[Open Forum] Public Enterprise Evaluation Criteria Should Be Reworked to Support Private Firms

Concerns about the bloated management of public enterprises continue to be raised. In response, the government has newly revised the criteria for evaluating public enterprises. The goal is to address their problems. However, it remains uncertain whether these new standards can actually become the key to solving them. Public enterprises are government-led entities with a public-interest mission. If they forget the public interest and focus only on organizational self-interest, there is no longer any reason for them to exist.

It is difficult to accept that public enterprises operate businesses lacking public value. The biggest distinction between private firms and public enterprises is their public nature. Of course, public enterprises are not unnecessary. In areas such as electricity, water supply, and gas, having public enterprises take responsibility can help prevent price increases caused by competition among firms. In this sense, projects led by public enterprises should possess both public value and business viability. The golf course and hotel businesses run by the Korea Sports Promotion Foundation are difficult to regard as projects serving the public interest in this context. Golf course users are ordinary consumers, and the nature of the business is highly commercial. The public enterprise argues that profits earned through competition with private firms will be used for the public good. But this plan to use profits gained through competition with private companies for the public interest is not very persuasive.

Excessive intervention by public enterprises in business sectors soon has negative economic effects on private firms. This is because public enterprises can crowd out private companies. In a free competitive market, many private firms survive through competition with one another. In a competitive structure between private companies and public enterprises, public enterprises naturally occupy a more advantageous position. Public enterprises are established by the government when a business is too difficult for the private sector to undertake or when there is a need to pioneer a new market. Since public enterprises are state-led, they are structurally unlikely to fail. If their scope expands into industries that should belong to the private sector, private firms will not be able to survive. If this situation deepens, the risk of undermining the free market economy could also increase.

Damage to private firms also affects the public. Korea Electric Power Corporation recorded an operating loss of more than 14 trillion won in the first half of this year. This was the result of the government deliberately blocking electricity rate hikes in order to secure public support. Excessive intervention prevents economic changes from being reflected in management. A stance that ignores economic conditions causes confusion in management. In the end, Korea Electric Power Corporation has already raised rates twice this year to make up for its funding shortfall. Most of the operating funds of public enterprises come from the people’s taxes. Failing to respond in a timely manner to economic changes out of sensitivity to public opinion can result in wasting taxpayers’ money.

Public enterprises should shift from being leading business operators to playing a supporting role. In other words, businesses that the private sector can lead should be opened up as opportunities for private firms. Public enterprises should not directly participate in profit-making but should instead support private companies. Strict standards should be established for the management of public enterprises, and their necessity should be thoroughly reviewed. Rather than taking the lead in business itself, public enterprises should focus on creating a favorable business environment, which can encourage active participation by private firms. Public enterprises that improve the private-sector economic environment demonstrate the fulfillment of their public-interest mission.

The government’s evaluation criteria for public enterprises should be reorganized in a way that revitalizes private businesses. After the revision, the weight of social value indicators, which had previously been high, has been reduced, while the share of financial performance, which had carried less weight, has increased. The newly revised evaluation criteria for public enterprises reflect an intention to reduce political influence. Strengthening standards for financial performance is also one way to reduce the number of public enterprises. The new criteria can help prevent bloated management and create opportunities for private firms to enter business sectors. In the case of Korea Electric Power Corporation, excessive political pressure suppressed price adjustments and caused management difficulties. It is hoped that the revised evaluation criteria will be applied in line with reality and help resolve the problems of public enterprises. Public enterprises should actively reflect the interests of the people, and they should aim to foster an environment in which the business economy can thrive.

Hyeju Kim, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 공기업 평가기준, 민간기업 지원역할로 재정비돼야

Author: Hye-ju Kim

Date: 2022-11-04

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=7&idx=25060