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[Editorial] Privately Funded or Forcibly Funded?

Posted September. 10, 2009 08:27,   


A contract that will transfer 88.8 percent of AREX’s (Airport Railroad Co., Ltd) private capital of an estimated 1.2 trillion won (980 million U.S. dollars) to Korea Railroad, or Korail, is expected to be signed this month. The government thinks Korail’s acquisition will alleviate the persistent financial burden on taxpayers, whose money is being used to alleviate AREX’s chronic deficit.

Since the late 1990s, the government has promoted privately funded projects for profit social overhead capital construction such as roads, railroads and ports. Unfortunately, many of them have flopped due to inaccurate demand projections and consequently turned into white elephants living on government life support. The major cause of their failures had to do with a minimum revenue guarantee plan introduced in 1999 that guaranteed privately funded companies profit with state support for minimum operating revenue. In other words, privately funded turned into taxpayer funded.

A daily average of 16,600 people last year used AREX, which links Incheon International Airport with Gimpo International Airport. This is just 7.3 percent of the initial projection of 226,000 when the service was launched in March 2007. A subsidy worth a staggering 104 billion won (84 million dollars) in 2007 and another of 166.6 billion won (135 million dollars) last year were needed to make up for AREX’s deficit. Another example is Mokpo New Port, whose operating performance was 13.8 percent of what was planned last year. As a result, the subsidy snowballed from 2.5 billion won (two million dollars) in 2005 to 10.3 billion won (eight million dollars) last year. The combined financial support to alleviate the deficits of privately funded projects has rapidly risen every year from 266.4 billion won (217 million dollars) in 2007 to 351.2 billion won (286 million dollars) last year.

Previous governments approved privately funded projects without verifying their efficiency since they initially posed no financial burden and offered an effective way to accommodate each region’s demands. Companies had no reason to reject these projects either, since they could stay safe with the minimum revenue guarantee program. Even those with low priority were included on the list under the pretext of privately funded projects. Though the government gave the excuse that these projects require much capital in interest payment and maintenance, the actual damage is beyond repair.

As a result, the government in 2006 abolished the minimum revenue guarantee program for projects proposed by the private sector. It also plans to remove the benefit from government-proposed projects by revising the basic plan for privately funded projects. Attracting private investment for promoting social overhead capital projects is important, but not at the cost of a distorted structure in which private companies are not held accountable to profitability at taxpayers’ expense.