[Analysis] The point of conflict in the debate over railway privatization

Police spray water mixed with tear gas as they attempt to forcibly enter the offices of the Korea Confederation of Trade Unions in the Kyunghyang newspaper building in central Seoul, Dec. 22. The police were seeking the Korean Railway Workers’ Union leadership, including union head Kim Myung-hwan, who had already fled. (by Park Jong-shik, staff photographer)

Government and workers have different positions on possibility that separation of one line would lead to privatization

By Noh Hyun-woong, staff reporter

As part of the government’s response to the controversy over the privatization of the railroad, various officials - including the Minister of Land, Infrastructure, and Transport; the Minister of Strategy and Finance; and the Prime Minister - have stepped forward to reiterate that the separation of the Suseo KTX Line does not represent privatization. But the Korean Railway Workers’ Union and civic groups refuse to believe the government’s claims, insisting that this is the first step toward privatization.

The government’s position is that privatization can be prevented by mobilizing the available methods, which include placing limitations on the transfer of company shares to private investors and revoking the operating license. According to the government’s proposal, Korail will have a 41% share in the new operator of the Suseo KTX line, which will begin operations in early 2016. Private investors are not able to purchase the remaining 59% of the company’s stocks either; stock participation is limited to public corporations such as the National Pension Fund.

In addition, a clause is included in the company’s articles of association prohibiting the sale of publicly controlled shares to the private sector. The articles of association also mandate that the board of directors must pass a special resolution (2/3 of directors present, 2/3 in favor) for any sale of shares. In addition, if Korail has an operating surplus, it can increase its shares by 10 percentage points each year. This would suggest that Korail could eventually buy all of the shares of the new operator depending on its performance.

Land, Infrastructure, and Transport Minister Suh Seoung-hwan even said that if public corporations sell their stock to the private sector, the ministry would revoke the new company’s right to operate the railroad.

But the railroad union sees things differently. The union argues that it would essentially be impossible for Korail to turn a profit if it splits the KTX market, the most profitable part of the business. From the labor union’s point of view, there is no chance that Korail could increase its share in the new company as the government has claimed. The union also believes that there would be a variety of ways to get around the government’s measures to prevent the private sector from investing in the new company, such as buying shares in a fund.

The union has some evidence to back up its argument. The law firm Sejong was commissioned by Korail to prepare a review of the government’s proposal. The law firm concluded that the privatization prevention plan put forward by the government is seriously flawed. It is likely that the quorum requirement for board meetings convened to sell shares violates commercial law, and it is also probable that the restriction on the operating license is unconstitutional, since it is an administrative tactic that wields the government’s right to license activities as a weapon against stock transfers in the private sector.

The second point under debate is the effect of setting up a new operator. The government believes that introducing a new operator will result in an improvement of Korail’s loose management and will lead to an improvement in the quality of railroad service. According to the government, the laxness of Korail’s management is so severe that the company is running an average yearly deficit of 570 billion won (US$536 million). In addition, the government has argued, Korail’s accounting is opaque and there is no other comparison company, making it hard to expect any improvement. The argument is that introducing a new operator would provide a model that Korail’s management could be compared to, and that this would also lead to more efficient management.

However, the opposite case can also be made. Opponents say that splitting off a new operator from Korail, which is saddled with a substantial debt because of the government’s failed policies, would result in more problems at the company. According to documents that Korail prepared before its board of directors meeting on Dec. 10, at which it was decided to set up a new operator, the creation of the new operator is estimated to reduce Korail’s revenue by an approximate yearly average of 500 billion won.

In addition, opponents argue that the government has only offered a vague explanation of how creating a new operator would help normalize Korail’s management. Since Korail keeps losing money, the government is basically saying, we should split up the company and see what happens. In fact, according to the National Assembly Research Service’s (NARS) Dec. 20 analysis of the government’s plan to develop the railroad business, investing in a separate company without devising any fundamental measures for normalizing railroad operations is not enough to prevent Korail’s deficit from continuing to grow.

For these reasons, the argument that the government’s creation of the new railroad company will eventually lead to railway privatization is gaining strength. In particular, the NARS analysis predicted that splitting a line that is expected to be highly profitable into a separate company would worsen operating conditions at Korail and make it difficult to keep the railroads public.

If efforts to make Korail’s management more efficient by prioritizing profitability end in failure, the only remaining option would be selling the railroad to the private sector. In fact, the government and Korail agreed in theory during the railroad development measures workshop in July to shut down eight unprofitable railroad lines.