[Editorial] Deeper in the red

Alarm bells are ringing about the deteriorating profitability of most public companies, which have been compelled to take the lead in implementing the ill-conceived policies of President Moon Jae-in’s administration over the past two years.

Data released by the Bank of Korea last week has heightened concerns.

The country’s nonfinancial public firms recorded a combined deficit of 10 trillion won ($8.3 billion) last year, representing a 25-fold increase from the previous year, when the corresponding figure remained at 400 billion won.

Over the cited period, their total revenue decreased by 1 trillion won to 173.3 trillion won, while their overall expenditure increased by 8.5 trillion won to 183.3 trillion won.

Korea Electric Power Corp. has shown the steepest decline in profitability. The utility firm posted an operating loss of 208 billion won last year after seeing its operating profit plummet from 12.1 trillion won in 2016 to 4.9 trillion won in 2017.

The company has been pressed to increase the purchase of more expensive electricity generated by renewable sources and natural gas power plants in keeping with the Moon government’s policy to phase out nuclear power generation. Its operating loss is expected to exceed 1.5 trillion won this year, if it continues to be barred by the government from raising electricity charges.

KEPCO and other public companies have also been burdened with mounting personnel costs as a result of efforts to carry out Moon’s labor-friendly election pledges. During his presidential campaign in 2017, he promised to create 810,000 jobs in the public sector and make all temporary employees at public firms permanent. Last year alone, 339 major public corporations and institutions hired 39,000 workers, double the number for 2017.

Over the years since the Moon administration assumed office, some profitable public firms have degraded into “zombie” companies that cannot repay the interest on loans with their profits.

Recent figures from the Ministry of Economy and Finance forecast that the average debt-to-equity ratio of major public companies and institutions will rise by 3 percentage points from a year earlier to 170 percent at the end of the year. The estimated ratio is far higher than the 163 percent predicted by the ministry last year.

The amount of debt is projected to increase from 479 trillion won to 498.9 trillion won over the cited period. This rising trend contrasts with the situation in many advanced countries, where the problem of indebted public companies is not so serious due to high levels of privatization.

Debt owed by public corporations account for more than 30 percent of all the public-sector debt in the country, the highest level among the 36 member states of the Organization for Economic Cooperation and Development.

Deficits of public corporations will eventually result in increasing the burden on people. For instance, a rise in electricity bills will be unavoidable if the utility firm continues to pile up deficits.

What is concerning is that the mechanism needed to enhance the managerial efficiency of public companies has been scrapped under the Moon administration.

The method of evaluating the managerial performance of public corporations has shifted its focus from profitability and financial soundness to ethical principles, cooperation with small businesses and job creation. Efforts to replace seniority-based payment with performance-based one have been dumped in the face of objections from labor groups.

Under these circumstances, there is no reason for executives of public corporations to try to reduce deficits. It is just absurd that an indebted public company may get a better score in managerial evaluation by spending more to increase employment and promote social values rather than improving the bottom line and labor productivity.

As with private companies, it is the basic duty of public firms to try to make profits. Increased profits earned by public corporations will help raise government revenue and reduce taxpayers’ burden.

In this regard, the Moon administration may well be criticized for having taken an easygoing approach by seeking to make up for rising deficits of public corporations with taxpayers’ money.

Such an attempt is tantamount to passing the financial burden on to future generations. The government should discard its ill-designed policies to avoid deficits of public firms ballooning out of control, which will severely damage the country’s fragile fiscal stability.