3rd Phase of Public Sector Reform Announced

The government announced yesterday the third phase of its public sector reform, saying it will delay the decision on whether to merge Korea Credit Guarantee Fund and Kibo Technology Fund to late this year.

The Strategy and Finance Ministry will sell a portion of the government’s stake in Korea District Heating Corp., instead of privatization. Also, the government will prevent Korea Broadcasting Advertising Corp. and Korea Gas Corp. from owning exclusive rights and allow private firms to bid.

The Lee administration has announced all of its plans to privatize or merge state-run corporations.

Most experts said the government effort to reform the public sector is likely to lose momentum, saying major state-run companies are excluded from the privatization plan.

○ Privatization efforts on hold

Under the reform plan, 88 Tourism Development and Korea Housing Guarantee will be privatized. The government will also sell its 40-percent stake in Korea Power Engineering Co. and 20-percent stake in KPS Co., Ltd., owned by the Korea Electric Power Corp.

Also to be sold is the 49-percent stake in Grand Korea Leisure Corp., which runs casinos for foreigners and is owned by Korea Tourism Organization, by 2010. The tourism body will remain the largest shareholder of Grand, however, since it will limit the number of shares purchased by an investor.

In two years, the government will open up the natural gas import and distribution market now monopolized by Korea Gas Corp. to private companies.

The advertising corporation’s shares will be government-owned. Private companies will also be allowed to participate in the broadcast advertising industry from late next year.

The government initially decided to merge Korea Credit Guarantee Fund and Kibo Technology Fund. Vice Strategy and Finance Minister Bae Kook-hwan, however, said the government and the ruling Grand National Party agreed to delay the decision to late this year.

“The ruling party believes it is undesirable to bring changes to state-run organizations providing support to small and medium enterprises, which are facing difficulties in fundraising due to the financial crisis,” he said.

○ Reform drive likely to lose momentum

Under the reform plan, 108 of 319 state-run companies will face changes that include privatization, mergers and acquisitions, changes in functions, abolishment and more efficient management.

Thirty-eight state-run companies will be privatized, but the number falls to 12 given that five state-run companies whose shares will be partially sold, seven state-run financial institutions including Korea Development Bank and Industrial Bank of Korea that had been set for privatization before the reform plan’s announcement, and 14 government-funded organizations are excluded.

The number of employees at the 12 reached 3,379 late last year, or just 1.3 percent of staff employed by state-run organizations (259,000).

The reform measure is far weaker than the initial plan. In August, the government defended the privatization plan, citing the examples of Britain and Japan whose public sector reform contributed to boosting national competitiveness.

Bae suggested the possibility of additional privatization, saying, “Korea Power Engineering and KPS Co., Ltd. should be privatized when the market matures.”

The government, however, is likely to face difficulty implementing its reform plan.

The ruling party opposes the merger of Korea Credit Guarantee Fund and Kibo Technology Fund, urging more state financial support for smaller companies that have suffered a lot from the financial crisis.

Deciding the new location of Korea National Housing Corp. and Korea Land Corp. will also be far from easy. Both entities will be relocated to the provinces and merged.

Given the sluggish stock market, finding investors will prove tough. Getting the right investors is hard, but the government could face criticism of selling its shares at giveaway prices.

The sale of the shares will come between 2010 and 2012 due to economic difficulties.

The government will also release measures to heighten management efficiency at each state agency to boost efficiency of the entire public sector 10 percent.

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