KORAIL Ordered to Liquidate Companies

Seventeen companies financed by the Korea Railroad Corporation (KORAIL) will be massively restructured after a recent Board of Audit and Inspection (BAI) investigation revealed slack management and reckless investment practices.

The BAI discovered chronic deficits resulting from KORAIL’s slack oversight of the companies and recommended KORAIL sell or liquidate its shares in five of the 17 companies. The board also advised merging or closing three investment companies.

This was followed by a BAI inspection on 17 KORAIL investment companies from April through June last year.

According to the BAI, the National Railroad Administration (NRA), KORAIL’s predecessor, established 12 investment companies in 2004, but only two companies turned a profit, with the rest running deficits. The total deficit amounted to 6.4 billion won.

A BAI spokesperson explained, “The National Railroad Administration had seemingly rushed to increase the number of its investment companies before it changed to KORAIL. It did so because the process of setting up investment companies would become tougher once NRA becomes the state enterprise.”

Sales of some companies were found blown out of proportion in business feasibility tests.

The railroad corporation financed one billion won to KTX Tourism and Leisure Co. and released a report predicting annual sales of 11.7 billion won from the investment. However, it ran a deficit of 380 million won a year later. The report fixed its sales outlook figures at 68 times the annual sales of 170 million won by a similar company.

Making an investment to the Korea Railroad Help Center, a legal service provider, in 2004, it also drafted a report that the center would take 200 cases the following year. However, the center covered only 14 cases from outside as of 2004.

Moreover, KORAIL hired its former executives instead of professional managers in the 36 high-ranking positions of 17 investment companies or 80 percent of the total. In addition, eight companies including the Railroad Industry Development Co., sealed private contracts with KORAIL worth 70.3 billion won or 98 percent of 71.9 billion- won - deals from January through April 2004.

Nine other companies financed 4.2 billion won or 33 percent of the total capital of 12.6 billion won through a circular investment system among the companies.

Min-Hyuk Park mhpark@donga.com