Since 2012, the Korean government has been establishing five-year mid- to long-term financial management plans for public institutions with assets over KRW2 trillion and submitting it to the National Assembly with the goal of enhancing their financial soundness. In 2013, the ｢2013~2017 Mid- to Long-Term Financial Management Plan for Public Institutions｣ for 41 public corporations and quasi-governmental institutions was submitted to the National Assembly, with public institutions with impaired capital and non-financial public institutions, whose losses are covered by the government, also becoming subject to plan submission.    

    Recently, the debt liability of public institutions has been surging, raising the possibility of the debt burden weighing down on national finance. The combined debt liability of public institutions has been increasing continuously from KRW290 trillion in 2008 to KRW493.4 trillion in 2012. This is highly likely to have a negative impact on Korea's sovereign credit rating.   

    As of November 2013, Korea Railroad Corporation, Korea Resources Corporation, Korea Land & Housing Corporation, and Korea National Oil Corporation received non-investment grades from global credit rating agencies based on their stand-alone ratings. Their stand-alone ratings were also downgraded compared to the end of 2012. In addition, the interest coverage ratio (operating profits/interest costs) of nine public institutions [Korea Land & Housing Corporation, Korea Electric Power Corporation (KEPCO), Korea Rail Network Authority, Korea National Oil Corporation, Korea Railroad Corporation, Korea Hydro & Nuclear Power Co., Ltd., Korea Resources Corporation, Korea Coal Corporation, and Yeosu Gwangyang Port Authority] was less than 1 in 2012, indicating that they could not afford to cover their interest costs with their operating profits.  

    Under these circumstances, enhancing the financial soundness of public institutions has become a significant policy goal of the Korean government and it is imperative to strictly manage the debt liability of public institutions by identifying the cause of the increase.      

    This report analyzed the appropriateness and feasibility of the government's mid- to long-term financial management plan for 41 public institutions. Specifically, we evaluated the effectiveness of debt reduction measures by public institutions and performance results of the ｢2012~2016 Mid- to Long-Term Financial Management Plan for Public Institutions｣ submitted in 2012.  

    The comparison of annual debt-to-equity ratio estimates in the mid- to long-term financial management plan of 2013 with those of 2012 showed that debt-to-equity ratio estimates increased 10.2~20.4%p each year. Public institutions whose actual debt-to-equity ratios were well above the estimates in 2012 included Korea Rural Community Corporation, Korea Railroad Corporation, and Korea Gas Corporation. Efforts should be made to improve the financial structures of these public institutions.      Also, evaluation of the financial management plan for each institution led us to the conclusion that there should be a more comprehensive and practical financial management plan, e.g. more realistic and effective debt reduction measures for large public institutions.     

    In order for Korea Water Resources Corporation (K-Water) to achieve financial soundness, its mid- to long-term financial management plan should include some fundamental measures for recovering the funds invested in the Four Major Rivers Restoration Project. Until now, KRW8 trillion was injected into the project and K-Water plans to recover a total of KRW2.2 trillion through self-rescue measures including the KRW785 billion profit expected from the Waterfront Area Project. Still, the prospect of recovering the remaining KRW5.8 trillion looks uncertain. K-Water should also re-examine the financial feasibility of its Eco Delta City Project as our analysis of the feasibility study conducted by K-Water showed that housing-lot and R&D-lot demand was overestimated. In order to resolve debt from the Four Rivers Project, K-Water plans to invest KRW5.4 trillion in the Eco Delta City Project to generate an estimated net profit before tax of KRW790.5 billion. However, our analysis showed that the net profit before tax will decrease to KRW364.3 billion after adjustment for an interest cost calculation error. The Eco Delta City Project was exempted from a preliminary feasibility study in accordance with the ｢Special Act on Utilization of Waterfront Areas｣, but it seems that the financial feasibility of the project should be re-examined. 

    As for Korea Expressway Corporation, the appropriateness of the scale of expressway construction should be reviewed in order to secure financial soundness. Korea Expressway Corporation is experiencing a continuous rise in debt because it is funding road construction costs, which are above the cash generated from its business operations, through financial debt. Over the recent decade, Korea Expressway Corporation invested an extra KRW6,645.4 billion in expressway construction. However, with the utility rate after construction reaching only 39.4%, its financial structure may possibly worsen going forward.   

    According to our analysis, Korea Railroad Corporation's (KORAIL) prospects for the corporate tax refund lawsuit related to the Yongsan International Business District Project, asset disposal, etc. are somewhat positive and should be re-examined. That is, KORAIL expects that its debt-to-equity ratio will decrease sharply from 445.1% in 2013 to 199.4% in 2015 in reflection of KRW 1.1 trillion worth of tax refunds expected based on the assumption of winning the tax refund suit and

    KRW1.8 trillion in gains from the disposal of Korail Airport Railroad Corporation. However, if KORAIL loses the suit, the debt ratio may come in at 257.7%, up 58.3%p compared to winning case. Also, if the government's support method for Korail Airport Railroad Corporation changes from revenue preservation to cost coverage, the estimated gain from the disposal of Korail Airport Railroad Corporation may be less than KRW1.8 trillion.  

    Korea Land & Housing Corporation should stop overextending itself to expand its businesses and make stronger efforts to sell assets, which have been left unsold for a long period of time. Korea Land & Housing Corporation's financial debt is rising continuously as its operating expenses exceed the cash generated from its business operations. The corporation estimates that it will be able to reduce its financial debt by KRW4.8 trillion through aggressive inventory asset disposal. However, given the recent downturn in the real estate market and the size of its unsold assets and new home inventories, the estimate appears somewhat optimistic. 

    The mid- to long-term financial management plan for KEPCO should be modified to reflect the plan for electricity rate and cost system reform. In the mid- to long-term financial management plan, the ASP-to-cost ratio, derived by dividing the ASP of electricity by total cost, is estimated to exceed 100% in 2016. However, since the estimate is just a mechanical figure based on simple assumptions of oil prices and rate hikes, the plan should be modified according to actual oil prices and rate fluctuations going forward. Also, in order to ease the financial hazards of KEPCO and encourage rational power consumption, the cost-price linkage system  (of reflecting fuel cost increase/decrease to electric rates) needs to be implemented. The plan should also reflect hidden costs, which were not counted in as costs, including spent fuel processing costs and costs for supporting areas neighboring power transmission and substation facilities.        　

    We suggested the following measures for resolving the above-mentioned problems found in the mid- to long-term financial management plan for public institutions. 

    The system for conducting preliminary feasibility studies on projects of public institutions should be improved to manage large-scale projects. Unlike government projects, preliminary feasibility studies for projects of public institutions are not regulated by law and only stipulated in the ｢Budget Planning Guidelines for Public Corporations and Quasi-Governmental Institutions｣. Hence, the legal basis should be provided to clearly define target projects and exemption causes. Also, there should be a system to disclose materials supporting the results of preliminary feasibility studies for social proof.       

    The plan for supporting public institutions should be established based on the separate accounting method. The Ministry of Strategy and Finance plans to introduce the separate accounting method to clarify where the responsibility for debt lies and enhance transparency regarding the debt of public institutions by analyzing debt by cause, including public projects and the businesses of public institutions. Once the separate accounting method is applied, financial statements can be written separately for public projects and the businesses of public institutions. Therefore, financial support plans and the self-rescue measures of public institutions for enhancing financial soundness should be reflected separately in the mid- to long-term financial management plan.  

    Lastly, there should be measures for managing the financial soundness of public financial institutions, which are not subject to the mid- to long-term financial management plan. Although the combined debt of the five public financial institutions including Korea Export-Import Bank was KRW397.9 trillion in 2012, they were excluded from the mid- to long-term financial management plan for public institutions. However, the financial soundness of public financial institutions, whose losses are covered by the government in accordance with the basic law on their establishment, needs to be managed and supervised strictly to reduce the government's financial burden. To this end, there should be a separate system for managing the financial soundness of the five public financial institutions including Korea Development Bank and the existing non-banking public financial institutions such as Korea Trade Insurance Corporation and Korea Credit Guarantee Fund, apart from the mid- to long-term financial management plan.