Recently, there has been rising public interest in the financial status of local public enterprises as some local public enterprises’ distress caused by reckless development projects has posed a financial burden on their local governments. Moreover, the improper management of local public enterprises may result in the potential distress of not only the relevant local government that invested in the enterprises but also the central government.

    Hence, the National Assembly Budget Office (NABO) comprehensively analyzed the profit structure and financial structure of local public enterprises under the Local Public Enterprises Act with focus on those enterprises funded by local governments and other invested corporations. 

    The number of local public enterprises under the Local Public Enterprises Act stood at 388 directly-operated local corporations, local public corporations, and local public companies as of Dec. 2012. As of the end of 2012, directly-operated local corporations (251) encompassed water supply entities (115), sewerage entities (85), public development entities (33), and regional development funds (18), local public corporations encompassed subway corporations (7), urban development corporations (16), and other corporations (36), and there are local public companies (78). The number of local public enterprises has stably increased from 272 in 2000 to 361 in 2008, 382 in 2010, 379 in 2011, and 388 in 2012.  
    NABO’s analysis found that urban development corporations that were proceeding with diverse real estate development projects and other invested corporations with less than 50% of the investments by local governments showed weak financial soundness and that the overall profitability of local public enterprises was poor. 
    The total assets of local public enterprises have stably increased from 119 trillion won in 2008 to 160 trillion won in 2011. However, their profitability is low with 118.1~905.9 billion won in operating losses and 101.7~713.6 billion won in net losses over the last five years. Moreover, while the debt ratio (debt/capital) of local public enterprises stands below 100%, this was found to be attributable to investment by local governments not improvement in profitability. In other words, local public enterprises cannot survive without continuous capital increases and subsidy support by local governments, and hence the business prospects of local public enterprises were found to be uncertain. 
    In more detail, subway corporations have run a deficit with 858.5 ~917.8 billion won in annual operating losses and have 14.6 trillion won in accumulated deficits, with their capital erosion rate reaching 44% as of the end of 2011. Moreover, some subway corporations’ ratios of sales cost exceeded 500% because of a shortage of passengers. Hence, the seven public subway corporations are failing to pay the interest cost of 91.5 billion won because of continuous operating losses as of 2011 in spite of their low debt ratios. Analysis found that the reasons for such deficits include senior discounts and discounted fares for the disabled and the elderly. The fare discount amount of the seven public subway corporations over the past five years reached 1.7 trillion won in total, and it was composed of 1.3 trillion won in senior discounts, 333.5 billion won in discounts for the disabled, and 39.2 billion won in discounts for citizens of national merit.
    The total fare discount amount accounts for 12.4~23.2% of the revenue for Seoul Metro, Seoul Metropolitan Rapid Transit (SMRT), and Busan Transportation Corporation, and the financial burden from the senior fare discount on subway corporations is expected to increase as the senior population aged 65 and above continues to rise. Therefore, discussion on the fare discount system is required with respect to diverse aspects including who should bear the cost and by how much.
    Moreover, the 16 urban development corporations’ returns on their assets worth 55 trillion won are low as the excessive expansion of corporations coincided with deterioration in the real estate business. While construction of 48 project districts by 15 urban development corporations has been completed, 2.5 trillion won out of the 16.7 trillion won of project costs was not recovered as of Mar. 2013 due to poor lot sales. The weak financial status of urban development corporations has been aggravated over the past five years and nine out of the 16 corporations are failing to pay interest costs with their operating income. There were five urban development corporations with debt ratios exceeding 300% as of the end of 2011, including SH Corporation (312.6%), Incheon Development and Tourism Corporation (326%), Ulsan Metropolitan City Authority (324.6%), Gangwon Development Corporation (343.8%), and Gyeong Nam Development Corporation (314%). 
    Among the 36 other local public enterprises, 15 enterprises have seen operating losses for more than three of the past five years, and 12 enterprises were experiencing partial capital erosion as of the end of 2011. Moreover, 13 agricultural corporations are not financially autonomous as they are recovering their operation losses with government subsidies and interest income based on the funds deposited as securities for policy funds. In other words, some agricultural corporations are seeing net interest income based on lending-deposit rates spread by lending policy funds at low interest rates with deposits in financial institutions as securities, and as a result, some of the corporations’ net losses have been turned around into net profits. 
    Hence, NABO proposed the following solutions to prevent local public enterprises supported by local government from being exposed to poor profit structures.

    Thorough feasibility studies should be conducted beforehand on new investment projects, and strong disciplinary actions should be put in place in case of non-compliance. Local public enterprises have entered diverse real estate development projects that require hundreds of billions of won in investments without objective and professional pre-feasibility studies and are now faced with low profitability and liquidity deterioration due to poor lot sales performance. Therefore, laws and detailed standards should be established to require local public enterprises to review the need for projects and the feasibility of project plans based on a set methodology and procedures and to go through decision-making processes at local councils when investing in new projects.

    Moreover, NABO proposed that it is necessary to lower the issue limit of public corporation bonds, establish mid-/long-term financial management plans, and have stricter performance evaluations.