[Column] Privatization of KEPCO is a must

Globally, there has been a privatization trend of state-owned enterprises (SOEs). Such a trend rides on the fact that the SOEs are inefficient. Before getting to the crux of the matter, a clarification of terminology is necessary.

In Korea, SOEs are mistakenly called public corporations by many. Actually public corporations are those that have become listed on the stock exchange. Among Koreans, there is a mistaken belief that only government enterprises equate to public ones.

However, the very nature of an enterprise being a public one is not necessarily the exclusivity of the government. A private company, when it serves the public, could become a public enterprise. When a company becomes listed on the stock exchange, it becomes a public company and must serve a great number of stockholders. As such, a public company should not be equated with SOEs. In the following column, the enterprise run by the government will be termed SOEs.

The SOEs impede the efficiency of the Korean economy through various shortcomings. First, the SOEs do not go bankrupt even under failed management. As such, there is a danger of great laxity and indiscretion in the management such as purchasing, production and human resources.

Worse yet, in case of well-structured labor unions within the SOEs, the upper management find negotiating with labor unions a great obstacle, and the motivation to enter into such difficult negotiations is lacking. As a result, SOEs come to have excessive redundant human resource and have overhead expenses much beyond their capability to handle.

Second, when the SOE enjoys a monopoly in a particular field, the evil practices grow ever more rampant. As the SOE enjoys monopolistic profit in a field without competition, the profits are more often than not wasted or paid out in high salaries to the upper management.

Third, when the SOEs compete with non-government enterprises, it becomes an unfair competition. In the case of the communication network field, which requires government certification, the government tends to side with the SOEs when conflicts arise. Even in the fields that do not require government certification, the SOEs enjoy various benefits from the government.

Fourth, although the SOEs are kept under the directorship of the government through inspections, increased inspections proportionally transform the SOEs into bureaucratic agencies of the government. Lastly, the heads of the SOEs are installed based on government favors rather than expertise and qualification. As a result, management becomes shabby and inadequate.

Due to such inefficiencies and pitfalls, many nations around the world have been hastily privatizing SOEs. One of the greatest pursuits of the former Prime Minster of Britain Margaret Thatcher was the privatization of SOEs.

Today, the railways, the mail and even prisons are being considered for privatization. Also, the central and eastern European countries, which are adopting capitalism, also are hastily privatizing their SOEs. The greatest obstacle faced by the Chinese economy was the inefficiencies of the SOEs.

It could be considered that the number of SOEs in a nation is inversely proportional to the efficiency of the nation's economy. In companies or enterprises lacking any real individual ownership, the upper management only serves as managers who look out for the interests of the stakeholders. While in a public corporation, the market forces and stockholders discipline the upper management, the government inspects and disciplines the SOEs. However, due the shortcomings mentioned earlier, the discipline of the government is far short of that by the market forces.

As such, Korea Electric Power Corp.'s breakup and privatization could become the cornerstone in showing the success of the restructuring of the Korean economy.

The argument against privatization of KEPCO is not very persuasive. Currently, KEPCO has debts in the amount of 33 trillion won and require trillions more in loans annually. If the government fails to accomplish the restructuring and privatization of KEPCO, the government will lose its voice and authority in stressing reform and restructuring of the non-government companies. In addition, it also will lose its effectiveness in calling for the privatization of other SOEs.

Should such be the case, a greater threat to the Korean economy might be the loss of credibility and trust of the international capital fund market.

The National Assembly must pass the KEPCO restructuring bill. Should the National Assembly fail to do so, the failure may take Korea down the path toward economic crisis as the failure to successfully pass the Labor Laws in early 1997 and the failure to pass the Financial Reform Bill in August of the same year led to the 1997 economic crisis.

Jung Ku-Hyun, Dean of the Graduate School of Business Administration at Yonsei University