Low fares are no solution

Pork barrel projects financed by private capital have turned into a headache for the government. Due to guarantees to compensate for any losses incurred in the projects, the government has been paying private contractors more than 2 trillion won ($1.75 billion) over the years for money-losing businesses.

In order to minimize the losses, the central or local governments will have to raise subway and road toll fees. But they cannot raise fares in fear of sparking inflationary pressure and public protests. The Seoul Metro subway line No. 9, which was constructed and is run by a private company, is in hot water for its surprising announcement that it will raise fares.

The operator of the subway line No. 9, which passes through Gimpo Airport and Yeouido, plans to hike fares by 500 won from the current 1,050 won, a decision that the Seoul Metropolitan City government vehemently opposes. They will probably end up bargaining for a smaller hike as we have seen in similar cases involving private operators. But the dispute over business between local governments and private companies will most likely continue to cause problems down the road.

Under the agreement signed with the Seoul Metropolitan government in 2005, which authorizes the private operator to set the prices, the company does nothing wrong in raising the fares. As it turns out, the company’s losses have piled up to 182 billion won because it could not raise fares due to the city government’s pressure to keep them low. A fare hike seems inevitable, but the city’s dilemma is also understandable. If it allows private subway operators to increase fares, consumer prices will go up accordingly and passengers could strongly protest.

But the city also cannot suppress the fares forever. According to the contract, the city administration must compensate for any losses from the operation and guarantees up to 90 percent of the private operator’s estimated income. The city has to remunerate it for its losses and those funds ultimately have to come from the taxpayers.

Seoul City must choose between a fare hike or a tax bailout. The city administrators can complain that the contracts with private companies were all pushed by the Kim Dae-jung and Roh Moo-hyun administrations and signed by then-Seoul Mayor Lee Myung-bak. However, what’s done is done. What is important now is addressing the problem with the best possible solution and it would be better to raise fares instead of using tax funds.