A report released by a state-run research institute last week rings the alarm about the mounting debts of South Korea’s public corporations.
Debt owed by nonfinancial public companies accounted for 23.5 percent of the nation’s gross domestic product in 2017, the highest but for Norway among the comparable 33 members of the Organization for Economic Cooperation and Development, according to the paper from the Korea Development Institute. The figure far exceeds the OECD average of 12.8 percent.
Korea’s ratio of public firms’ debt to government liabilities stood at 48.8 percent, the largest among the OECD members surveyed.
Public corporations here have been saddled with a mounting level of debt as the government makes them borrow large amounts of money to finance major policy projects.
Government policymakers resort to this practice to lower the headline national debt figure. They insist on excluding debt owed by public companies from state debt.
Last year Korea’s national debt in a broad sense reached 1,985 trillion won ($1.78 trillion), surpassing its annual gross domestic product for the first time. The country’s GDP stood at 1,924 trillion won in 2020.
But fiscal authorities insist that, of the total sum, only 846.9 trillion won owed by central and local governments should be classified as state debt. The KDI report suggested that the debt owed by public companies should be calculated into national debt so that it will be put under the direct management of the government.
Debt held by public corporations has increased at a steep pace under President Moon Jae-in’s administration as they have been compelled to take the lead in implementing its policies. According to data from the National Assembly Budget Office, their aggregate debt increased from 495.2 trillion won in 2017 when Moon took office to 525.1 trillion won in 2019.
Korea Electric Power Corp. is an exemplary case of a public company being made to suffer deteriorating profitability because of misguided government policy. It 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 administration’s policy to phase out nuclear power generation in the country.
Kepco and other public firms have also been burdened with mounting personnel costs as a result of efforts to carry out Moon’s pro-labor election pledges. During his presidential campaign in 2017, he promised to create 810,000 jobs in the public sector and give all temporary employees at public firms a permanent status.
Over the years since the Moon administration assumed office, some profitable public corporations have degraded into “zombie” companies -- ones that cannot repay the interest on loans with the money they earn.
Deficits of public corporations will eventually increase the burden on the public. For instance, a rise in electricity bills will be unavoidable if the utility firm continues to pile up deficits.
An injection of taxpayers’ money might be inevitable to help keep heavily indebted public firms afloat.
What is concerning is that the mechanism needed to improve the managerial efficiency of public firms 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 pay levels with performance-related pay have been dumped in the face of objections from labor organizations.
Under these circumstances, there is little 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 businesses, it is the basic duty of public firms to try to make profits. An increase in profits earned by public corporations will help raise government revenue and reduce the burden on taxpayers.
Making up for rising deficits of public firms with taxpayers’ money is tantamount to passing the financial burden on to future generations. Ill-designed policies should be discarded to avoid deficits of public firms ballooning out of control.
