Korea’s state firms: Poorly managed, heavily indebted

2013-11-10 11:11

State firms: Poorly managed, heavily indebted

Parliamentary audit finds countless irregularities at land ministry-affiliated companies
By Kim Bo-eun

Koreans often refer to state-run corporations as the ultimate workplace because these jobs not only pay well, but also guarantee work until retirement age. Plus, many of these companies offer additional perks like high performance-based bonuses, severance pay and expensive retirement gifts. Based on these extravagant benefits, you might expect these firms to post excellent profits, but annual parliamentary audits show that they are plagued with debt and corruption. This year’s audit was no exception. The recent National Assembly audit exposed poor management, especially at state-run firms under the Ministry of Land, Infrastructure and Transport headed by Suh Seoung-hwan. While the audit showed mounting debts at public corporations as a whole, firms under the land ministry accounted for 42 percent of the debt accumulated by all state-owned enterprises. Meanwhile, the audit showed these corporations have low levels of integrity, undue benefits for employees, and little willingness to change.Snowballing debt
According to Park Ki-choon, a lawmaker of the opposition Democratic United Party, the amount of debt accrued by public firms under the land ministry is 211 trillion won, out of the total of 493 trillion won.
Korea Land and Housing Corp. (LH) holds 55 percent of the debt, which is the highest debt of any corporation under the land ministry, according to lawmaker Kim Tae-won of the Saenuri Party. LH’s debts amount to 141 trillion won, which adds up to 12 billion won in interest payment daily. This makes its expenditures exceed its earnings each year. In addition, 75.6 percent of its total debt accounts for loans, exhibiting the poor financial status of the firm.
A look into the source of its debt shows government projects account for more than half. In fact, six government projects it has undertaken account for 56.2 percent of the corporation’s total amount of debt as of June this year. The Park Geun-hye administration’s housing project for the underprivileged is expected to pose additional burdens. Estimates based on LH’s current financial status tell that it could have 170 trillion won in debts by 2017.
LH is not the only company struggling with heavy debt. The debt ratio for the Korea Appraisal Board (KAB) was 1,151 percent in 2012, up 325 percentage points from a year earlier.
Meanwhile, its operating profits to sales ratio marked 0.2 percent, a 0.3 percentage point fall from the previous year. It had the highest rate of debt increase at 37.9 percent.
Integrity crisis
In a recent state assessment, LH scored miserably in integrity. In the 2012 integrity assessment conducted by the Anti-corruption and Civil Rights Commission, it ranked 25 out of 26 public firms.
The KAB spent big bucks to entertain new interests while its debt continued to grow. Its expenditures on entertainment exceeded legal limits in 2012, according to an online research firm, CEO Score.
Research shows six out of the 26 state-run firms exceeded entertainment spending limits, with KAB leading the pack by spending 390 million to entertain last year, four times the legal limit.
Speculative buying also occurred, according to lawmaker Kim. Employees of state-run firms relocating to provincial cities had made profits by selling the houses provided to them at prices discounted by around 20 percent. The relocations are taking place in a state project to spread central government functions to provincial cities, to decentralize the population in the capital, and to promote balanced development.
The Korea Housing Guarantee (KHG), which is relocating its office to the southern port city of Busan in September 2014, had provided 132 employees with apartments at discounted prices. Among them, 32 employees made a total of 749 million won in profits by selling the houses a year after purchasing them. Calculated per person, each made 23 million in profit.
Ten employees at the Korea Cadastral Survey Corp. (KCSC) also made profits through the same method. The corporation is relocating to an area in North Jeolla Province this month.
Excessive benefits for employees
Corporations under the land ministry are among the highest paying public firms, according to job information portal, Saramin. Analysis by Saramin shows the highest paying corporation is Incheon International Airport Corp., where newly recruited employees get 39 million won in their first year. Other firms under the ministry that made it on the top 10 list were the Housing Guarantee and the Korea Airports Corp.
While employees at these corporations get a head start, they also enjoy various benefits. The KCSC, KAB and KHG provide tuition for employees with middle and high school age children. The subsidies did not have a cap, financing tuition for more expensive schools as well. The total amount of tuition financed by the three institutions exceeded the Ministry of Safety and Public Administration’s regulations by 548 million won. Among them, the KCSC paid a total of 26 million won to employees with children in art schools, from 2010 to June of this year.
The perks also include performance-based bonuses. LH’s CEO got a 125 million won in performance-based bonus this year and employees got an average of 13 million won. The average annual income of an LH employee, including bonuses, totals 65 million. This is significantly higher than 59 million won, which is the average income of working Koreans at 366 listed companies here, according to CEO Score.
“Employees at state-run enterprises in need of restructuring are in essence enjoying greater benefits than those at conglomerates,” said Kim.
The KAB paid 153 retires 480 million won in “performance-based bonuses,” in addition to the 9.6 billion won they got as severance pay.
According to lawmaker Lee Mi-kyung of the Democratic United Party, the KAB is also paying its retirees large sums through a early retirement option.
A KAB executive who retired in June, for example, received 88 million won in legal severance pay and an additional 210 million won in early retirement pay — totaling to some 300 million won. The corporation spent 1.6 billion won this year on early retirement pay alone.
“The severance pay at KAB is a tremendous amount considering the current scale of its debt,” said Lee. “Receiving such a large sum of severance pay is a privilege that only employees of public corporations are able to enjoy.”
Retirees of these firms not only get huge sums of severance pay, they also get pricey gifts. The KAB and KHG currently provide tenured employees with commemorative coins and retirees with tablets and keys made of solid gold.
According to lawmaker Kim, KAB employees who retire after working long enough are able to get 31.6 grams of solid gold, which is worth 14 million won. The KAB provided 361 million won worth of gold gifts to 592 employees from 2008.
The KHG has also provided tenured employees with keys made of gold as well as dining vouchers worth up to 400,000 won. These gifts were provided to 280 employees from 2008, which amounts to 60 million won.
According to new budget planning guidelines from the finance ministry, government agencies can’t have a budget for such gifts.
Lobbying assessment panelists
The corporations spent tens of millions of won to lobby assessment panelists for better evaluations. The corporations gave these candidates, who were mostly professors, research projects, opportunities to give lectures or even positions within the firm.
In June, the KCSC gave a 52 million won project to a professor who was a member of the firm’s assessment panel in 2010. Another individual who served as director at the corporation from 2009 to 2011 was on its assessment panel in 2010 and 2012. The firm provided a total of 36 million won in extra pay to the director.
The KAB also gave a professor, formerly on its assessment panel in 2011, a 76 million won project in February.
The KHG invited a chairman of an organization to provide a series of lectures from May to June. The corporation paid the chairman 5.4 million won for six lectures. The chairman was a member of the assessment panel for 2012.
According the Ministry of Strategy and Finance’s regulations, assessment panel members cannot assume research projects or lectures provided by the organization they are evaluating.
Response from corporations
According to LH, it is currently working on 23 initiatives to alleviate its debt.
“These include disposal of holding assets, reducing costs of building houses, inviting private businesses to work together on government projects and having reputable organizations conduct reviews of projects,” an LH official told The Korea Times’ Business Focus.
The corporation said that it is also discussing with the land ministry to get government support for its rental housing project.
In addition, it plans to request government regulations in green areas to be eased and suggests local municipalities share some of the infrastructure costs where LH houses are built.
“Legal restrictions are currently imposing significant cost burdens, so we plan to request for some of these to be relaxed,” the official said.
The corporation plans to have a comprehensive debt reduction plan by the end of November.
Regarding integrity issues, LH says regaining public trust is a top priority. According to a press release, the company created a special committee on putting its integrity policies into practice and also launched an initiative with its contractors for its construction projects, to foster a horizontal power structure.
Furthermore, it has established an inspection body within the firm and begun an integrity campaign among its employees to promote ethical practices.
While LH has an overall plan in place, the other corporations offered fewer solutions to these ongoing problems.
An official at the KAB stated that the debt figures cited by CEO Score did not correctly represent the corporation’s debt.
“CEO Score reported that our debt ratio was 1,151 percent for 2012, but our actual debt ratio was 64 percent,” the official told Business Focus.
According to him, the significant difference between the two figures stems from compensating civil complaints with money given to the company by the government.
“The money that was entrusted was calculated as being debt in accounting, but this was not actual debt of the firm,” the official said.
Another large debt calculation stems from the sale of the corporation’s building in Seoul. At the time of the calculations, the new owner hadn’t taken possession, which increased the company’s debt, according to the source. The KAB sold its building in the capital over the summer and relocated its office to the southeastern city of Daegu in September.
The official also said that the company had provided performance-based bonuses strictly according to the government’s standards.
However, he was unable to respond to the issue of excessive expenditures on entertainment or gifts for retirees.
A KHG official said the corporation was in the process of creating documents explaining the issues that came up during the National Assembly audit.
Vicious cycle
While state-run corporations brace themselves for the annual parliamentary audit, get grilled and put to shame by lawmakers, after they manage to slide by, they simply go back to how the way things were, lawmakers and civic groups point out.
“The careless management and moral laxity of public enterprises under the land ministry are barely undergoing any change. Even though these issues are brought up each year, they merely say they will fix these issues but make no effort to do so,” said Kim.
“There is a need for special countermeasures, so that these issues are dealt with by next year’s audit.”
One civic activist said that the issues stem from CEOs who lack knowledge or dedication to the firms they are in charge of.
“The problem is that most of the public firms scout professional executives as their CEOs, rather than employees at the firm who have built extensive knowledge about the firm while making their way up,” said Kim Sam-soo, director of the policy research team at the Citizens’ Coalition for Economic Justice.
“As a result, rather than having long-term visions for the company, the scouted CEOs merely serve their terms. Since they know they will leave, they have less of a sense of responsibility,” he said.
Kim chimed in that there is a dire need to break this impasse.
“These issues are raised every year during the National Assembly audit, but no progress is being made. This practice seriously needs to be changed.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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