSCR and cumulative

DSCR can be entered and, if no restriction applies, the cells may be left blank.

Interests on subordinated debt are paid when the simple DSCR and cumulative

DSCR in a given year are equal to or more than the set value; otherwise, they

are not paid.

- 33 -

[Figure Ⅲ-11] Subordinated debt interest payment condition

[Figure Ⅲ-12] Dividend payment restriction

C) Dividend Payment Restriction

Enter the simple and cumulative DSCRs of senior debt, debt ratio, or other

dividend payment restrictions. The simple and cumulative DSCRs of senior

debt can be entered in the same way as for subordinated debt interest payment

condition and the debt ratio must be entered in percentage unit. Dividend

resolution and payments are made when the simple and cumulative DSCRs in

a given year are equal to or more than the set value or when the debt ratio is

equal to or lower than the set value. To add a condition restricting dividend

payment prior to repayment of senior debt, enter the value of 2 in the cell

titled dividend payment prior to senior debt repayment. Enter 1 to allow

dividend payments to be made before repayment of senior debt.

D) Loan Amortization Schedule

For each type of borrowing, enter the percentage of loan principal to be

repaid each year. The values entered must total 100%.

- 34 -

[Figure Ⅲ-13] Loan amortization schedule

- 35 -

[Figure Ⅲ-14] Quarterly index sheet

4. Index Sheet

The Index Sheet computes various index values to be used throughout the

financial model. It computes the period index values to estimate the inflation

rate, construction period, and operation period. This is for the convenience of

applying formulas throughout the model. The quarterly index values are as

follows.

- 36 -

[Figure Ⅲ-15] Annual Index Sheet

□ Construction Period Index : It shows a value of 1 if a quarter is included

in the construction period and a value of 0 if not.

□ Operation Period Index : It shows a value of 1 if a quarter is included in

the operation period and a value of 0 if not.

□ Start-up Index : It shows a value of 1 for the start-up quarter.

□ Start of Construction Index : It shows a value of 1 for the quarter in which

construction starts.

□ End of Construction Index : It shows a value of 1 for the quarter in which

construction is completed.

□ Start of Operation Index : It shows a value of 1 for the quarter in which

operation starts.

□ End of Operation Index : It shows a value of 1 for the quarter in which

operation is ended.

□ Total project period : It shows a value of 1 if a quarter is included in the

project period (construction period + operation period) and a value of 0 if

not.

- 37 -

[Figure Ⅲ-16] Total project cost summary

□ Construction Period Index : It shows the percentage of the construction

period falling in a specific year with a value between 0 and 1.

□ Operation Period Index : It shows the percentage of the operation period

falling in a specific year with a value between 0 and 1.

□ End of Construction : It shows a value of 1 for the year in which

construction is completed.

□ End of Operation : It shows a value of 1 for the year in which operation

is ended.

5. Total Project Cost Summary Sheet

The total project cost summary sheet is basic data necessary to produce the

total project cost sheet. It shows the value of each item of total project cost.

The sheet is produced by multiplying the value of each item of total project

cost by the input rate in the project cost investment schedule.

The costs in the sheet are shown in constant prices except for insurance

premiums and incidental financing cost in the incidental cost category and

organization cost and stock issuance cost in the operating reserves category.

Start-up cost is computed in another sheet. Survey cost, design cost,

construction cost, incidental cost (insurance premiums and incidental financing

cost excluded), operating equipment cost, and taxes and public charges are

computed by multiplying the respective raw data, which are in constant prices,

by the application rate. They are then reflected in the total project cost sheet.

- 38 -

[Figure Ⅲ-17] Costs computed based on current prices

Insurance premiums and incidental financing cost in the incidental cost

category and organization cost and stock issuance cost in the operating reserves

category are computed in current prices, so they must be converted into

constant prices before they are reflected in the total project cost sheet. For this

reason, no rates apply for these cost items in this sheet.

Insurance premiums consist of contractors' all risk insurance, advance loss

of profits insurance, employer's liability insurance and performance bond. To

cover re-investment amount, loss of profits and losses incurred in times of

accidents, insurance coverage shall be calculated based on current prices to

account for inflation. The resulting insurance premiums shall be reflected in the

total investment cost sheet. Insurance coverage may also be calculated in

constant prices.

6. Project Cost Investment Schedule Sheet

The project cost investment schedule shows when and how much of each

item of the total project cost is to be invested. It has the function of allocating

total project cost data to the relevant quarters. The schedule is also used to fill

the construction period index, start-up index, start of construction index, and

end of construction index in the index sheet.

- 39 -

[Figure Ⅲ-18] Project cost investment schedule

7. Start-up Cost Sheet

The start-up cost sheet allows values imported from the operating reserves

sheet to be reflected in the total project cost sheet. It shall be based on both

constant and current prices.

8. Total Project Cost Sheet

The total project cost sheet is computed using total project cost summary,

project cost investment schedule, and total investment cost sheets. It allows the

total investment cost sheet to be filled with consideration of cost of price

fluctuations. Contractors' all risk insurance, advance loss of profits insurance,

employer's liability insurance, performance bond, incidental financing cost,

organization cost and stock issuance cost are calculated by dividing the

respective values in the total investment cost sheet by the rate of price

fluctuation. Start-up cost is computed in the start-up cost sheet.

- 40 -

The sum of all items of total project cost is the constant-price total project

cost, from which the amount of constant-price government subsidies imported

from the financing sheet is subtracted to derive the total private project cost.

Reserve fund comprises private sector funds and government funds. Private

sector reserve fund, which are similar to price fluctuation costs, are derived as

follows. Government reserve fund are the difference between current-price

government subsidies and constant-price government subsidies. The total

investment cost is calculated by adding reserve fund and interest on

construction loans to total project cost.

9. Total Investment Cost Sheet

The total investment cost sheet is produced by multiplying each item in the

total project cost sheet by the rate of price fluctuation in each quarter. Items

based on current prices are imported from the relevant sheets: contractors' all

risk insurance, advance loss of profits insurance, employer's liability insurance

and performance bond from the total project cost summary sheet, and

incidental financing cost, organization cost, and stock issuance cost from the

financing sheet.

All of these items add up to the total private project cost in current prices.

The total investment cost is computed by adding interest on construction loans

to the total current-price private project cost. The total private investment cost

is derived by subtracting current-price government subsidies from the total

investment cost. The total private investment cost, which is the amount that

must be financed by the project developer through equity or debt, is used in

the financing sheet.

Interest on construction loans, which refers to interest expenses paid for

borrowings made during the period of construction, is imported from the

financing sheet. Any interest expenses arising in the operation period are

recognized as costs. Meanwhile, interest on construction loans arising in the

construction period is added to the total investment cost and accounted for as

management & operation right, the cost of which is depreciated throughout the

operation period.

Annual total investment cost is computed by adding all quarterly investment

- 41 -

[Figure Ⅲ-19] Financing structure

costs from Q1 to Q4 in a given year. It is used as data for cash outflows

arising from each investment activity, personnel cost and other costs (start-up

costs), tangible assets (assets under construction, office fixtures, operating

equipment) in the cash flow statement (CF), income statement (IS), and

balance sheet supplementary schedule (BS supplementary schedule) that are

shown in annual current prices.

10. Financing Sheet

The financing sheet is used to allocate the amounts of required financing

(private financing + government subsidies) computed in the total investment

cost sheet by quarter and by year. Private financing consists of equity and

debt. Financing amounts are shown by type of investors or financing sources,

with equity divided into those of construction investors and of financial

investors and debt divided into financial institution loans and subordinated

debt.

For government subsidies, the amounts in constant prices of total project

cost minus compensation cost multiplied by the subsidy rate are to be received

based on quarterly construction progress rate (or apply quarterly constant-price

fixed amounts depending on project characteristic). It is assumed that

government subsidies are paid after full investment of equity capital. Private

financing of capital, financial institution loans, and subordinated debt are

arranged according to the ranking determined in the sensitivity & results sheet.

- 42 -

[Figure Ⅲ-20] Borrowing conditiont

Of private financing, debt are to be repaid according to the repayment

schedule. Interest costs are computed based on the balance at the end of the

previous quarter and divided into interest costs of the construction period and

those of the operation period. Interest costs arising in the construction period

are capitalized and treated as interest on construction loans, while those arising

in the operation period are treated as current expenses.

Incidental financing cost arising from use of debt consists of management

fee, commitment fee, agent fee and other fees. Incidental cost is computed

based on the terms of financing determined in the sensitivity & results sheet.

They are treated as incidental cost in the construction period and as

non-operating expenses in the operation period.

- 43 -

The management fee is arranged in such a way that half of the 1.5% of the

total amount of debt is paid at the time of loan agreement and the other half

at the time of initial loan withdrawal. The commitment fee is calculated as

0.3% of any unused amount of annual borrowing at the end of a given quarter.

The agent fee is calculated with the assumption that 50 million won is paid at

the end of every year during the construction period and 30 million won at the

end of every year during the operation period until full repayment of senior

debt.

The cost of issuing new shares arises at the time of start-up and when new

shares are issued according to the percentage determined in the sensitivity &

results sheet. It serves as the basis for operating reserves in the total

investment cost sheet.

The financing sheet is calculated with the assumption that financing and

repayment of debt is made on a quarterly basis. The financing plan for each

year is produced based on this sheet.

11. Operating Revenue Summary Sheet

Amounts calculated in constant prices in the operating revenue summary

sheet are applied annual inflation rates for use as operating revenue and cash

inflows arising from operating activities in the statement of income and the

statement of cash flows. The constant-price operating revenue is imported to

the real cash flow statement (Real CF) and is used as the basis for computing

the real rate of return of the project.

12. Operation Cost Sheet

Operation cost consists of personnel cost, overhead cost, maintenance &

management cost, insurance premiums and tangible assets replacement cost

(operating equipment, office fixtures) that are calculated in constant prices.

Constant-price operation cost is linked to the cash outflow components of the

real cash flow statement and serves as the basis for calculating the real rate of

return of the project.

Personnel cost, overhead cost, maintenance & management cost and

- 44 -

[Figure Ⅲ-21] Application of operation cost

insurance premiums shown in current prices are linked to the cash outflows

arising from operation activities in the statement of cash flows and to the

operation cost in the statement of income. On the other hand, tangible assets

replacement cost (operating equipment, office fixtures) is included in the

category of cash outflows arising from investment activities in the statement of

cash flows and is treated as depreciation expense over its useful life. Thus,

operating equipment and office fixtures shall be classified by their useful life.

An application rate can be entered for each item on the sheet to evaluate the

sensitivity of operation cost.

- 45 -

[Figure Ⅲ-22] Rate of return and user fees formula on the basic PPP plan

13. Real Cash Flow Statement (CF) Sheet

The rate of return and user fees formula on the basic PPP plan is as

follows:

n: End date of construction

N: End date of free usage period or management and operation rights end date

CCi: Annual investment cost for construction (excluding government subsidies)

ORi: Annual operating revenue

OCi: Annual operating cost

ANRi: Annual pre-tax net profit from supplementary projects

r: pre-tax real rate of return

The real CF sheet calculates the project's rate of return and user fees using

the above formula. Cash outflows and cash inflows are entered in constant

prices.

The sheet is used to estimate the profitability of a project using the total

private project cost, operating revenue and operation cost regardless of the

terms of financing and dividend payment conditions. However, profitability

may vary due to incidental financing cost and operating reserves in the total

private project cost, and business interruption insurance premium (to cover

personnel cost, overhead cost, and financing costs) in the operating cost.

Cash outflows consist of total private project cost, which is total project

cost minus government subsidies, and operation cost excluding income taxes.

Net cash flow, where cash inflows are subtracted from cash outflows, is used

to calculate the rate of return before tax. The net cash flow after tax, where

real income tax expense is subtracted, is used to calculate the rate of return

- 46 -

after tax. Here, the rate of return refers to the internal rate of return (IRR) that

makes the net present value "zero."

14. Cash Flow Statement (CF) Sheet

It is customary for current-price cash flow statements to be entered directly

to allow details of cash flows to be identified quickly by source. Cash flow

statement consists of cash flows from operating activities, cash flows from

investing activities, and cash flows from financing activities. Current-price cash

flow statements show cash held at the end of every year to see ability to pay

interest on debt, shareholders' dividend yield ratio, and cash over and short.

The cash flow statement in this model is made under the assumption that cash

inflows and outflows arise on an end-of-period basis and that operation

dividends are paid in the first quarter immediately upon dividend decision.

The values of cash flows from operating activities are imported from the

operating revenue sheet, operation cost sheet, and financing sheet. Interests on

debt, which are calculated on a quarterly basis, are summed to a per annum

interest. To calculate the amount of interest payment on subordinated

shareholder loans, cash available for interest payment is derived from cash at

end of year in the statement of cash flows and applied the subordinated debt

interest payment condition assumed in the sensitivity & results sheet. Financing

fees are agent fees arising in the operation period; it is assumed that the fees

are paid until the end of the year in which the repayment of interest and

principal of subordinate shareholder loans is completed. Cash flows arising

from investing activities consist of total investment cost in the construction

period and cash outflows arising from tangible assets replacement cost in the

operation period. Cash flows from financing activities are cash flows related to

the procurement and repayment of the needed financing.

Based on the cash at end of year derived from operating, investing and

financing activities, the debt service coverage ratio (DSCR) can be computed.

Simple DSCR is a benchmark used in the measurement of an entity's ability to

produce enough cash from operating (before payment of interest expenses and

financing fees) and investing activities in a year to cover any due interest and

principal payments on senior debt in that year. Cumulative DSCR is computed

- 47 -

by adding beginning cash - cumulative cash balance from previous period - to

simple DSCR.

Senior debt DSCR is used to qualify calculation of interest payments on

subordinated shareholder loans and of dividend payments. It is used to gauge

the ability to service senior debt. Since interest and principal of subordinated

shareholder loans can be carried over to the next year in case of cash shortage

in current period, DSCR for subordinated shareholder loans is not computed.

The waterfall payment method is used for procurement of short-term

borrowings, repayment of interest and principal of subordinated shareholder

loans, and computation of cash available for dividend payments.

In the current cash flow statement, the values of operation and liquidating

dividends are imported from the statement of appropriations of retained

earnings sheet and they are used to compute return on equity (ROE) and return

on investment (ROI).

Meanwhile, cash flows consist of cash flows from operating activities

(before payment of interest on subordinated shareholder loans), cash flows from

investing activities, and cash flows from financing activities (before

procurement of short-term borrowings and repayment of subordinated

shareholder loans).

15. IS, BS, RE, BS Supplementary Schedule Sheets

The statement of income (IS), balance sheet (BS), and statement of

appropriations of retained earnings (RE) are based on current prices and

created according to Korea's Generally Accepted Accounting Principles

(GAAP).

The statement of income computes net income from operating revenue,

operation cost, non-operating income or loss, and income tax expense. When

calculating income tax expense, the tax base shall be determined with the

consideration that deficit carried forward can be deducted for five years. For

each business year, the amount of income tax expense shall be calculated by

applying 14.3% (including resident tax) if the tax base does not exceed 100

million won and 27.5% (including resident tax) if it exceeds 10 million won.

The balance sheet (BS) supplementary schedule must be filled out before

- 48 -

[Figure Ⅲ-23] Dividend payment conditions

the balance sheet. In principle, values must be imported from the total

investment cost sheet, financing sheet and other sheets where initial values

were derived. The balance sheet serves as a final check on the accuracy of the

financial model.

The statement of appropriations of retained earnings is designed to calculate

dividends and appropriate retained earnings such as legal reserve and

amortization of stock discounts, or deficit. Considerations are made to allow

dividends to be paid after full repayment of senior debt, and cash available for

dividend payments are derived based on the dividend payment conditions

determined in the sensitivity & results sheet.

After deriving cash available for dividend payments, 10% of cash dividends,

which shall not exceed retained earnings for dividend payments (retained

earnings before appropriations minus amortization of stock discount) at the end

of each year, shall be accumulated as legal reserve until it reaches 50% of

capital stock, and the remaining amount shall be paid in dividend the next

year. When the time comes for liquidation, capital stock, legal reserve, retained

earnings and unamortized stock discount shall be paid as liquidating dividends

within the limit of cash available for dividend payments.

16. Project Cost Summary Sheet

The project cost summary sheet is a summary of the constant-price values

of each component of project cost calculated based on the estimated cost. For

each item of project cost, it aggregates the amounts calculated in other sheets

- 49 -

[Figure Ⅲ-24] Survey cost items and amounts

and links them to the total project cost summary sheet.

17. Survey Cost Sheet

A. Definition

Survey cost consists of measurement costs and other costs for carrying out

surveys needed to execute a project. The components of survey cost (e.g. soil

test cost, measurement cost, cultural heritage excavation and survey cost) are

based on the guidelines for engineering service fees under Article 10 of the

Engineering Technology Promotion Act. They are linked to the project cost

summary sheet. The items of survey cost are shown below.

B. Overview by Item

1) Soil Test Cost

Soil test cost is based on the guidelines of the Ministry of Construction &

Transportation and the KEC. Other components of cost can be added as needed

depending on the characteristics of construction.

- 50 -

[Figure Ⅲ-25] Soil test cost items and amounts

[Figure Ⅲ-26] Measurement cost items and amounts

2) Measurement cost

Measurement cost is calculated based on the guidelines of the Ministry of

Construction & Transportation. It is calculated by adding direct measurement

cost, indirect measurement cost, and other additional costs that may be incurred

considering the nature of the project.

- 51 -

[Figure Ⅲ-27] Cultural heritage excavation/survey cost items and amounts

[Figure Ⅲ-28] Design cost items and amounts

3) Cultural Heritage Excavation and Survey Cost

Calculation of the cost of excavating and surveying cultural heritage is

based on the Enforcement Rules of the Cultural Heritage Protection Act.

18. Design cost

A. Definition

The design cost sheet shows costs incurred for the basic design and

working design. It is linked to the project cost summary sheet. The items of

design cost are shown below.

B. Overview by Item

Design cost is incurred for the production of working design. Design cost

is divided into basic design cost and working design cost, which are calculated

based on the guidelines of the Ministry of Science & Technology. The sheet

shows the rates and amounts of the basic design cost and working design cost

by type of construction.

- 52 -

[Figure Ⅲ-29] Basis for calculating design cost

19. Construction Cost Sheet

A. Definition

Construction cost is the sum of material costs, labor costs, expenditures, and

administrative costs for execution of a project and profits thereof. The cost is

calculated based on the applicable statutes governing government contracts.

Construction cost is calculated by type of work section such as general

sections (earthworks sections) and structures. Design standards are determined

based on road characteristics, traffic volume, topographical conditions,

geological and soil conditions, weather conditions, and economic efficiency.

When applying methods used by experts, where construction cost is broken

down by detailed types of work, users shall take into consideration price levels,

unit wages in the market, standard cost estimation of construction works, and

- 53 -

[Figure Ⅲ-30] Calculation of construction cost

standards for price estimation based on cost accounting.

Construction cost shall be divided by work section, unit, quantity, and unit

price to show the details of calculation.

Construction cost for entrance/exit facilities and tollgates are included in the

cost for general sections (earthworks sections).

B. Overview by Item

1) Earthworks Sections

Unit prices applied for calculating construction cost of general sections

(earthworks sections) are based on methods used by experts, where quantities

are calculated for each type of work and then multiplied by the respective unit

price in Korean won. The details of calculation shall be shown by entering

unit, quantity, and unit price (i.e. appropriate categories). Cells marked in

yellow are those where values are entered.

- 54 -

[Figure Ⅲ-31] Calculation of earthworks section construction cost

[Figure Ⅲ-32] Calculation of bridge section construction cost

2) Bridge Sections

Extension and type of bridge shall be applied by span length as they can

significantly change civil engineering construction cost. The total number of

bridges by bridge type shall be multiplied by the respective unit price. The

details of calculation shall be shown by entering unit, quantity, and unit price.

- 55 -

[Figure Ⅲ-33] Calculation of tunnel section construction cost

[Figure Ⅲ-34] Calculation of other construction costs

3) Tunnel Sections

Tunnels are constructed using NATM method or TBM method. Given that

most road tunnels use NATM method due to machinery, construction cost, and

constructability, this model also uses NATM method to calculate tunnel

construction cost. The details of calculation shall be shown by entering unit,

quantity, and unit price.

4) Other Construction Cost

Other construction costs refer to those other than for civil engineering

works, such as the cost of electrical works, mechanical works, architectural

works, landscaping, and optical communication works. The details of

calculation shall be shown by entering unit, quantity, and unit price.

5) Service Areas

The cost for building service areas shall be computed in consideration of

natural environmental conditions, appropriateness of construction, maintenance

and management conditions, and transportation conditions. Service areas are

divided into regular service areas and small-size service areas. The details of

- 56 -

[Figure Ⅲ-35] Calculation of service area construction cost

[Figure Ⅲ-36] Calculation of entrance/exit facility and tollgate office construction cost

calculation shall be shown by entering unit, quantity, and unit price.

Entrance/exit facilities are divided into junction (JCT) and interchange (IC)

considering transportation conditions, population, nearby facilities and traffic

volume. Construction cost shall be computed for every new entrance/exit

facility to be built and in consideration of facility type and size.

The details of construction cost for entrance/exit facility and tollgate office

shall be shown by entering unit, quantity, and unit price.

The cost of tollgate offices shall include the cost of tollgates and buildings

only and shall be calculated for the main tollgate office and IC tollgate offices.

The cost of developing land for tollgate offices shall be included in the

earthworks construction cost for the main tollgate office and construction costs

shall be computed for each tollgate office.

- 57 -

[Figure Ⅲ-37] Calculation of compensation cost

20. Compensation Cost Sheet

A. Definition

Compensation cost refers to the cost of purchasing land (including cost of

purchasing buildings and trees), resident resettlement compensation, and

compensation for goodwill, fishing rights, mining rights and other such rights.

Show the details of land compensation cost, obstacles compensation cost,

and other compensation costs calculated in accordance with the relevant

guidelines for calculating compensation costs. If carrying out computerization

work for each project, divide total land area to be purchased into field, rice

field, forest, land, and others, and calculate compensation cost by multiplying

each by the respective unit land price. If compensation work is carried out by

the competent authority (and not by the project developer), go to the total

project cost summary sheet and enter 0% in the application rate.

B. Overview by Item

In principle, the calculation of land compensation cost, obstacles

compensation cost, and other compensation costs shall be based on actual

transaction prices. If finding actual transaction prices is difficult, use the

officially assessed price of reference land multiplied by the application rate.

- 58 -

[Figure Ⅲ-39] Calculation of obstacles compensation cost

[Figure Ⅲ-40] Calculation of other compensation cost

[Figure Ⅲ-38] Calculation of land compensation cost

21. Incidental Cost Sheet

A. Definition

Incidental cost includes the costs of construction supervision, environmental

impact assessment, traffic impact assessment, post-construction environmental

impact assessment, and insurance. The costs of design supervision,

full-responsibility supervision, environmental impact assessment,

- 59 -

[Figure Ⅲ-41] Calculation of incidental cost

post-construction environmental impact assessment, pre-construction disaster

impact review, and traffic impact assessment shall be calculated in accordance

with the guidelines provided for in the relevant statutes. This sheet only shows

insurance premium rates and calculation method and the cost of insurance is

computed in the total project cost summary sheet. For supervision cost,

environmental impact assessment cost and the like, show the details of

calculation as follows; for insurances, show premium rates and coverage.

B. Overview by Item

1) Design Supervision Cost

Design supervision cost shall be computed based on the public notice of the

Ministry of Construction & Transportation. Service fees are calculated by the

public institution placing the order either using the

percentage-of-construction-cost method or the cost-plus-fixed-fee method

depending on the nature of the project. If using the

percentage-of-construction-cost method, the cost of additional services are

accounted for separately in actual cost. The details of calculation shall be

shown by entering unit, quantity, unit price, etc (i.e. using appropriate

information). Cells marked in yellow are those where values are entered.

- 60 -

[Figure Ⅲ-42] Calculation of design supervision cost

[Figure Ⅲ-43] Calculation of full-responsibility supervision cost

2) Full-responsibility Supervision Cost

The details of calculation for full-responsibility supervision cost shall be

shown by entering unit, quantity, unit price, etc (i.e. using appropriate

information) in accordance with the public notice of the Ministry of

Construction & Transportation. Cells marked in yellow are those where values

are entered.

3) Environmental Impact Assessment Cost

Environmental impact assessment cost shall be based on the public notice of

the Ministry of Environment and comprise direct personnel cost, direct cost,

overhead cost and engineering service fees. If special or additional investigation

becomes necessary during the course of assessment or consultation, any

additional costs incurred thereof shall be accounted for additionally. The details

of calculation shall be shown by entering unit, quantity, unit price, etc. Cells

marked in yellow are those where values are entered.

- 61 -

[Figure Ⅲ-44] Calculation of environmental impact assessment cost

[Figure Ⅲ-45] Calculation of post-construction environmental impact assessment

cost

4) Post-construction Environmental Impact Assessment

Costs

Post-construction environmental impact assessment cost shall be based on

the public notice of the Ministry of Environment and comprise direct personnel

cost, direct cost, overhead cost and engineering service fees. If special or

additional investigation becomes necessary during the course of assessment or

consultation, any additional costs incurred thereof shall be accounted for

additionally. The details of calculation shall be shown by entering unit,

quantity, unit price, etc. Cells marked in yellow are those where values are

entered.

5) Traffic Impact Assessment Cost

Traffic impact assessment cost shall be based on the standards published by

- 62 -

[Figure Ⅲ-46] Calculation of traffic impact assessment cost

[Figure Ⅲ-47] Calculation of pre-construction disaster impact review cost

Ministry of Construction & Transportation and comprise direct personnel cost,

direct cost, overhead cost and engineering service fees. The details of

calculation shall be shown by entering unit, quantity, unit price, etc. Cells

marked in yellow are those where values are entered.

6) Pre-construction Disaster Impact Review Cost

Pre-construction disaster impact review cost shall be based on the public

notice of the Ministry of Environment. The cost comprises direct personnel

cost, direct cost, overhead cost, and engineering service fees. If special or

additional investigation becomes necessary during the course of assessment or

consultation, any additional costs incurred thereof shall be accounted for

additionally. The details of calculation shall be shown by entering unit,

quantity, unit price, etc. Cells marked in yellow are those where values are

entered.

- 63 -

[Figure Ⅲ-48] Calculation of insurance premiums

7) Insurance Premiums

Insurance premiums shall be calculated in the total project cost summary

sheet. This sheet only shows insurance premium rates. However, coverage

shown below must be modified appropriately in accordance with the nature of

the project. Also, though the coverage in the table below is in current prices,

it can also be calculated in constant prices.

8) Incidental Financing Cost

Incidental financing cost is not calculated in this sheet. The rates of various

fees are entered in the sensitivity & results sheet and the cost is calculated in

the financing sheet.

9) Others

For all other incidental costs not mentioned above, show the details of

calculation by entering unit, quantity, unit price, etc.

- 64 -

[Figure Ⅲ-49] Calculation of operating equipment cost

22. Operating Equipment Cost Sheet

A. Definition

The operating equipment cost sheet shows the cost of each item of

operating equipment. The cost is also shown by useful life for accounting of

depreciation expenses and replacement.

B. Overview by Item

1) TCS

Calculate the cost of TCS by entering unit, useful life, quantity, and unit

price, etc (i.e. using appropriate information).

- 65 -

[Figure Ⅲ-50] Calculation of TCS cost

[Figure Ⅲ-51] Calculation of ETCS cost

2) ETCS

Calculate the cost of ETCS by entering unit, useful life, quantity, and unit

price, etc (i.e. using appropriate information).

3) Tollgate offices and integrated facilities

Calculate the cost of tollgate offices and integrated facilities by entering

unit, useful life, quantity, and unit price, etc (i.e. using appropriate

information).

- 66 -

[Figure Ⅲ-52] Calculation of tollgate offices and integrated facilities cost

[Figure Ⅲ-53] Calculation of fleeing and overloaded vehicles filming cost

[Figure Ⅲ-54] Calculation of incidental equipment cost

4) Fleeing & Overloaded Vehicles Filming

Calculate the cost of filming fleeing and overloaded vehicles by entering

unit, useful life, quantity, and unit price, etc (i.e. using appropriate

information).

5) Incidental Equipment

Calculate the cost of incidental equipment by entering unit, useful life,

quantity, and unit price, etc (i.e. using appropriate information).

- 67 -

[Figure Ⅲ-55] Calculation of vehicle weighing equipment cost

[Figure Ⅲ-56] Calculation of traffic control systems cost

6) Vehicle Weighing Equipment

Calculate the cost of vehicle weighing equipment by entering unit, useful

life, quantity, and unit price, etc (i.e. using appropriate information).

7) Traffic Control Systems

The cost of traffic control systems shall be calculated by entering unit,

useful life, quantity, unit price, etc.

8) Equipments & Vehicles

The cost of equipment and vehicles shall be calculated by entering unit,

useful life, quantity, unit price, etc.

- 68 -

[Figure Ⅲ-57] Calculation of equipment and vehicles cost

[Figure Ⅲ-58] Calculation of other equipment cost

9) Other equipments

The cost of other equipments shall be calculated by entering unit, useful

life, quantity, unit price, etc.

23. Taxes & Public Charges Sheet

A. Definition

Taxes and public charges refer to all taxes such as acquisition tax,

registration tax, and value added tax related to the execution, completion,

registration, and change of ownership, as well as public charges and all other

charges imposed by law.

Show the cost for each type of charges, such as charge for damage to a

development restriction zone, ecosystem conservation contribution, farmland

conservation charge, and alternative forest resources development cost.

- 69 -

[Figure Ⅲ-59] Calculation of taxes and public charges

[Figure Ⅲ-60] Calculation of charge for damage to a development restriction

zone

[Figure Ⅲ-61] Calculation of ecosystem conservation contribution

For construction of facilities for public use, the project developer shall

calculate the charge for damage to a development restriction zone in

accordance with the Act on Special Measures for Designation and Management

of Development Restriction Zones.

The ecosystem conservation contribution shall be based on the Natural

Environment Conservation Act. The calculation is damaged surface area times

amount imposed per unit area times zone coefficient.

- 70 -

[Figure Ⅲ-62] Calculation of farmland conservation charge

[Figure Ⅲ-63] Calculation of alternative forest resources development cost

The farmland conservation charge is calculated by applying the unit price of

the farmland conservation charge publicly notified by the Minister of

Agriculture and Forestry. This model assumes that there are no farmland

conservation charges.

The alternative forest resources development cost is calculated based on the

Management of Mountainous District Act. This model assumes that there are

no farmland conservation charges.

Any tax benefits granted for building facilities to run the PPP project in the

basic PPP plan shall be properly reflected in the sheet.

24. Operating Reserves Sheet

Operating reserves are organization cost, start-up cost and other costs that

an incorporated project developer needs to prepare for operation of facilities.

They comprise start-up cost such as personnel cost, general cost, and office

fixtures cost, as well as registration tax on capital, education tax, notarial

charges and legal fees. Costs related to start-up cost are calculated in the

- 71 -

[Figure Ⅲ-64] Salary chart

operating reserves sheet, while the stock issuance cost, which is related to

capital, is calculated in the financing sheet.

A. Definition

The operating reserves sheet shows a quarterly allocation of personnel cost,

general cost, office fixtures cost of the total project cost incurred during the

construction period.

B. Overview by Item

1) Personnel Cost

Personnel cost is calculated by multiplying the salary of each position grade

by the number of people to be hired by function and department. The salary

chart is shown on [Figure Ⅲ-63].

The annual salary information by position grade shall be entered in yellow

cells in Korean won. Retirement benefits can be modified according to specific

company pay policy. The sum of annual salaries and retirement benefits is the

total personnel cost by position grade.

◦ Number of personnel by function

Enter the number of personnel by department and position grade for each

quarter. Enter the position grades by department and make sure that the

- 72 -

[Figure Ⅲ-65] Calculation of number of personnel by quarter

[Figure Ⅲ-66] Calculation of number of personnel by position grade

position grading system matches the one in the salary chart. In the yellow cells

below, enter the position grades and the number of personnel needed in each

quarter.

◦ Number of personnel

Reorganize the personnel plan above by position grade to calculate the

quarterly personnel cost by position grade using the salary chart.

- 73 -

[Figure Ⅲ-67] Calculation of total personnel cost by position grade

◦ Calculation of personnel cost

To compute personnel cost, multiply the number of personnel by position

grade by the personnel cost by position grade. If the salary chart is on an

annual basis, convert it into quarterly basis.

2) General Cost

Compute general cost such as welfare cost, education and training cost

needed to run an organization as shown in [Figure Ⅲ-67]. Categories can be

added or deleted as needed.

Explain how each category of general cost is calculated as in [FigureⅢ

-68].

- 74 -

[Figure Ⅲ-68] Calculation of general cost

- 75 -

[Figure Ⅲ-69] General cost calculation formula

Enter the calculation formula for each item in such a way that it can be

modified automatically in line with any changes in the raw data in the yellow

cells. For the number of regular employees, use the number calculated under

personnel cost. Enter price amounts in Korean won.

3) Office Fixtures Cost

Show the cost of purchasing office fixtures necessary to run an organization

during the construction period by unit, useful life, and quantity, etc, as a basis

for calculating quarterly cost and depreciation cost.

◦ Classification of office fixtures

For each type of office fixtures, enter the unit price in thousand Korean

won.

- 76 -

[Figure Ⅲ-70] Calculation of office fixtures

[Figure Ⅲ-71] Office fixtures purchase schedule

◦ Quantities

Enter the quantity and purchase schedule for each item of office fixtures in

each quarter. Also enter the cost of replacement after expiry of useful life.

◦ Office fixtures cost

Multiply the number of office fixtures by the unit price to compute the

quarterly office fixtures cost. When calculating, note that the unit price of

office fixtures are shown in thousand Korean won.

- 77 -

[Figure Ⅲ-72] Calculation of quarterly office fixtures cost

[Figure Ⅲ-73] Office fixtures by useful life

◦Classification by useful life

In order to depreciate office fixtures as tangible assets other than those

under construction, reclassify them by useful life. Depreciation of office

fixtures are calculated in the BS supplementary schedule sheet.

25. Operating Revenue Sheet

A. Definition

The operating revenue sheet calculates toll revenues based on the traffic

volume in the traffic volume sheet using class of vehicle and toll by distance

information. Traffic volume and operating revenue sheets will vary depending

on whether the road is open-type or closed-type. In this analysis, a relatively

long-distance closed-type expressway is assumed.

- 78 -

[Figure Ⅲ-74] Toll by class of vehicle

[Figure Ⅲ-75] Distance Table

B. Overview by Item

1) Toll by Class of Vehicle

Enter the basic rate and the per-kilometer unit price for each class of

vehicle of the KEC. Then determine the toll level to be applied by the project

developer as a percentage of KEC's tolls. The multiplier relative to KEC's

pricing is linked to the sensitivity & results sheet and adjustment of the

multiplier can be made in the operating revenue sheet. The percentage of

vehicles exempted from paying tolls is entered in the yellow cell.

2) Distance Table

Enter the distance between ICs and JCs. The distances are used to compute

toll rates by class of vehicle and by section.

- 79 -

[Figure Ⅲ-76] Toll rate schedule for each class of vehicle

3) Toll Rate Schedule by Class of Vehicle

Multiply the tolls calculated in 1) by the distances in 2) to compute the toll

rates for each class of vehicle and section.

A toll rate schedule is generated for each class of vehicle. The rate

schedule below is calculated in Korean won.

- 80 -

[Figure Ⅲ-77] Calculation of annual toll revenue

4) Annual Toll Revenue

Annual toll revenue is computed by multiplying the daily traffic volume in

the traffic volume sheet by the toll rate by class of vehicle and by section

computed in this sheet. Initial ramp-up rate and percentage of exempted

vehicles are reflected to the annual toll revenue to compute the toll revenue

inclusive of VAT. The net revenue amount can be computed by subtracting

VAT from this amount.

The above annual toll revenue is the sum of toll revenue by class of

vehicle and year.

- 81 -

C. Others

Annual amounts computed in constant prices are shown in a table and

converted in current prices in the operating revenue sheet.

26. Traffic Volume Sheet

A. Definition

The traffic volume sheet shows the traffic volume by year, section, and

class of vehicle. The traffic volume, which is computed based on annual daily

traffic, is linked to the operation revenue sheet and used as a basis for

calculating toll revenue. The traffic volume sheet must be modified depending

on whether the road is closed-type or open-type.

B. Overview by Item

1) Traffic Volume Raw Data

Enter the daily traffic volume by year, section, and class of vehicle. Enter

the traffic volume by class of vehicle for each year. The table below is for a

closed-type road with 10 ICs and JCTs. The number of cells will be adjusted

depending on the number of ICs and JCTs. The following is an example of

traffic volume by class of vehicle for the year 2015.

- 82 -

[Figure Ⅲ-78] Calculation of traffic volume by class of vehicle

As shown above, the traffic volume data by class of vehicle shall be

- 83 -

[Figure Ⅲ-79] Calculation of annual daily traffic by section and class of vehicle

for each year

computed for each year of operation.

2) Counting of Traffic Volume

The annual daily traffic entered in ‘1) Traffic Volume Raw Data’ must be

reorganized to compute operating revenue. Compute the annual daily traffic by

section and class of vehicle for each year.

27. Personnel & General Costs Sheet

A. Definition

The personnel & general cost sheet computes personnel cost, general cost,

and office fixtures cost incurred during the operation period and allocates them

across periods. Personnel cost and general cost, which are allocated on a

quarterly basis in the operating reserves sheet, are allocated across years in this

- 84 -

[Figure Ⅲ-80] Salary chart

sheet. Meanwhile, the office fixtures cost for the operation period are computed

in the tangible assets replacement cost sheet.

B. Overview by Item

1) Personnel Cost

Personnel cost is calculated by multiplying the salary of each position grade

by the number of people to be hired by function and department. The salary

chart is shown below.

The salaries by position grade in this sheet are linked with the salaries by

position grade in the operating reserves sheet as they are assumed to be

identical. If personnel cost during the operation period are different from

personnel cost during the construction period, enter the values directly. The

sum of annual salaries and retirement benefits is the total personnel cost by

position grade.

◦ Number of personnel by function

Like in the operating reserves sheet, enter the number of personnel by

department and position grade for each year. Enter the position grades by

department and make sure that the position grading system matches the one in

the salary chart.

- 85 -

[Figure Ⅲ-81] Number of personnel by year

[Figure Ⅲ-82] Number of personnel by position grade

In the yellow cells below, enter the position grades and the number of

personnel needed each year.

◦ Counting of number of personnel

Reorganize the personnel plan above by position grade to calculate the

quarterly personnel cost per position grade using the salary chart.

◦ Calculation of personnel cost

To compute personnel cost, multiply the number of personnel in each

position grade by the corresponding personnel cost.

- 86 -

[Figure Ⅲ-83] Calculation of personnel cost by position grade

[Figure Ⅲ-84] Calculation of general cost

2) General Cost

Compute general cost such as welfare cost, education and training cost

needed to run an organization as shown below. Categories can be added or

deleted as needed.

Explain how each category of general cost is calculated as in the following

table. This information is provided in the columns to the right of the annual

general cost columns.

- 87 -

[Figure Ⅲ-85] General cost calculation formula

Enter the calculation formula of each item in such a way that it can be

modified automatically according to changes in the raw data in the yellow

cells. For the number of regular employees, use the number calculated under

personnel cost. Enter price amounts in Korean won.

28. Maintenance & Management Cost Sheet

A. Definition

Maintenance and management cost refers to cost related to the operation of

tollgate offices and cost incurred for the maintenance, management, and repair

of roads and various facilities for safe and comfortable driving of vehicles.

Maintenance and management cost is largely divided into maintenance &

repair cost and road improvement cost. Other sub-items are tollgate office

operation cost, road management administrative personnel cost, pavement repair

cost (surface treatment, overlay, etc), structures repair cost (Type 1, Type 2),

inclined planes repair cost, disaster and damage repair cost, safety facilities

- 88 -

maintenance cost, and snow removal and road surface cleaning cost.

Cost for road maintenance and repair may differ depending on whether a

certain level of services is to be offered based on traffic volume, geographical

conditions, planned performance period in pavement design, years elapsed, and

road importance.

The maintenance and management cost shall be updated in accordance with

the guidelines announced by the Ministry of Construction & Transportation and

the Korea Expressway Corporation during the maintenance and management

period of thirty years.

The budget for maintenance and management of facilities relates to all costs

necessary for inspection, monitoring, diagnosis, repair, reinforcement, and

replacement. The central and local governments must secure budget necessary

for maintenance and management of the facilities within their respective

jurisdiction in accordance with the implementation plan established every year.

The maintenance and management sheet computes repair cost, monitoring

cost, electricity cost, and management cost and allocates them by year. The

calculation method and cost items vary by project so the sheet must be

properly modified before use.

B. Overview by Item

1) Monitoring Cost

Monitoring cost is divided into close monitoring cost and close safety

monitoring cost based on the Enforcement Decree of the Special Act on the

Safety Control of Public Structures.

□ Close Monitoring

Close monitoring is conducted on facilities of type 1 and 2 once every two

years and is skipped if overlapping with close safety monitoring. The cost shall

be calculated based on the Enforcement Decree of the Special Act on the

Safety Control of Public Structures.

- 89 -

[Figure Ⅲ-86] Calculation of close monitoring cost

[Figure Ⅲ-87] Calculation of close safety monitoring cost

□ Close Safety Monitoring

Close safety monitoring is conducted on facilities of type 1 once every five

years after ten years have elapsed. The service fees for close safety monitoring

is based on the Enforcement Decree of the Special Act on the Safety Control

of Public Structures.

□ Other Monitoring Cost

Other monitoring cost refers to all monitoring costs other than close

monitoring cost and close safety monitoring cost. The cost shall be computed

in consideration of the characteristics of the construction work of each project.

□ Monitoring Schedule

The monitoring schedule is drawn with the assumption that close monitoring

is conducted once every two years and close safety monitoring once every five

years after ten years have elapsed. The value of 1 means that monitoring is

conducted and 0 means it is not conducted. Monitoring is conducted according

to the monitoring schedule and the annual monitoring cost is shown in the

maintenance and management cost summary.

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[Figure Ⅲ-88] Monitoring Schedule

[Figure Ⅲ-89] Calculation of regular repair cost

2) Regular Repair Cost

Regular repair cost comprises the costs of road cleaning, traffic lane

painting, snow removal, landscape repair, safety facility repair, electrical

facility repair, emergency recovery, tunnel walls tile cleaning, tunnel waterway

dredging, surface treatment, slip repair, and shock absorption facility repair.

Cost shall be calculated in consideration of the construction characteristics of

each project.

In the unit and quantity of annual cost, enter the total volume of repair

work per project. Enter, in annual amounts, regular repair cost incurred in the

operation period.

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[Figure Ⅲ-90] Calculation of structures repair cost

3) Structures Repair Cost

Structures repair cost is divided into bridge repair cost, tunnel repair cost,

and other repair cost. Bridge repair cost comprises the costs of bridge rail

repair, baseplate repair, main girder repair and reinforcement, bridge

bearing/new connection repair and replacement, and abutment/pier repair and

reinforcement. Tunnel repair cost includes the cost of crack repair, section

repair, painting, tunnel cleaning and replacement. Other repair costs refer to all

other costs for repair.

Structures repair cost shall be calculated in consideration of the construction

characteristics of each project.

In the unit and quantity of annual cost, enter the total volume of repair

work per project. Enter, in annual amounts, regular repair cost incurred in the

operation period.

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[Figure Ⅲ-91] Calculation of snow removal cost

[Figure Ⅲ-92] Calculation of substantial repair costs

4) Snow Removal Cost

Snow removal cost are incurred in winter periods (three months from

December to February) during the operation period. The cost shall be divided

into snow removal materials costs, equipment costs, personnel cost, and other

costs in consideration of the characteristics of each construction project and the

pricing base year.

5) Substantial Repair Costs

Substantial repair costs are costs incurred for repavement of roads. They are

calculated based on the study of road life cycle cost (LCC) by type of bridge

(Korea Expressway Corporation, 2003).

In the unit and quantity of annual costs, enter the total volume of repair

work per project. Enter, in annual amounts, regular substantial repair costs

incurred in the operation period.

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[Figure Ⅲ-93] Substantial repair cost disbursement cycle

Substantial repair cost is disbursed in above amounts in certain years. As

shown on the following table, disbursement shall be planned for once every

cycle after commencement of operation. The value of 1 means that substantial

repair cost is disbursed.

6) Operating Equipment Maintenance Cost

Operating equipment maintenance cost refers to the cost of maintaining

TCS/ETCS equipment and FTMS equipment. For each project, calculate the

cost of TCS/ETCS lanes, booths, tollgate offices equipment and the cost of

FTMS on-site equipment, and center and other equipment.

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[Figure Ⅲ-94] Calculation of operating equipment maintenance cost

7) Electricity Cost

Determine the amount of electricity needed and calculate electricity cost

using the electricity rate per unit.

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[Figure Ⅲ-95] Electricity rate per unit

[Figure Ⅲ-96] Electricity cost by facility

- 96 -

[Figure Ⅲ-97] Calculation of insurance premiums

29. Insurance Premiums Sheet

A. Definition

The insurance premium sheet shows premium rates necessary to compute

the cost of insurance premium in the operation period. Actual insurance

premiums are calculated in the operation cost sheet. Just like insurance

premiums incurred for the construction period, the coverage and amounts

insured for the operation period shall be adjusted according to the nature of

each project.

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[Figure Ⅲ-98] Office fixtures by item

30. Tangible Assets Replacement Cost Sheet

A. Definition

The tangible assets replacement cost sheet calculates the cost of replacing

office fixtures and operating equipment each year during the operation period.

1) Office Fixtures Cost

Show the cost of purchasing office fixtures necessary for the organization

during the operation period with unit price, useful life, and quantity of each

item such that they can be used as the basis for calculating annual costs and

depreciation costs.

◦ Office fixtures by item

For each item of office fixtures, enter the unit price in thousand Korean

won. Given that the unit price and useful life of office fixtures for the

operation period are basically the same as those for the construction period,

this sheet imports the office fixtures cost data from the operating reserves

sheet. Enter quantities considering such relevant information as number of

personnel. Though quantities can be calculated automatically based on number

of personnel, this model is designed to enter quantities directly.

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[Figure Ⅲ-99] Office fixtures replacement schedule

[Figure Ⅲ-100] Office fixtures cost

◦ Quantities

The quantities and purchase schedule of each item of office fixtures are

shown by year. The quantities, unit price, and years to replacement are filled

using the data above. Since office fixtures must be replaced after expiration of

useful life, enter the first year they were purchased during the construction

period. If replacement occurred more than once during the construction period,

enter the last year they were purchased during the construction period.

◦ Cost of purchasing office fixtures

Multiply the unit price of each item of office fixtures by quantities

calculated above to compute the cost of purchasing office fixtures each year.

Special attention is needed for this calculation as the unit price is in thousand

Korean won.

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[Figure Ⅲ-101] Office fixtures by useful life

◦ Classification by useful life

In order to compute the depreciation cost on office fixtures during the

operation period, reclassify office fixtures by useful life. Depreciation of office

fixtures are calculated in the BS supplementary schedule sheet.

2) Operating Equipment Cost

Show the cost of purchasing operating equipment necessary in the operation

period with unit price, useful life, and quantity of each item such that they can

be used as the basis for calculating annual cost and depreciation cost.

◦ Operating equipment by item

For each item of operating equipment, enter the unit price in thousand

Korean won. Given that the unit price and useful life of operating equipment

for the operation period are basically the same as those for the construction

period, this sheet imports the operating equipment cost data from the operating

equipment cost sheet. If the price and useful life of operating equipment

purchased for replacement differ from the price and useful life of operating

equipment to be replaced, enter the price and useful life separately in the table

below.

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[Figure Ⅲ-102] Calculation of operating equipment costs

[Figure Ⅲ-103] Operating equipment replacement schedule

◦ Quantities

Quantities are shown on the annual replacement schedule. Fill out the form

such that once the first year of purchase is entered on this schedule, a value of

1 (or if more than one item is purchased, then the number of item purchased

will appear) appears for replacement after useful life expires.

◦ Operating equipment cost

Multiply the replacement schedule by the unit price above to calculate

annual operating equipment cost. The application rate (enter 100% if the

replacement cost is equal to the estimated cost) for operating equipment

replacement cost can be adjusted in the operation cost sheet. Note that the

application rate for operating equipment replacement cost is different from the

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[Figure Ⅲ-104] Annual operating equipment cost

[Figure Ⅲ-105] Operating equipment by useful life

application rate (total project cost summary sheet) applied for first-time

purchase. For example, if TCS is applied a rate of 80% on the estimated cost

of 5 billion won, resulting in an application value of 4 billion won, the cost of

replacement must be applied a different replacement application rate based on

the estimated cost of 5 billion won.

◦ Classification by useful life

In order to compute the depreciation cost on operating equipment for the

operation period, reclassify operating equipment by useful life. Depreciation

cost of operating equipment is calculated in the BS supplementary schedule

sheet.

31. Forms

There are thirteen forms in the forms sheet. These forms are made based on

the most recent Basic Plan for Road Facility Projects notice and Third-Party

Request for Proposal notice. The forms are designed to summarize all the

information of financial model in a standardized format.

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A. Form 1: Summary of Key Financial Facts

The form summarizes key facts of the project. It is linked to the sensitivity

& results sheet.

B. Form 2: Investors

The form shows investors' share of investment, their share of total private

investment cost, and investors' role.

C. Form 3: Total Project Cost

The form shows a breakdown of total project cost by quarter and by year.

D. Form 4: Total Investment Cost

The form shows a breakdown of total investment cost by quarter and by

year.

E. Form 5: Financing Plan

The form shows the amounts of equity and of debt by quarter and by year,

and cumulative equity ratio.

F. Form 6: Details of Operating Revenue

The form shows a breakdown of annual operating revenue, annual daily

traffic volume, and average daily traffic volume.

G. Form 7: Details of Operation Cost

The form shows a breakdown of operation cost by personnel cost, overhead

cost, operating equipment replacement cost, office fixtures replacement cost,

maintenance and management cost, and insurance premiums. It also shows the

average annual amounts by item and by year as well as the average annual

amounts per kilometer.

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H. Form 8: Statement of Cash Flows for Determination of User Fees

The form shows the statement of cash flows (real cash flow statement) to

calculate user fees based on total private project cost, real operation cost, and

real operating revenue. It calculates the total of cash outflows (total private

project project cost + real operation cost) and its present value, the total of

cash inflows (toll revenue + revenue from ancillary facilities) and its present

value, user fees, and the project's rate of return before tax. It also calculates

the project's rate of return after tax using real income tax expense.

I. Form 9: Amounts and Timeline of Government Subsidies

The form shows the required quarterly government subsidy amounts in

constant prices and current prices, if any, and the equivalent amounts adjusted

to present value by using a discount rate.

J. Form 10: Balance Sheet

The form shows balance sheets by year.

K. Form 11: Income Statement

The form shows income statements by year.

L. Form 12: Statement of Cash Flows

The form shows statements of cash flows by year.

M. Form 13: Key Sensitivity Analysis

It shows the results of sensitivity analysis performed on project cost

application rate, traffic volume application rate, operation cost application rate,

and construction subsidy application rate.

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CHAPTER IV. KEY PROJECT FEASIBILITY

INDICATORS

SECTION 1. Analysis of Project Feasibility

The purpose of feasibility analysis lies in evaluating the profitability of a

project by estimating its cash flows. Previous sections dealt with how a

project's cash flows can be estimated. Using this information, each stakeholder

involved in a project performs a project feasibility analysis.

1. Key Indicators for Analysis of Project Feasibility

Project feasibility analysis is performed based on estimated cash flows,

which can be derived from the perspective of the project itself, of the

shareholders and of lenders.

To analyse project feasibility of the project itself, indicators like NPV or

IRR can be computed using cash flows from operating and investing activities.

Shareholders would analyse project feasibility using cash flows that reflect

invested capital, dividends, and cash payback for capital reduction to calculate

the IRR of shareholders' cash flows, which is equal to return on equity (ROE).

Lenders would compute their IRR using cash flows that show loans, principal

and interest payments. They would also use DSCR, occurrence of short-term

borrowings, and debt-to-equity ratio to gauge the possibility of recovering loan

principal and interest.

2. Sensitivity & Scenario Analysis

Though estimating a project's cash flows is a very complex and difficult

task, it is the basis for determining the structure of project financing. Cash

flows estimation involves certain assumptions about a number of variables.

Sensitivity analysis is performed to see how fluctuations in variables change

- 105 -

NPV= ∑n

t=0It/(1+r)

t- ∑n

t=0Ot/(1+r)

t

∞

key feasibility analysis indicators.

A scenario analysis can also be performed using changes in key variables

assumptions to present several alternative future developments. Though many

scenarios exist, a basic scenario serves as a guideline for determining how loan

principal and interest are to be paid, while a pessimistic scenario serves as a

guideline for determining the level of reserves, flexibility in loan principal and

interest payments, and the level of default rate. The most optimistic scenario

would present a schedule for early repayment of loans.

SECTION 2. Project Indicators

1. Net Present Value (NPV)

Net present value is calculated by subtracting the present values of cash

outflows from the present values of cash inflows. An investment plan is taken

if NPV>0 at the required discount rate and rejected if otherwise.

2. Real Return (Real IRR ) vs. Nominal Return

All cash flows have an inherent interest rate, which is called internal rate of

return. Internal rate of return of an investment proposal refers to the discount

rate that makes the NPV of its cash flows zero. For convenience sake, we call

the interest rate inherent in real cash flows 'real return', and the interest rate

inherent in nominal cash flow 'nominal (current) return.'

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A business owner decides to invest when the real return and nominal return

inherent in the cash flows of an investment proposal are higher than the

required real return and required nominal return. Otherwise, an investment

proposal is rejected.

SECTION 3. Indicators for Shareholders

1. Return On Equity (ROE)

Of IRR inherent in all cash flows, the IRR calculated using cash flows

from the perspective of shareholders (cash outflows: paid-in capital; cash

inflows: dividends, capital reduction by payment in cash, etc) is called return

on equity (ROE).

ROE is calculated as follows:

ROE = Net income/shareholder equity = ROI x total capital/shareholder equity

ROI = Net income/total capital

ROE measures the profitability of shareholders' investment. From the

perspective of shareholders, it is the most important financial ratio.

SECTION 4. Indicators for Lenders

1. Debt Service Coverage Ratio (DSCR)

DSCR measures the ability to meet regular debt obligations with the

project's cash flows. Simple DSCR measures the ability to pay debt obligations

using cash flows from operating and investing activities of a given year;

cumulative DSCR also includes beginning cash in the measurement.

Simple DSCR = (Cash flows from operating activities + cash flows from

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investing activities + interest expenses) ÷ (amount of

principal and interest to be paid)

Cumulative DSCR = (Beginning cash + cash flows from operating activities

+ cash flows from investing activities + interest

expenses) ÷ (amount of principal and interest to be

paid)

If simple DSCR is below 1.0, the cash flows in a given year is not enough

to cover debt servicing. If cumulative DSCR is below 1.0, the cash flows in a

given year is not enough to cover debt servicing even if including cash at

beginning of year. For infrastructure development projects in Korea, financial

institutions usually require simple and cumulative DSCRs to be maintained

above the range between 1.0 and 1.5 during the loan period. However, this

requirement can be strengthened or reduced depending on circumstances.

2. Short-term Borrowings (Temporary Shortage of Funds)

When faced with a shortage of funds during the operation period, a project

development company may need short-term borrowings in addition to loans

borrowed through project financing. If short-term borrowing occurs on the

statement of cash flows in a certain year, it means that the sum of cash at

beginning of year and cash inflows in that year is not enough to cover all

items of cash outflows so additional borrowing must be procured in order to

make payments. Even though the profitability of estimated cash flows (NPV,

IRR) meet the standards for investment, temporary shortage of funds can be

expected.

3. Debt-to-Equity Ratio

Debt-to-equity ratio is the ratio of total liabilities to total capital on the

balance sheet each year throughout the project period. A high debt-to-equity

ratio means a high risk for financial institutions to recover principal and

interest. The criteria for determining debt-to-equity ratio basically lies in the

cash flows that reflect the risks of a project, but it is negotiated between the

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[Figure Ⅳ-1] Impact of Key Sensitivity Analysis

project owner and financial institutions. However, given that a project owner's

equity investment reflects his/her will for the project, equity investment by the

project owner at or above certain level has a significant implication for the

success of the project.

SECTION 5. Key Sensitivity Analysis Method

Sensitivity analysis is a method of financial analysis to evaluate the optimal

level of financial feasibility by analysing how changes in major assumptions or

conditions impact return, financial support, and other key output.

1. Elements and Impacts of Key Sensitivity Analysis

2. Examples

A. Change in Total Project Cost

To see the impacts of a reduction in total project cost, lower the application

rate in the total project cost summary sheet and check the changes in the

sensitivity & results sheet.

Example) When reducing total project cost components such as survey cost,

design cost, compensation cost, incidental cost, operating equipment cost,

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operating reserves

⇒ Lower return

⇒ Possible reduction in government subsidies

B. Change in Operation Cost

To reduce personnel cost, overhead cost, maintenance & management cost,

and insurance premiums in the operation cost, lower the application rate in the

sensitivity & results sheet.

Example) When reducing operation cost components such as personnel cost,

general cost, and maintenance & management cost

⇒ Lower return

⇒ Possible reduction in government subsidies

C. Change in Operating Revenue

To perform a sensitivity analysis of the impacts of increased demand,

increase the traffic volume application rate in the sensitivity & results sheet.

Also, to see the effects of higher user fees, raise the toll rates in the operating

revenue sheet.

Example) When expecting higher demand or raising user fees

⇒ Lower return

⇒ Possible reduction in government subsidies (assuming that there is no

change in demand when raising user fees)

D. Change in Free-use Period

To perform a sensitivity analysis of the effect of extended free-use period,

extend the free-use period in the sensitivity & results sheet.

Example) When extending the free-use period

⇒ Higher return in general

⇒ Possible reduction in government subsidies

⇒ However, extension of the free-use period by certain number of years

may actually result in lower return due to needs for large replacement

investments.