Potential Risks in the Liability of Public Institutions and the Policy Response

Abstract

Korea shows relatively low government debt/GDP ratio of 38% as of 2011. However, it should be noted that such a low ratio does not include the debt by the 288 public corporations of which aggregated liability amounts to 36% of GDP. The top 7 in the high debtors' list take up 95% of the total, and they are: Land & Housing (LH), Electricity (KEPCO), Gas (KOGAS), Expressway (KEC), Water Resource (K-Water), Oil (KNOC), and Railway (KORAIL). The ‘most risky' financial statement is found in KEPCO. Though the second in the volume, it shows negative operating profits 4 years in a row. The next ‘very risky' one is KORAIL which is enjoying transient positive profit. The biggest debtor LH taking up 41% of the total liabilities by public corporations, is surprisingly categorized to the ‘risky', not ‘very risky' because it shows interest coverage ratio of 610%, the highest among the top 7 debtors. KOGAS and KNOC are also in the league of the ‘risky' followed by K-Water and Expressway in the ‘potentially risky' group. The liability of public corporations is a result of two types of collusion by three parties: the government, public corporations, and the citizen. The first type is public projects conducted by the debt of public corporations not by the government budget, which enables the government to enjoy low debt/GDP ratio. The public corporations do not mind these debt-ridden projects because it will expand their political power and staffs' promotion opportunity. The citizen look forward to those projects because they will be beneficiaries. The second type of collusion is low public utility rate such as electricity, water, gas, toll fee etc, which is of course very welcomed by the citizen. The government enjoys low inflation rate and consequential favorable approval rating by the citizen. The public corporation accepts the regulated price level partly by the government pressure and partly by the belief that the low rate will put more distance to the privatization. The background of the debt problem is the three party collusion through which both the government and the citizen seek its own benefit without paying the cost. This unpaid cost is eventually shifted to the next generation as a form of debt. The government should finance the public projects by the budget not by the debt of public corporations. The citizen also should be ready to pay a utility rate that can recover the costs. Of course, the public corporations should do their homework by innovating themselves to be more efficient. To solve the debt problem, all three parties should change.

Korea shows relatively low government debt/GDP ratio of 38% as of 2011. However, it should be noted that such a low ratio does not include the debt by the 288 public corporations of which aggregated liability amounts to 36% of GDP. The top 7 in the high debtors' list take up 95% of the total, and they are: Land & Housing (LH), Electricity (KEPCO), Gas (KOGAS), Expressway (KEC), Water Resource (K-Water), Oil (KNOC), and Railway (KORAIL). The ‘most risky' financial statement is found in KEPCO. Though the second in the volume, it shows negative operating profits 4 years in a row. The next ‘very risky' one is KORAIL which is enjoying transient positive profit. The biggest debtor LH taking up 41% of the total liabilities by public corporations, is surprisingly categorized to the ‘risky', not ‘very risky' because it shows interest coverage ratio of 610%, the highest among the top 7 debtors. KOGAS and KNOC are also in the league of the ‘risky' followed by K-Water and Expressway in the ‘potentially risky' group. The liability of public corporations is a result of two types of collusion by three parties: the government, public corporations, and the citizen. The first type is public projects conducted by the debt of public corporations not by the government budget, which enables the government to enjoy low debt/GDP ratio. The public corporations do not mind these debt-ridden projects because it will expand their political power and staffs' promotion opportunity. The citizen look forward to those projects because they will be beneficiaries. The second type of collusion is low public utility rate such as electricity, water, gas, toll fee etc, which is of course very welcomed by the citizen. The government enjoys low inflation rate and consequential favorable approval rating by the citizen. The public corporation accepts the regulated price level partly by the government pressure and partly by the belief that the low rate will put more distance to the privatization. The background of the debt problem is the three party collusion through which both the government and the citizen seek its own benefit without paying the cost. This unpaid cost is eventually shifted to the next generation as a form of debt. The government should finance the public projects by the budget not by the debt of public corporations. The citizen also should be ready to pay a utility rate that can recover the costs. Of course, the public corporations should do their homework by innovating themselves to be more efficient. To solve the debt problem, all three parties should change.