Government announces debt-cutting measures

The government announced yesterday plans to cut debt at 18 public institutions as well as measures that would address lax management at 38 institutions.

The plan came two days after President Park Geun-hye emphasized the normalization of the public sector on Tuesday in her three-year economic innovation plan.

“The very first task to make the economy robust is to reform the public sector, which makes this latest plan very meaningful,” said Hyun Oh-seok, finance minister and deputy prime minister for economy, at a press conference in central Seoul.

The 18 public institutions targeted will be required to slash 42 trillion won ($39.3 billion) in debt by 2017, mainly through asset purchases, the strongest measure imposed by the government so far to straighten out finances and efficiency at public companies.

The total debt of Korea’s 295 public institutes, corporations and quasi-governmental organizations shot up from 290 trillion won in 2008 to 493 trillion won in 2012.

According to the government’s estimations, if the plan goes well, the total debt growth of the institutions will be curbed at 43.5 trillion won by 2017, almost half the original plan.

Public companies in Korea are notorious for their extravagant welfare benefits, high salaries and workplace complacency.

And young job seekers often spend more than a year on average preparing for annual examinations to enter these public companies.

While most of the debt-reduction proposals submitted by public companies late last year were accepted by the central government, the plans by five institutions, including the housing project developer Korea Land and Housing (LH) Corp., were rejected.

“For public institutions to be able to provide quality services at low prices, they should have sound financial health,” the minister said.

The debt-ridden Korea Electric Power Corp. (Kepco) and LH have both announced that they will sell some of the properties where their headquarters are located, while Kepco also plans to sell its condominium membership.

Korea Expressway Corp. will be selling its golf club memberships, rather than providing them for free to employees, while Korea Gas Corp. will sell off its training center. LH, Korea Water Resources Corp., Korea Hydro and Nuclear Power Corp. and Kepco’s power generator subsidiaries will also sell off corporate residences provided for employees.

The government said sales of those assets will be conducted in such a way so that they don’t affect the core businesses of those institutions.

If all goes according to plan, the total debt of those institutions will start decreasing by 2016, the government projected.

The financial health of 13 of those 18 institutions will be able improve if they faithfully carry out the debt reduction plans, the government analyzed.

LH, K-water, Korail, Korea Rail Network Authority and Korea Coal Corp. are in dire straits when it comes to financial soundness. The total debt of the five companies combined amounts to 185 trillion won. They were told to submit supplementary debt-reduction plans again by next month. The government will come up with a separate plan for the five institutions.

The Ministry of Strategy and Finance ordered LH, in particular, to cut back on projects that are deemed less competitive than comparable projects pushed by the private sector. Korail was also told to improve its competitiveness by restructuring its current business model.

The other 38 institutions promised to cut back on superfluous spending on welfare benefits for employees, including education and medical costs.

Those companies must cut welfare costs by 154.4 billion won, or 31 percent, from this year compared to last year.

Per employee, the average welfare cost must go down 1.37 million won, or 32 percent, to keep it below 5 million won. Korea Exchange will more than halve its costs, from 13 million won to 4.5 million won. And the Export-Import Bank of Korea will reduce it expenditure from 9.7 million won to 3.9 million won. Koscom, an IT solution and security company for financial transactions, will slice costs from 9.4 million won to 4.6 million won and Korea Racing Authority (KRA) will reduce them to 5.5 million won from 9.2 million won.

The government found that Korea Expressway paid 70 percent of the cost for employees’ children to attend English camps. KRA handed out financial assistance for both skiing and English camps for its workers’ offspring. Similarly, the Korea Agro-Fisheries Trade Corp. paid for up to 20 million won per child for private school tuition.

The latest plan didn’t touch upon personnel reshuffling in those public institutions, however, as the government believes that current managers at those companies have the most awareness over their financial situations.

The plan also ruled out raising the prices of public utility services provided by debt-ridden companies. “Some of the institutions’ normalization plans might involve public utility prices during the process of cutting debt,” the minister said. “But the government’s principle is that unit costs of those services should be analyzed before discussing raising consumer prices.”

Earlier, the institutions requested a 3.8 trillion won increase in their service prices, but the government disapproved. As a condition for reducing debt, Kepco wanted a 2 trillion won increase; K-water wanted a 300 billion won increase; Korail a 700 billion won increase; and Korea Expressway a 800 billion won increase.

The government will evaluate performances of these companies in September and hold chiefs and executives accountable if they are not executing the plans.

BY song su-hyun [ssh@joongang.co.kr]