Privatization: meanings and reasons Public enterprises commonly execute various works for the government with the government support. Therefore, the profit structure is stable and public enterprises may have monopoly in the specific area. This stable structure can have side effects such as a decrease in effective work. However, privatization aims to fix this problem by enhancing market competition. How privatization works is as follows: national or public organizations which have legal ownership of specific business trades move to the private sector through divestment. In a broad sense, it consists of contracting out, supplying infrastructure facilities of private, private participation allowance to public service business. However, in a narrow sense it doesn’t consist of privatization. The government believes that if the private sector’s capital is invested in public enterprises, it will reduce government cost and strengthen its efficiency. However, it is unclear who is responsible for the lack of efficiency in the public enterprises, and what side effects to private business’s monopolization can cause. Price increases are also likely to occur.
Foreign examples of privatization
British Airways was privatized in 1987, it was a successful case of the privatization. Before its privatization, it was notorious for disregarding client needs and its employees had incompetent and arrogant attitudes. At that time, the CEO Sir Colin Marshall said, “We will struggle until we achieve the best customer service possible.” Due to his dedicated decision and Prime Minister Thatcher’s intensive restructuring, it was able to be a global airline.
The United Kingdom’s Prime Minister Thatcher privatized British railway and she divided it into several pieces to maximize competition. First of all, the company named “Rail Track” was established and received national tracks at the same time. It was divided into several departments. After that, the company “Rail Track” monopolized the entire country’s railway system and made a profit in the process. Therefore, train conductors were suffered from a chronic deficit. This resulted in conductors being dependent on government subsidies. Also, several horrible accidents occurred due to general neglect in safety. Finally, the British government decided to nationalize railroad system again.
The other example is medical insurance of America. Now, U.S’s medical treatment is most advanced in the world. However, health care in the U.S is going to hell in a hand basket. According to the U.S Census Bureau, American citizen without health insurance is 457 million of population. It is about 15.3 percent of population in 2007. As a result, medical bills are so expensive and 2 million people claim bankruptcy annually. The nation health level was also world ranked 30th and has remained a low rank ever since. President Obama’s health care policy comes into effect this year and introduces a public medical insurances option. In the early 2000s, there were frequent accidents like the U.K train derailment, blackouts, an interruption to the gas supply and blackouts at Silicon Valley which is located in California, U.S. Through these examples, privatization of resources such as electricity and gas or services such as the railway system is a dangerous policy according to popular opinion. Furthermore, in the mid-2000s privatized water companies in Bolivia and the Philippines acted dishonestly and caused issues. Therefore, recent situations show the negative implications.
Privatization in Korea
KT, KT&G and POSCO are all privatized enterprises. KT decided to complete their sale during the IMF bailout loan request, and sold government equities in stages in 2002. However, net profits dropped in 2003 and KT cut its employees in 2005. This caused long distance call services to go down in major cities. Recently, KT caused controversy by trying to dispose of the Mugunghwa satellite 3 and rented out its frequency to other countries. In contrast, KT&G and POSCO are cases of successful privatization. Korea Tobacco & Ginseng Corporation was privatized by changing the corporation name to KT&G in 2002. After privatizing, KT&G exported its products to over 50 countries and was awarded the ‘400 million dollar Export Tower’ in 2008. Furthermore, POSCO extended operating profits and assets and also cut down its debt after privatization. The Korean government earned 18 trillion won by the privatization of POSCO.
Current controversial privatizations
Suseo KTX affiliate was established last January 11th. The government’s purpose was to make the rail company more efficient and make a new demand which could coexist with its parent company Korail. In addition, they predict it would contribute to the development of the Korean railway industry. However, Suseo KTX affiliate is still controversial. Korail would present the profitable routes to a subsidiary company and Korail would take on the unprofitable routes. Therefore, the government is essentially promoting the disposal of Korail’s assets. Finally, experts from each field have doubt that the surplus operating assets will follow a process of privatization. Suseo KTX affiliate has plan to build a new company building which will cost approximately 28 billion won. This has further caused controversy.
It was impossible for private companies to sell the rest of natural gas even if they imported it. However, city gas business law was pushed ahead last April which included the stipulation that enabled private companies resell gas abroad or sell to other import companies. The government expected this law to decrease gas prices. However, the opposition parties and civic groups concern that the existing 30 city gas retail companies will have to compete with private companies and that this may not help decreasing price of household gas. Finally congress deleted domestic resale law and city gas business law was passed last December 31st.
Revised Medical Laws
The government revised its medical laws last December. The government said that this is not health care privatization because the government maintains health insurance and plans to permit commercial activity of medical corporations to fund subsidiary companies at the same time.
However, health care professionals are warning that allowing medical corporations to establish these can destroy the health insurance system. Medical corporation’s subsidiaries are to seek profits and would be likely to result in an increase in average hospital bills. The per capita hospital bill would be increased but the national health insurance’s coverage would not be extended. This will cause a dependence on private insurance firms and weaken the national health insurance system. It forces experts to review revised medical law via health care privatization. The government announced a tele-health care system which would treat seniors who live in rural areas by using computers or smart phones. They said tele-health care promotes centrally located doctors. However, experts are concerned that local doctors will get suffer as they cannot compete with big hospital tele-health care systems. Also, they are concerned that tele-health care can have high misdiagnosis rate.
The Observer interviewed Song Yu Na, who is in charge of energy and rail at Public Policy Institute For People.Recently the press announced that public enterprises are facing management crisis and debt. What do you think is the reason?
Korail has a lot of debt. In case of the KTX, all lines except the Gyeongbu line show losses. Saemaul train or Mugunghwa train show losses, as well. However, ordinary people use these, so railroad fare is priced low. Also, Korail manages these unprofitable routes. Another reason for deficit is the investment cost of KTX infrastructure. It becomes expensive. Most public enterprises record losses, to maintain their public image. The government calculates the public enterprise management situation by amount of loss recorded. Of course, there are public enterprises which are mismanaged such as the Water Resources Corporation. It suffered losses due to the Four-River Refurbishment Project. Additionally, the Land Public Corporation and Housing Construction are also other representative cases. However, the government should not estimate enterprises via its debt. They need to estimate the public enterprises via its service quality.
Do you think establishment of Suseo KTX affiliate is helpful to improve Korail’s management?
In Seoul, people said Gangnam is the rich district and Gangbuk is the neglected district. However all railway stations are in Gangbuk. There are no major railway stations in Gangnam even though the first train in Korea opened 100 years ago. So if a new railroad station is opened in Gangnam, it would create a new market which means creating profit. If Suseo KTX affiliate is established, it would not preserve unprofitable routes and cost the change of obsolete trains. Especially, it is important to lower the prices of the KTX. Nevertheless, the government announced that this route will be handed over to private enterprises. Consequently, the majority of people opposed this decision. Therefore, the government planned to establish a second railroad company which will never give its company management to private enterprises. However, there is no reason to make a second company. It would further weaken Korail’s business potential. It is hard to process the cross preservation of unprofitable routes. In addition, the board of directors would be divided into two and this will create inefficient management.
What is your opinion about how to improve the management of the public funds?
It is a really hard problem. For example, if we maintain status of Korail, is it for the public?
In our country, it is not possible for labor union to participate in the management. In the case of other countries, like the US, labor workers can participate in management and people supervise enterprises. Even they target private enterprises. Nevertheless, this is not currently a possibility in our country. We really need workers who are professional in their areas to be supervisors of public enterprises and to dispel corruption. Furthermore, making a civil society and local resident watching system to protect public property is really needed at this time. Though we are facilitating discussions about whether privatization is right or not, at this time we need to be concerned about how to manage public enterprises.
There are a lot of controversies over wether the creation of Suseo KTX affiliate and the revision of medical laws can do good for the public. We should instead keep in mind which areas are that the government demands business and service improvement and that are directly connected to people’s lives. If reckless management or efficiency were discussed, business improvement would be the only way to proceed. But after analysis, if these improvements were to fail, it would damage the public sector. Furthermore, it is not important to privatize public enterprises. With the number of incidents which occur at public enterprises nowadays, it’s time to discuss how to manage public enterprises more securely.