법경제
Public Enterprise Reform and Privatization in Korea : Lessons for Developing Countries
The essence of public enterprise reform prior to privatization is to establish this type of effective incentive mechanism by implementing the following set of actions: (1) Minimize political interference, especially in personnel and pricing decisions; (2) Clarify the firm’s objectives, using performance indicators whenever possible; (3) Increase managerial autonomy to meet these objectives; (4) Evaluate managerial performance; (5) Link reward to performance.
Privatization makes a fundamental break from this approach and changes the objective of the firm from “public interest” to “profit.” As such, a decision to privatize a public enterprise should be based on a judgement that the firm’s “public interest” function has been exhausted or can be replaced by other means such as direct fiscal subsidies. There should also be an additional judgment that the introduction of the profit motive through privatization is likely to lead to increased consumer welfare through substantive competition and regulation. Privatization will risk a serious backlash if it leads to a destruction of firm value through “tunneling” or other acts of malfeasance, or gives rise to monopoly rent due to the lack of competition or the capture of regulatory bodies. As the effectiveness of privatization crucially depends on the existence of competitive and efficient markets, privatization should be part of a comprehensive program of market-oriented reform.
Public Enterprise Reform and Corporate Governance Improvement
In Korea, the most important reform measure adopted before the full-fledged
privatization of public enterprises was the Government-Invested Enterprise (GIE)
Administration Basic Act of 1983. Through this Act, the government introduced
a German-type dual board at each GIE, establishing a supervisory board made
up of non-standing directors (except the CEO) and a virtual executive board
staffed with internally promoted executive officers. The supervisory board
included representatives from the supervisory ministry and the Economic Planning
Board. The separation of internally promoted executive officers
and non-standing outside directors was designed to reduce the “parachute appointment”
of outsiders to executive positions, which had weakened the morale of employees
at public enterprises. In addition, the 1983 Act streamlined various controls
to increase managerial autonomy, and established an inter-ministerial council
to evaluate public enterprise performance and link reward to performance. Based
on the efficiency principle, a set of performance indicators devised by experts
had the effect of checking managers as well as bureaucrats and politicians from
pursuing their narrowly defined private interests. This reform was widely
regarded as a success (Shirley 1989).
As the Korean economy was progressively
liberalized and the “public interest” argument for public enterprises was
weakened, privatization began to surface as a realistic policy option in the
late 1980s. Yet due to bureaucratic inertia as well as general concern
about the increasing concentration of economic power in the hands of the chaebol,
or Korea’s family-based business groups, the government exercised a great deal
of caution in pushing ahead with privatization prior to the 1997 economic crisis.
The government took measures to improve the corporate governance of public
enterprises, and partially sold its shares in public enterprises while retaining
control.
Representative of the government’s cautious approach was the 1997
Act on the Managerial Structure Improvement and Privatization of Public Enterprises.
This Act aimed at improving managerial efficiency and pushing ahead with
privatization while preventing further concentration of economic power. It
imposed a shareholding cap of 7 percent to prevent the chaebol from acquiring
controlling interests, and envisioned an Anglo-Saxon style corporate governance
structure, involving active participation by institutional investors with significant
but non-controlling interests. Although the 1997 Act provided an alternative
to chaebol-dominated privatization, it had serious shortcomings as it was accompanied
neither by a credible program to sell government shares nor by a plan to separate
regulatory and industrial policy objectives from the business objectives of
public enterprises. In fact, Korea implemented a comprehensive program
of privatization only after the outbreak of the economic crisis at the end of
1997.
Privatization and Remaining Challenges
The economic crisis added a new sense of urgency to privatization policy,
as the sale of highly regarded public enterprises was viewed as a means of generating
hard currency and securing foreign investors’ confidence in Korea. The
implementation of institutional reforms to reduce moral hazard, improve corporate
governance, and enhance competition also supported the privatization drive.
As
the crisis put a serious dent in the chaebol’s claim for superior efficiency,
most of the privatization plans for large-scale public enterprises were drafted
with a view toward establishing Anglo-Saxon style corporate governance. In
fact, the privatization of POSCO, KT, and KT&G proceeded along this line.
In
addition, there was an increased awareness of the importance of competition
and regulation in the process of privatization. In particular, the sale
of co-generation facilities in Anyang and Bucheon without an appropriate transformation
of regulatory policy led to significant hikes in heating bills and subsequent
consumer complaints. Through this experience, the government learned an
expensive lesson that the introduction of the profit motive through privatization
should be accompanied by substantive competition or regulation if it is to lead
to improved consumer welfare.
This lesson should not be lost on policymakers. Of the eleven public enterprises
targeted for privatization in 1998, only three remain public enterprises, in
electric power, gas, and district heating sectors-all network industries where
competitive market design and regulation are of crucial importance. In
order for privatization to improve efficiency and consumer welfare, it should
be a component of a comprehensive program to enhance the operation of market
forces.