Analysis: S.Korean privatization off track

By JONG-HEON LEE, UPI Business Correspondent  |  April 24, 2003 at 11:11 AM
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SEOUL, April 24 (UPI) -- South Korea's 10-year push to privatize troubled state-controlled companies has hit a snag as the pro-labor Roh Moo-hyun government bowed to unionists' opposition to the privatization drive.

Analysts warn an aborted drive to privatize the ailing public sector would increase the financial burden on taxpayers and eventually lead to a downgrade in the country's sovereign credit rating.

The government retreated on the reform drive earlier this week when it decided to shelve its plan to sell off the heavily indebted railway operations to private business concerns.

After a face-off with the labor union of the state-run Korea National Railroad that had threatened to stage massive strikes, the government agreed to seek an alternative to privatization and build a social consensus before launching a new cost-cutting program.

Officials said the government would continue to control railway tracks and establish a state enterprise to restructure their operations, instead of privatizing the industry immediately.

Transportation Minister Choi Jong-chan explained the KORAIL would be transformed into a public company in a preliminary process for the long-term privatization. "This phased privatization would prevent sudden job losses that an immediate change in ownership would cause," a ministry spokesman said.

But many analysts have raised doubts over the "phased privatization" because the labor union insists the government has agreed to "scrap privatization and seek an alternative jointly with the union."

The dispute is just one of many hurdles in the way of the railway industry privatization as the nation's other railway arms, the Korea High Speed Rail Construction Authority, is also under strong labor opposition.

Some critics say the cancelled railway privatization is a result of Roh's pro-labor policy. Roh indicated his government would not seek the railway privatization, saying the country's network infrastructure business should remain government control "for the sake of the public interest."

Roh's aides sad the newly inaugurated president had offered a cautious approach to the privatization of the government-owned companies, which could trigger labor protests.

"We don't think that privatization is the sole way to rescue the public sector," said a senior presidential official told United Press International. "It would be hard to bring competition into the railway business even if it is privatized," the official said who requested anonymity.

Officials also indicated the government would drop plans to privatize other key public corporations -- the electricity utility and gas industry.

South Korea has carried out programs to privatize 12 main state-run businesses in the wake of the 1997-98 financial crisis that forced the country to go to the International Monetary Fund for a record $58 billion bailout to avoid a national debt default.

Roh's predecessor, Kim Dae-jung sold off eight of the 12 companies, including steel giant Pohang Iron and Steel Co, and the telecommunication service, during his five-year term that ended last February.

The four main monopoly utilities, in electricity, gas and residential heating -- have also been under the privatization process.

Kim's government has split state-run Korea Electric Power Corp's power generation operations into six companies in hopes of selling five of them as part of efforts to speed up the privatization. If the plan is successfully implemented, the only remaining government-controlled sector would be electricity transmission with small working capital requirements.

The previous government also had proposed to split Korea Gas Corp, the country's sole gas distributor, to help sell them.

Analysts say the Roh government is misguided for backpedaling on privatization and called for continuous efforts to sell off ailing state-owned sectors.

The railway sector currently has an excess of $6.9 billion in accumulated losses, and is losing $491 million to $574 million annually. Industry analysts forecast its accumulated loss could reach $41 billion by 2020.

South Korea is among the few countries that still operates with state-run railway industries, along with India, Sri Lanka, Russia and North Korea, analysts say.

"The government is urged to push for privatization, which will encourage competition based on market principles," said Kim Dong-gun, a Seoul National University professor.

Kang Eung-sun, an economic commentator at the Maeil Business Newspaper, warned the worsening situation at the state-owned companies would increase the financial burdens on taxpayers. "The government will have to make up for huge losses with taxpayers' money in the years ahead," he said.

Local brokerages also said the suspension of the 10-year government-led privatization plan would negatively affect foreign investors. "The government may reverse its course again one or two years later by re-employing the privatization campaign to ease taxpayers' burden," said an analyst at Seoul-based foreign security firm.

Some analysts say the aborted privatization of the railway sector would spark stronger labor opposition to a government plan to sell off state-run Chohung Bank.

The government has proposed to sell its 80-percent stake at the ailing bank to Shinhan Finance Holding Co, South Korea's fourth largest lender.

The labor union at Chohung has vowed to make all-out efforts to prevent privatization which it says will result in massive layoffs, calling for the lender's independent survival.

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