Reform of public institutions with mounting debt should be hurried

The Ministry of Economy and Finance began to review measures to have the private sector take over some work and plans to reduce public institutions’ debt, as well as the revision of the wage system based on job function, which has been delayed by the labor union’s opposition. In the second half of the year, the ministry will announce guidelines for restructuring public institutions. It is believed that the ministry began the reform process to address poor management and inefficiency accumulated at public institutions while this year’s loss of Korea Electric Power Corporation, a major public institution, will reach 30 trillion won.

Reform cannot be delayed further given the poor management, mounting debt, and oversized growth of public institutions during the past five years. One out of two public institutions had a loss last year. The total debt of all public institutions is 583 trillion won, which is 90 trillion won more than five years ago and comparable to the government’s budget for this year of 607 trillion won.

In particular, Korea Electric Power Corporation is facing a serious situation with a 7.8 trillion won loss in the first quarter of this year. Its loss is growing as LNG prices surge due to the war in Ukraine while the share of LNG power generation increased under the previous administration’s policies to expand new renewable energy generation and phase out nuclear power. The amount of corporate bonds issued by Korea Electric Power Corporation until April this year exceeded 50 trillion won. It even started credit transactions due to the lack of funds to buy electricity from its subsidiaries.

The oversized growth of organizations is also negatively affecting public institutions’ management. The number of employees at 350 public institutions increased by about 100,000 from 2017 to the end of 2021 while their labor costs rose from 24.2 trillion won in 2012 to 32.4 trillion won last year. Even with such challenging situations, the heads of Korea Electric Power Corporation, Korea Hydro & Nuclear Power, and power-related subsidiaries received about 100 million won in incentives last year. The executives of the Korea Real Estate Board, which caused confusion in policies with its incorrect statistics, and the Korea Tourism Organization, which did not generate performance due to a huge drop in inbound tourists from COVID-19, also received incentives. They are hard to avoid the criticism of moral hazard.

South Korea’s public institutions are the largest in number and the roles they play among OECD member countries. Poor management of public institutions is partially attributed to the government passing policy costs to them. The debt of public institutions is called ‘hidden national debt’ as the government practically acts as a surety. It should be paid with taxes at the end, which can further harm the country’s finance, which is already at risk. Without hurried efforts to remove inefficiencies at public institutions and put their management on a track, the country’s finance will face grave consequences.