The Planning and Budget Commission unveiled its first-stage program for the privatization of state-run companies July 3, and followed it up with its second-stage plan Aug. 4. Together, they represent the backbone of the government's public sector reform policy. Eleven major state-owned enterprises, plus a large number of their subsidiaries and those of other significant public corporations totalling 40 in number, will be put up for sale in the international marketplace from now through to the year 2002. The aggregate proceeds of the privatization drive is estimated to amount to three percent of the gross national product.
 There are three major factors which have prompted the government to expedite the privatization of so large a raft of public companies. The first is related to the inefficiency of their management. Because they tend to dominate the markets they operate in, most of them have declined in competitiveness. The privatization plan has thus been motivated in part to enhance Korea's overall competitiveness by removing such obvious sources of inefficiency and ineffectiveness as it is in the government's power to remove. The second is the dire need to attract foreign capital as the sole means for the country to contend with and overcome the current financial crisis. The last factor is borne out of the need to provide a much-needed supply of public financing. The government views selling state-owned companies as a short-cut to both providing funding to cope with the rapid rise unemployment and the needs of its corporate restructuring drive. The government plans to raise $6 billion to $8 billion between now and the end of 1999 through the sell-off. Of this, it is anticipated $1billion to $1.2 billion this year, and $2.5 billion next year will end up in state coffers, all of which will be of considerable help to the government easing the financial crunch.

Selling Everything Possible

 The eleven state-run corporations and 40 subsidiaries referred to above will be privatized at full throttle. Meanwhile, other subsidiaries are scheduled to be merged later into their respective parent companies. The 11 include four major corporations: Pohang Iron & Steel Co. (POSCO), Korea Electric Power Corporation (KEPCO), Korea Telecom and Korea Tobacco & Ginseng Corporation. The government is taking this route since it judges putting such prominent enterprises up for sale will result in a fast and favorable response from the international investment community, as well as signalling to the world Korea is serious about public sector reform. The Korea Institute of Industrial Economics and Technology projects the sale of the state-run enterprises will result in an inflow of some $10.3 billion in foreign capital.

 President Kim Dae-jung initiated the reform program by ordering the relevant authorities to put as many enterpries as possible up for sale last April. To sell them on the most favorable terms, the Planning and Budget Committee intends to stagger their marketing. "We plan to vary the dates and methods of bringing the state-run enterprises to market with a view to maximizing the prices we can realize from their sales," said committee chairman Jin Nyum. "The methods of purchase will include sales of both stakes and assets, and the issuance of convertible bonds."

Privatization Scheduling

 Of the 51 companies slated for sell-off, the government plans to privatize 33 such as Pohang Iron & Steel Co. immediately, while divesting itself of 28 others including Korea Telecom on a gradual basis through to the year 2002.
 Those companies subject to immediate privatization include POSCO, Korea Heavy Industries & Construction (Hanjung), Korea General Chemical Corporation (KGCC), Korea Technology Banking Corp., and National Textbook Co.

POSCO

 POSCO is a world-ranking steel producer with $14.4 billion in assets and $5.9 billion in paid-up capital as of the end of 1997. The government will sell its 3.1 percent directly-owned stake in the company as will the state-run Korea Development Bank (KDB) sell its 23.6 percent holding, seeking buyers among both Koreans and foreigners with a individual limit of three percent per person. The aggregate foreign stock ownership ceiling will be abolished in August and the individual ownership ceiling will be raised from the current one percent level to three percent in August, to five percent later, and will be eventually scrapped by the end of 2001. The six percent stake held by another government policy bank, the Industrial Bank of Korea, will also be sold off beginning in 2000. The Monopoly Regulation and Fair Trade Act and other related laws will be rewritten to prevent any acquiring company abusing its resultant market dominance achieved through the privatization program. Specifically, POSCO will be listed among the top 30 business conglomerates subject to the act.

Korea Heavy Industries & Construction (Hanjung)

 An exclusive supplier of electricity generating equipment to KEPCO and a manufacturer of industrial facilities and engines for massive ocean-going freighters, Hanjung is a financially-healthy and lucrative company which recorded $880 million in paid-up capital and a net income of $38 million at the close of 1997. The government will sell 51 percent of its total 58.2 percent stake in the company by the end of this year. In a bid to maximize the price it can realize for Hanjung, the government plans to subject it to an intensive corporate restructuring program between now and the end of this year and the reevaluate the company's assets before selling its stake through open bidding.

Korea General Chemical

 One of the country's leading manufacturers of chemical products, Korea General Chemical registered $134 million in assets as well as $79 million in debts at the end of 1997. Its capitalization amounts to $55.3 million. After it sells its 45 percent stake in Namhae Chemical, KGCC will sell the assets of its money-losing hydrated aluminum factory. A KGCC subsidiary which uses by-products of the hydrated aluminum manufacturing process will be disposed of along with the factory.

Korea Technology Banking Corp.

 The government will sell its 10.2 percent holdings in KTB along with an additional employee-held four percent in public bidding. The timing of the sales will be geared to maximize returns. Venture businesses from Silicon Valley and Texas are expected to be the chief takeover prospects. Among domestic conglomerates, the Hyundai Group has long been fingered as a potential purchaser of KTBC.

National Textbook

 The company will be sold off in a public bidding during the latter half of 1998. NT's price structure and supply levels will be maintained at their current rate for three years to avoid price hikes and shortages of material. About 40 percent of state-held stakes will be sold at the close of this year.
 Six major enterprises including Korea Telecom and KEPCO will be privatized gradually from now until 2002.

Korea Telecom

 The government will list Korea Telecom on the Korea Stock Exchange as soon as possible. It plans to issue the necessary depository receipts and new stock October this year and sell 28 percent of its stake to foreign interests as part of its initial privatization stage. Once achieved, the government's stake in the KT will have decreased from 71.2 percent to between 48 and 49 percent. A further 15 percent of government-held shares will be sold to employees, institutional investors and the general public. A rump holding of 33.4 percent will be disposed of after 2001, at a time when it is anticipated there will be a measure of consolidation in both the domestic and foreign economic environment.
 The government owns 71.2 percent of KT's stock with the remaining 7.4 percent held by the National Pension Fund, 5.1 percent by employees and 16.3 percent by others. New stocks will account for 10 percent of KT's entire securities and which will be offered for sale directly to foreigners. Overseas DRs will be issued sometime in October to the value of 18 percent of the total shares.

KEPCO

 The government will be compelled to hold more than 51 percent of KEPCO shares due to the default terms of loan agreements signed with foreign lenders. The corporation's power generation function will be separated from that concerned with transmission and the distribution of power to enable its early privatization. The government will sell five percent of its total 58.2 percent holding by the end of this year. A restructuring of the electricity industry to allow direct trading in electricity will be drafted in October in order to permit the selling of power generation facilities.
 Two thermal power plants, and two combined power generation plants in Puchon and Anyang will be sold in 1999.

Korea Tobacco & Ginseng Corp.

Korea Tobacco & Ginseng Corporation will be completely privatized by the year 2000 through the sale of state-held stocks and equity held by banks. The government will sell the 25 percent of KT&G stock which it holds to local and foreign investors by June 1999, under the formula of a seven-percent individual ownership ceiling. Priority will be given to KT&G employees. The individual ownership ceiling and monopoly on cigarette manufacturing will be scrapped, and the remaining stocks held by banks will be sold by 2000.
 The red ginseng business will be separated from the tobacco business by the end of this year following a process of asset evaluation. Modernization and rationalization of the business's facilities and an overall restructuring will be completed by 2000. In order to expedite the sale of the company, the government is considering inviting open bids for domestic and foreign enterprises and listing the related stocks on KOSDAQ and on NASDAQ in the form of DRs.

Korea Gas Corp.

 The government will increase the capitalization of Korea Gas by $208 million and will then sell its holdings in the company to domestic and foreign investors by 1999. Some stock will be sold to the general public. The central government owns 50.2 percent of Korea Gas, KEPCO 35.5 percent, and provincial governments 14.3 percent. An open-access system and other competitive systems will be introduced to the process of distribution as a basis for privatization by the year 2000, with the aim of the corporation being completely privately owned by 2002.

Daehan Oil Pipeline Corp.

 The government judges the corporation's competitiveness has been sufficiently enhanced and plans to sell its 48.8 percent stake in the company by 2000 after merging it with its subsidiary, Korea Oil Pipeline Co. Market observers consider it highly probable that the corporation will be taken over by existing oil refiners. In the process, the government plans to set up a consortium to prevent market domination by any one company and the possibility of conflicts with others. The industry's fare system, now controlled by the government, will revert to being self-regulatory.

Korea District Heating Corp.

 The government decided to sell the Seoul subsidiaries of the company and those in the metropolitan area on an individual basis as the management of each is considered to be autonomous. After encouraging a climate of competition between the subsidiaries in the process of the initial-stage sell-offs, the government will sell the remainder under a comprehensive privatization program. The 51 percent stake owned by the government and KEPCO will be put up for sale under public bidding and the corporation will be privatized completely by the year 2001.

Privatization Draws Foreign Interest

 An increasing number of foreign investors are showing keen interest in buying into comparatively financially healthy enterprises such as POSCO, KT and Hanjung.
 Interested foreigners cite POSCO as the most attractive firm in this regard. Nippon Steel Corp., which has already has a joint-venture with POSCO, is planning to buy at least one percent of POSCO's stock. European steel makers such as British Steel are considering the possibility of setting up joint-venture ties with POSCO through purchasing the company's stock.
 Meanwhile, corporations in the United States, Britain, Spain, Germany and Singapore have expressed interest in purchasing the thermo-electric power division of KEPCO. ACI, a consortium of nine electricity providers from Spain and the U.S. oil multinational Texaco has begun exploring the possibilities of the Korean thermo-electric market through the Ministry of Commerce, Industry and Energy.
 In addition, German firms are reportedly assessing the electricity generating division of POSCO via the German embassy in Seoul.
 French rolling stock manufacturer Alsthom has gone public with its interest in Hanjung, while other electricity generating equipment builders have also declared their intentions to takeover the company. Domestic conglomerates, too, would like to buy into the state-owned concerns but lack the financial resources. For instance, they would need 180 billion won to purchase just one percent of Korea Telecom stock. Such a purchases are out of the question because they have been consumed by their own efforts to restructure corporately and are continually pressed to pay off debts by creditor banks. An official of the Samsung Group said, "Even though we want to takeover the state enterprises now coming up for sale, how can we possibly borrow money from the banks to do so at this time when they too are caught up in the whirlpool of their own corporate restructuring?"

Barricades to Privatization Still Exist

 According to the Planning and Budget Commission, the nation's telecommunications, tobacco, steel and gas industries will be reorganized to operate on competitive lines. Competition among domestic and foreign companies to take over the state-owned enterprises is expected to intensify further and major changes are expected in their related business sectors as a result of the entire sell-off process.
 However, many barricades still lie in the path toward privatization. "Most market watchers have concurred on the need for privatization to raise the competitiveness of state-run companies, but working out the actual details has proven very difficult," said Kong Byung-ho, director of the Free Enterprise Center, a privately-funded think tank. The possibility of market domination by just few business interests has been cited as one of the problematic areas in this respect in since key sectors like telecom, gas, electricity and steel have a profound influence upon other industries and the general public. "We need to maintain the inherent efficiency of the competitive element in order to maximize the benefits of privatization," Hyundai Research Institute Executive director Chung Soon-won said. "Managerial efficiency cannot be achieved by only a change in ownership from the public to the private sector." He said privatization plus the entry of other private corporations into previously restricted markets should be expedited to enhance the effectiveness of management of those state-run companies now ear-marked for sale. "However, while the government has presented measures to control the terms under which charges are levied and services provided, it has lacked specific preparatory measures in terms of the resultant market structures," Mr. Chung said.

30,000 Jobless Expected

 The government also faces the urgent task of how to persuade the labor unions to accept the need for privatization and its attendant dislocations. In fact, the unions reacted strongly to the privatization initiative, and called on the government to scrap its privatization plans as soon as the commission announced the program Aug. 4. Labor opposition is expected to intensify as the process of privatization gets under way since it will inevitably lead to massive layoffs. Some 30,000 people are expected to lose their jobs due to privatization. Sungkyunkwan University's renowned sociology professor Lee Sung-soon commented, "The climate for privatization has improved compared with the past, but the rise in unemployment which already stands at two million people will become even more serious."

Government Manifests its Political Will

Considerable doubt about the success of the privatization program abounds since previous governments have tried and failed five times in this regard. Nonetheless, public and private sentiment toward the initiative is overwhelmingly positive. The drive toward privatization has gained momentum, borne out of the critical need to attract foreign capital, provide assistance for the unemployed, and cope with the financial crisis under the strictures of the International Monetary Fund's (IMF) austerity program. Meanwhile, Planning and Budget Commission chairman Jin Nyum has demonstrated his commitment to realizing the privatization program by marshaling all available resources to this end. To execute the program in a systematic fashion, the commission has formed a powerful task force consisting of vice ministerial-level officials of respective ministries, executive officials of the state-owned enterprises concerned, and professionals from the private sector.
With this initiative, hopes are riding high that Korea has at last found the solution to transferring so much of its state-owned industry to private hands.

by Woo-Che Suh