The Problem of Deteriorating Financial Soundness of Public Institutions and Immediate Tasks

As of 2021, public-sector debt (D3)—defined as the combined liabilities of the general government (central and local) and non-financial public corporations—reached approximately KRW 1,430 trillion, approaching 70% of GDP. This increase is partly attributable to the active use of fiscal resources in response to the COVID-19 pandemic, but it has also been significantly driven by the sharp rise in debt at state-owned enterprises (SOEs) such as Korea Electric Power Corporation (KEPCO) and the Korea Land and Housing Corporation (LH).

Over the past five years, public-sector debt increased from KRW 1,045 trillion in 2017 to KRW 1,427 trillion in 2021—an increase of roughly KRW 380 trillion (36.4%). Total liabilities of public institutions rose from KRW 493 trillion in 2017 to KRW 583 trillion in 2021, increasing by about KRW 90 trillion (18.3%). Public-sector debt appears to have expanded particularly rapidly during the Moon Jae-in administration.

In some cases, certain institutions have even issued additional corporate bonds to offset existing debt or losses, further worsening financial soundness and reinforcing the need for more concentrated debt management of public institutions. Against this backdrop, in July 2022, Rep. Song Eon-seok and ten co-sponsors submitted a partial amendment (Bill No. 16374) to the Act on the Management of Public Institutions. The amendment includes, broadly:

empowering the Minister of Economy and Finance to establish financial soundness standards for public institutions; and

requiring “financial risk institutions” to submit a financial soundness plan—covering sales revenue, debt ratios, and debt repayment plans—as well as a results report on financial structure improvement.

2. Deteriorating Financial Soundness of Public Institutions
◩ Ongoing Deterioration: Financial Risks Concentrated in Energy and SOC (Infrastructure) Institutions

Key indicators of the financial soundness of public institutions include equity (capital), liabilities, and net profit/loss. Total equity across public institutions increased from KRW 313.7 trillion in 2017 to KRW 386 trillion in 2021, an increase of roughly KRW 72 trillion. Over the same period, however, total liabilities rose from KRW 493.2 trillion to KRW 583 trillion—an increase of about KRW 90 trillion—meaning liabilities grew by approximately KRW 18 trillion more than equity.

Public institutions are broadly classified into SOEs, quasi-government institutions, and other public entities. SOE liabilities increased from KRW 364.4 trillion in 2017 to KRW 434.1 trillion in 2021—an increase of roughly KRW 70 trillion—indicating that most of the increase in public-institution debt occurred among large SOEs with substantial asset bases.

Net profits have also declined continuously over the past five years, recording a net loss of KRW 1.8 trillion in 2021. Among the institutions with the largest net losses, KEPCO ranked first with a deficit of KRW 5.2 trillion in 2021, followed by Korail (KRW 1.2 trillion), Incheon International Airport Corporation (KRW 750.6 billion), and Korea Racing Authority (KRW 348.0 billion). KEPCO’s losses were largely driven by cost increases due to surging fuel prices such as oil.

In 2022, the Ministry of Economy and Finance designated 14 institutions as “financial risk institutions.” The most severe cases included five organizations concentrated in the energy and SOC sectors: Korea National Oil Corporation, Korea Mine Rehabilitation and Mineral Resources Corporation, Korea Gas Corporation, Korea Coal Corporation, and Korail.

◩ KEPCO and Six Power Generation Subsidiaries: Debt Increased by KRW 50 Trillion Over Five Years (78% of the Increase in SOE Debt)

One of the largest drivers of SOE debt growth has been the energy sector—especially KEPCO and its power generation subsidiaries. KEPCO was also among the 14 institutions designated as financially at risk by the Ministry of Economy and Finance in June 2022.

The combined liabilities of KEPCO and its six generation subsidiaries increased from KRW 114.2 trillion in 2018 to KRW 165.8 trillion as of Q2 2022—roughly a 1.5-fold increase. Over the same period, the debt-to-equity ratio rose from 160.6% to nearly 300%, an approximately 1.9-fold increase. Since a debt ratio exceeding 300% is commonly classified as capital impairment or a financial risk condition, these institutions have reached that threshold.

This deterioration is attributable to:

sustained high oil prices triggered by the war in Ukraine; and

increased borrowing driven by the expansion of fuel and purchased power costs, as well as by the need for new or replacement power plants and expanded investment in renewable energy amid changes in the energy mix—resulting in large operating deficits.

3. Key Causes and Problems Behind the Deterioration of Financial Soundness
◩ Rising Bond Issuance Backed by Implicit Government Support, Regardless of Financial Health

In KEPCO’s case—as with many public institutions—one of the primary drivers of debt growth has been financing through bond issuance and external borrowing when funds are needed for large-scale facility investment. As of 2019, such funding accounted for 61.5% of total debt.

SOEs typically raise funds not through indirect financing channels such as bank lending (which involves screening), but through direct financing via bond issuance. This allows large-scale funding based primarily on the SOE’s credit rating, often without collateral or restrictive loan covenants (Park Seong-yong, 2021). Because public institutions can issue bonds at relatively low interest rates under the state’s implicit guarantee regardless of their financial soundness, this mechanism has become a core factor behind worsening financial conditions (Park Seong-yong, 2021).

◩ Excessive Regulation of Public Utility Rates Producing Operating Losses and Deficits: Suppressing Rate Increases as a Typical Form of Populism

Another major driver of rising public-institution debt is rate-setting policy that suppresses increases in electricity and gas prices despite rising costs (Choi Jun-wook, 2014). Recently, debt has surged at KEPCO, Korea Gas Corporation, and Korea National Oil Corporation amid sharp increases in oil prices, while public utility rates have failed to reflect underlying cost levels.

For Korail, the average cost recovery ratio during 2005–2018 was only 76.7%, and fares that fell short of full cost resulted in accumulated deficits of KRW 13.7 trillion (Park Seong-yong, 2021).

Public controversy has recently intensified over sharp heating cost increases (gas rates). A key reason is that under the Moon administration, the steady rise in international gas prices—despite Korea’s near-total reliance on imported gas—was not adequately reflected in domestic pricing. In international comparisons, Korea’s gas rates have been among the lowest, and adjustments failed to keep pace with global price increases. Artificially low gas rates encourage excessive consumption relative to supply, and rates below full cost create a vicious cycle of operating losses and deficits. Excessive suppression of rate increases constitutes a typical form of populism.

◩ Cost Increases from Inefficient Management: Overinvestment Without Feasibility Review and the Establishment of Subsidiaries

The establishment of subsidiaries through equity injections and aggressive investments without sufficient feasibility reviews has also been cited as a cause of debt growth (Choi Jun-wook, 2014; National Assembly Budget Office, 2016). The average debt ratio of 36 SOE subsidiaries (ALIO public institution disclosure data) stands at 232.2%, indicating serious financial fragility.

For example, Jungbu Generation Service, a subsidiary of Korea Midland Power established in December 2018, has a debt ratio of 6,682.5%, effectively indicating capital impairment. Other highly leveraged subsidiaries include First Keepers (1,253%) under Korea Hydro & Nuclear Power, KEPCO FMS (966.7%) under KEPCO, and Incheon Airport Operation Services (785.5%) under Incheon International Airport Corporation.

Many of these subsidiaries were created during the Moon administration as part of the policy to convert non-regular workers into regular employees, and they have become a major factor in deteriorating financial soundness.

4. Immediate Tasks: Swift Passage of the “Distressed Public Institution Management” Bill and the Establishment of Financial Soundness Standards by the Ministry of Economy and Finance

To respond to the sharp rise in public-institution debt and deterioration of financial soundness—particularly at KEPCO and related entities—the “distressed public institution management” bill (the proposed amendment to the Act on the Management of Public Institutions) introduced by Rep. Song Eon-seok and currently pending in the Strategy and Finance Committee should be passed swiftly.

Policy priorities should not focus on anti-market legislation that merely enables indiscriminate fiscal waste; rather, improving the financial soundness of public institutions should be treated as a top-priority livelihood and reform agenda. The Ministry of Economy and Finance should promptly establish and enforce rigorous financial soundness standards, including metrics such as the scale of debt and long-term borrowing as well as repayment ratios.

Going forward, utility rate-setting should be anchored in the full-cost pricing principle (the “total cost” principle). Even when taking inflation into account, rate increases should be implemented appropriately at a level sufficient to cover total costs. In addition, subsidiaries that were created indiscriminately during the Moon administration for workforce conversion policies and have since fallen into capital impairment should be re-evaluated from the ground up. Options such as privatization or expanding the share of private capital should be considered. Choi Jun-wook (2014), through international comparisons of public-institution debt, found that higher levels of privatization are associated with lower SOE debt.

Korean version: https://www.cfe.org/bbs/bbsDetail.php?cid=issue&pn=1&idx=25333