Korea Land and Housing Corp. will reconsider its 120 projects nationwide following the announcement of its suspension of a redevelopment plan for downtown Seongnam, Gyeonggi Province. It wants to drop projects with low profitability because their survival is threatened due to the sluggish property market. The state-run company had 110 trillion won (101 billion U.S. dollars) in debt as of last year, 75 trillion won (63.4 billion dollars) of which was financial debts. In other words, it must repay 8.4 billion won (7.1 million dollars) per day. At this pace, its debts will likely reach 200 trillion won (169.3 billion dollars) by 2014. The financial obligations of the state-owned corporation, which taxpayers could eventually pay, must be resolved as soon as possible. The sooner the better.
The company is swamped in debt because it is leading government projects such as public rental housing, Sejong City and bogeumjari housing. Previous administrations made the state-run land and housing corporations take the lead in government projects when they were separate entities, such as building a new city. The two corporations were under fire for buying large state-owned land at low prices, and the apartments they built sold well. The populist policies of previous administrations, however, ended up worsening the two companies financial situation.
The land and housing corporation is not the only state-owned entity in financial trouble. According to the National Assembly Budget Office, the debts of 25 highly leveraged state-owned corporations reached 181 trillion won (153.2 billion dollars) last year. Five of them had more than 10 trillion won (8.4 billion dollars) in debt, including the land and housing corporation (18.6 billion dollars), the Korea Electric Power Corp. (18.6 billion dollars) and Korea Expressway Corp. (16.9 billion dollars). Since the debts of state-owned corporations could trigger a national financial crisis, foreign credit rating agencies are closely following them.
Even if the land and housing corporation drops certain projects, its restructuring efforts will end up in vain if it is assigned another project. The government must stop its practice of assigning out-of-reach projects to public corporations. The land and housing corporation also needs to reassess its loose management under the belief that real estate investment never fails and start restructuring.
The companys abandonment of projects is a shock coming out of the blue to residents. In other words, the residents must clean up the mess from the debt disaster caused by the government and the company. The company must minimize the shock to residents and the real estate market while seeking to reduce problems from the potentially strained supply of houses. Other public corporations must also start streamlining projects before dropping others. The fundamental cause of this shock is the policy failure of state-owned corporations and loose management. To avoid a repeat, a new paradigm for the management of public corporations is needed.