[Issue] 2013, Issue 3 – CCEJ Special Issue
Privatization of railroads without people’s agreement will fail
Kwon Oh-In
Manager, Real Estate & National Project Team
Ministry of Land, Infrastructure and Transport (MOLIT) reported to the Cabinet council on June 25th, and held a meeting with the Railroad Industry Committee to determine the viability of privatizing Korea’s railway system. In the first 5 months of Park’s administration, the decision was handled swiftly without collecting any public opinion. President Park used to say during her candidacy that “to promote the rail industry, the mid and long term blueprint has to be designed first, a program to promote the railroad industry should be built, and it should be based on the blue print.” She also said that “privatization without national consensus and agreement on national infrastructure, including railroads, will not be carried forward.” However, the privatization of the railroad was determined with even more haste than the former President Lee, and it was done unilaterally. The decision making process is a problem, but there is an even bigger problem. MOLIT’s program to promote the railway seems to pull back the public interest in the railroad rather than promote it. 

MOLIT established the Private Review Committee last April to discuss how to promote the rail industry, but most of the committee members were pro privatization and met only three times for a month to build the program to promote the rail industry. Most of the 25 Railroad Industry Committee members are pro-MOLIT persons and privatization supporters, and thus, there were few obstacles along the way to privatizing the railroads. 
Check management efficiency first

MOLIT’s proposal poses a threat to KORAIL, the current state-owned railroad system. MOLIT claims that since the 1970s, the transport share rate of railroads has been in decline, and deficit operation has set in. Also, the exclusiveness of KORAIL, Korea’s railroad cooperation, is limited in its ability to control deficit operations. MOLIT argues that from 2005 to 2012, the government subsidized KORAIL with 4.3 trillion won, but there were still deficits each year of around 0.5 trillion won, which brought the accumulated deficit total to 4.5 trillion won. 

The argument of MOLIT is not true. The transportation share rate has increased since 2009, and sales profits have risen since 2005. Moreover, KORAIL’s debt is not only from deficit operation, but also from various other reasons. KORAIL purchased trains due to expansion of the railroad network, took over the operation of an airport train, as well as a default on misguided investments in Yongsang areas . Additionally, the government’s compensation for the loss of railroad lines operated at a deficit was not fulfilled, which makes the argument of MOLIT regarding the KORAIL debt unconvincing. If the debt of KORAIL is the main problem, it is necessary to check the reason of the debt first and then seek to enhance efficiency.  


There is no plan by investors to establish a subsidiary of KTX

The privatization program of the Rail Industry Committee reduces the function of KORAIL to a holding company and main railroad passenger transportation. At the same time, it parcels the KORAIL out into affiliate companies, such as passenger traffic, carriage of goods, railroad car management (maintenance and lease), facility (maintenance and asset management), subsidiary enterprises (station area development). The plan is for KORAIL to hold 100% of the shares of affiliate companies which have large deficits or need large investments. The plan also aims to privatize new service routes and deficit routes. 

MOLIT will launch its first affiliated company, KTX from Suseo. KORAIL will hold 30% of KTX Suseo’s shares and the remaining 70% will come from pension funds. To relieve concerns on selling out public funds to private entities, the ministry is planning to clarify that 30% of KORAIL’s shares cannot be sold for investment stipulation. However, regarding MOLIT’s plan, the National Pension service said ‘MOLIT has not contacted us for KTX—Suseo and its operation.’ Another person related to the National Pension Service said ‘there is no plan to invest and there was no single phone call about it.’ According to those comments, it appears that MOLIT is pushing ahead unilaterally, and with haste. The investment of the pension fund is determined by the independent Fund Management Committee, therefore, the government cannot control their decision, and even if the investment is decided, the committee is free to sell their shares. Also, the pension fund has to be guaranteed its minimum earning rate. From the pension fund’s earning rate in late 2012, the national pension was 6.99%, the pension for private school was 6.42%, and the pension for a public officer was 4%. If the National Pension Service contributes to KTX—Suseo, and MOLIT keeps its plan, the KTX—Suseo affiliate company will face financial difficulties because it has to guarantee a minimum earning rate for the National Pension Service, while at the same time eliminating the service fee. The financial difficulty will lead to a rise in the service price, an undue burden on passengers. 

Possibility of shoddy management of the current KTX and the new KTX Suseo

The argument of the MOLIT is that the competition between the current KTX (from Seoul and Yongsan/ northern part of Seoul) and the new KTX from Suseo (southern part of Seoul), will increase competition, raise the quality of service, and expand passenger choices. They claim that profits from KTX Suseo will repay the construction debt and expand investments in the rail industry. However, there are concerns that the division between the two areas would cause a social complication because there is a wealth gap between the northern and southern areas of Seoul.

If KTX Suseo were to reduce 10% of the cost as MOLIT plans, the current KTX by KORAIL will cut the price as well, which will lead to cutthroat competition and a division of limited profits, causing insolvency in both KTX Suseo and the current lines. 
With KTX Suseo, profits are expected to decline; investment costs in the early stages are estimated to be 0.3 trillion won, prices are expected to drop 10%, railroad fees of 0.5 trillion won will be incurred, and the pension’s earning rate preservation and capital interest will be at least 6% of the total budget. 

Privatizing a deficit line will damage the railroad by reducing public access to it

Another issue is the privatization of new service lines from 2017, in addition to the current service lines that currently run deficits. For the new service lines, MOLIT is planning to open the lines to the private sector through a subsidy bidding system. According to the plan, the deficit lines will be opened to private investors through a minimum subsidy bidding method, or they will be managed by local government, the so-called third sector management method. 

However, MOLIT has overlooked the investment situation. The private sector does not participate in the line’s operation as long as profit is secured. If the private sector operates a deficit line, government subsidies must be acquired.  It is less likely that the local government will invest due to its financial dependency and ongoing debt. Nevertheless, if MOLIT pushes ahead with privatization the railroad network centered on KORAIL will collapse, inconveniences and burdens on passengers will grow, and public access to it will be reduced. 

There should be an agency to bring pan-national public consensus.

Germany and France became rail powers because they went through pan-national discussions with an agency for public consensus during the early reform of the rail industries. In 2011, France held a railroad general assembly with participation from CEOs, employers, experts, passengers, transportation groups, members of the National Assembly, and key personnel. They held 5 general meetings, more than 60 working level meetings, and more than 130 hearings to build mid and long term plans. Germany held a board of directors meeting to decide the railroad’s management, along with the participation of executives, a labor union, passengers, and local government, among others. 

To become a rail power, Korea needs an agency which can collect the opinions of all classes. Railroad privatization without public opinion and the National Assembly’s voice cannot be successful. It is not too late to seek a pan-national consensus by collecting facts and opinions on the mid and long term plans presented by President Park.