[Opinion] How to Boost Rail Service Competitiveness

Integrating Korail and SR Without Structural Reform

It may only increase debt without improving efficiency

For better service for the public,

labor and management must join forces to strengthen sound management

In today’s global era, where even governments are one of many competing actors, public enterprises cannot be exempt from competition. Public enterprises must deliver results in the competition for efficiency that raises consumer benefits and reduces the burden on the public. Only then can they create social value and secure publicness.

Public enterprises that have fallen into chronic deficits by ignoring this reality must make efforts to improve productivity. Competitiveness does not arise automatically by securing monopoly power or increasing a company’s size. That is why the integration of public enterprises cannot be an end in itself. A merger is successful only when efficiency rises in the process. Otherwise, the rigidity of Korea’s labor environment may instead worsen management performance. In other words, the negative effects could outweigh the positive ones.

A representative case of failure resulting from trying to solve problems too easily through integration is LH, created by merging Korea Land Corporation and Korea National Housing Corporation. At the time, the government pushed ahead with the merger without prior restructuring, and LH’s debt eventually rose to 142 trillion won in 2013, with its debt ratio reaching 457%.

By contrast, there are successful cases in which public enterprises were split up and monopoly structures were converted into competitive systems. The Seoul Metropolitan Subway Corporation, which had suffered from frequent strikes, was split in 1994 into Seoul Metro and Seoul Metropolitan Rapid Transit Corporation. Korea Electric Power Corporation improved efficiency by dividing its power generation sector into six subsidiaries. Korail came under competitive pressure with the emergence of its subsidiary Suseo High Speed Rail (SR), and consumers were able to enjoy lower fares and differentiated transport services.

Last year, the Seoul Metropolitan Government reintegrated the two subway public enterprises. The merger was carried out as part of restructuring without forced workforce reductions, and the union welcomed it. But enlarging public enterprises without efforts to raise productivity could lead to an accumulation of management problems.

Recently, Oh Young-sik, the newly appointed president of Korail, expressed support for integration with SR. He is a capable leader with the experience and ability of a three-term member of the National Assembly. He has declared his ambition to use his political skills to draw out union cooperation and achieve economies of scale. The vision of a CEO seeking to strengthen railway competitiveness deserves praise.

The problem is whether the railway union will cooperate. Until now, the railway union has repeatedly rejected reform. When the Suseo high-speed train bound for Mokpo made its first departure, the Korail railway union poured cold water on the launch of subsidiary SR by staging a 74-day strike, the longest in its history. The slogan it put forward was opposition to the performance-based annual salary system.

The railway union prefers integration to a competitive system. That is probably because an integrated structure is more advantageous for a union seeking to pressure management. In the current integration discussion as well, the railway union will likely support integration but oppose the structural reforms needed to make it work.

SR is a subsidiary in which Korail holds a 41% stake. Most of its key executives and managers come from Korail, so in practical terms it can be seen as operating within Korail’s sphere of influence. Moreover, both companies are public enterprises and already provide services through close cooperation, maintaining partnerships in which major tasks such as rolling stock, repairs, and maintenance are outsourced. Therefore, the synergy from integration may not be very large.

As of the first half of 2017, Korail’s accumulated debt stood at 14.1 trillion won, with a debt ratio of 307%. If integration ends up being merely a simple merger without the fruits of structural reform, Korail’s debt could grow even larger. In addition, there is concern that the influence of a strike-driven union could expand and threaten management rights.

The public wants public enterprises to be run more efficiently. It also expects high-quality services. The railway, which had long been neglected by consumers, began to gain a foothold for a leap forward in 2005, when the former Korean National Railroad was divided into the Korea Rail Network Authority and Korail. This was the hard-won result of efforts by political leaders and the government to raise the quality of the railway system, and afterward railway services were able to develop in a direction that enhanced public convenience. Going forward, I hope both Korail and SR will achieve sound, substantive management so that railway services can make further progress.

Sung-no Choi

President, Center for Free Enterprise (CFE)

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Original title: [시론] 철도서비스 경쟁력 높이려면

Author: Sung-no Choi

Date: 2018-02-18

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=26&idx=10826