Conference on

Privatization, Employment and Employees

Istanbul, Turkey

Worker Participation in Privatization

in Korea
10-11 October 2002
Il Chong Nam
KDI School of Public Policy and Management
Korea
1. Key Aspects of SOEs in Korea

 There are 16 GOCs and 9 GICs in Korea

 GOCs (Government-Owned Corporations)
- More rigid and government-like management; more closely identified with the
functions of the government itself
- Generally run as a subsidiary of the line ministry in its pursuit of the industrial
policy objectives
 GICs (Government-Invested Corporations)
     - Considered to have stronger commercial elements than GOCs
- KT (Korea Telecom) has recently been fully privatized.

 Anglo-Saxon Style Board Structure for GICs and GOCs

 All the board members are selected from outside of the government
 CEOs were granted rather weak monetary incentives
 <Table 1 > Key Statistics on Government-Owned & Government-Invested Corporations
(Unit: Persons, %, 0.1 billion won)

Number of Employees Government’s Share Sales Profit (Loss)

Classification Name of Company 2000 2000
1997 1997 2000 1997 1997 2000
Korea Minting and Security Printing
2,634 1,450 100 100 1,96 2,142 158 251
Corporation
Agricultural & Fishery Marketing
948 500 100 100 1,825 947 6 32
Corporation
Rural Development Corporation 2,478 6,031 100 100 7,947 18,935 272 23
KEPCO (Korea Electric Power
39,454 33,745 69.8 52,2 131,162 182,528 5,606 17,926
Corporation)
Korea Coal Corporation 4,072 2,694 98.3 98.8 2,110 1,694 -833 -740
Korea Resources Corporation 431 328 98.1 98.3 550 547 -23 7
Korea National Oil Corporation 949 774 100 100 3,841 4,595 150 478
Government-
Owned Korea Trade Investment Promotion
649 565 100 100 784 1223 0 114
Corporation Agency
Korea National Housing
(Tooja Gigwan) 5,914 2,991 98.1 73.19 38,224 31,599 733 -2,485
Corporation
Korea Highway Corporation 5,178 3,704 89.5 82,6 14,778 19,366 448 253
Korea Water Resources
4,162 3,167 91.8 79.8 16,169 11,783 450 626
Corporation
Korea Land Corporation 2,490 1,820 92.9 72.1 32,706 33,845 5,207 1,160
Korea National Tourism
984 680 56.1 55.2 2,118 3,342 134 377
Organization
Korea Tobacco & Ginseng
7,680 4,467 89.2 13.8 42,434 45,686 2,258 2,704
Corporation
Korea Telecom 59,491 46,095 71.2 58,9 77,852 103,221 797 10,101
KOGAS (Korea Gas Corporation) 2,891 2,386 50.2 26.8 29,266 61,119 -3,355 945
Korea Appraisal Board 1,120 789 49.3 49.4 816 598 22 -467
Daehan Oil Pipeline Corporation 386 378 52.7 46.5 336 721 -443 -286
Seoul Shinmun 1,077 n.a. 50.0 50.0 1,840 1,050 -173 105

Government-Inv Korea Broadcasting System 5,741 5,049* 100 100 9,999 9,503* 686 956*
ested Corporati Korea District Heating Corporation 1,015 752 46.1 46.1 2,026 3,461 7 940
on
POSCO (Pohang Iron and Steel C
(Choolja gigwan 19,294 19,275 19.6 0 97,181 116,920 7,290 16,970
o.)
)
Korea General Chemical Co. 263 n.a. 0 0 150 793* -566 107*
Korea Heavy Industries and
7,851 6,322 0 0 30.070 24,091 453 -249
Construction Co.
Korea Technology Banking
163 231 10.2 0 4,384 4,967 24 1,509
Corporation
National Textbook Co. 1,120 847 40.0 0 517 1,030 38 17
 
Total 178,435 145,040 68.2 57.0 521,012 685,706 19,346 51,374

Source: Companies’ annual reports.

Note: Classification of GOCs and GICs is as of 1997. 10
Note: * 1999.
<Table 2> Main Business and Market Position of Government-Owned and Government-Invested Corporations

Main
Classification Name of Company Main Business Market Position
Consumer

Korea Minting and Security Printing

- Minting and printing of Korean currency and securities Government Monopoly
Corporation

Agricultural & Fishery Marketing - Promotion of the agroprocessing industry and operation of the
Government Monopoly
Corporation government's price stabilization program

- Large-scale comprehensive agricultural development

Rural Development Corporation Government Monopoly
- Southwestern Coast Reclamation Project

KEPCO (Korea Electric Power

- Integrated electric utility service General Monopoly
Corporation)

Korea Coal Corporation - Operation and development of coal mines Government Monopoly

- Provide integrated support to the mining industry

Korea Resources Corporation Government Monopoly
- Securing stable supply of overseas mineral resources

- Exploration and development of domestic and overseas oil resources

Korea National Oil Corporation - Construction, management, operation and lease of petroleum storage Government Monopoly
facilities
Government
- Owned Korea Trade Investment Promotion - Collection and provision of overseas market information to the
Corporation Government Monopoly
Agency government and private firms
(Tooja
Gigwan) Non-dominant firm in a
Korea National Housing Corporation - Housing construction for low income households General
competitive industry

- Construction, maintenance, and traffic management of

Korea Highway Corporation Government Monopoly
expressways

- Management and construction of multi-purpose dams and multi- Local

Korea Water Resources Corporation Monopoly
regional water supply systems Government

Korea Land Corporation - Land resource acquisition, management, development and supply Government Monopoly

- Overseas promotion of the Korean tourism industry

Korea National Tourism Organization Government Monopoly
- Development of tourist resorts

Korea Tobacco & Ginseng Corporation - Cigarettes and ginseng Manufacturing General Monopoly

- Principal licensed supplier of fixed-link local telephone service and Dominant Firm in
Korea Telecom General
domestic and international long-distance telecommunications services Oligopoly

KOGAS (Korea Gas Corporation) - Importer and wholesale distributor of natural gas General Monopoly
<Table 2> Main Business and Market Position of Government-Owned and Government-Invested Corporations

Korea Appraisal Board - Provision of valuation services General Monopoly

- Pipeline construction, operation, transportation and storage of oil

Daehan Oil Pipeline Corporation General Monopoly
products
Non-dominant firm in
Seoul Shinmun - Newspaper publishing General a competitive
industry

Dominant Firm in
Korea Broadcasting System - Broadcasting General
Oligopoly
Governmen
t-Invested Korea District Heating Corporation - Operator of district heating system General Monopoly
Corporatio
n
(Choolja gi Dominant Firm in
POSCO (Pohang Iron and Steel Co.) - The largest fully-integrated steel producer in Korea General
gwan) Oligopoly

Dominant Firm in
Korea General Chemical Co. - Producer of aluminum and other by-products thereof General
Oligopoly

Korea Heavy Industries and

- Manufacturer of power generators, industrial and marine engines General Monopoly
Construction Co.

Non-dominant firm in
Korea Technology Banking
- Financial services provider, especially venture capital financing General a competitive
Corporation
industry

National Textbook Co. - Textbooks publishing General Monopoly

 <Table 3> Profit Leaders among Listed Companies
(Unit: 0.1 billion won)
Rank Name of Company Profit
1 Samsung Electronics 60,145
2 KEPCO 17,925
3 POSCO 16,369
4 KT 10,101
5 SKTelecom 9,506
6 Hyundai Motors 6,678
7 Samsung SDI Co. 5,439
8 LG Electronics 5,021
9 Kia Motors 3,307
10 LG Chemical 3,248
11 LGCI 3,248
12 KT&G 2,704
13 Shinhan 2,631
14 Hanil Synthetic Fiber 2,592
15 SK 1,447
16 LG Construction 1,235
17 Hyundai Mobis 1,131
18 Anam Electronics 1,081
19 Hanwha 1,056
20 Dongbu Construction 1,039
21 KOGAS 944
22 PacInd 847
23 LG Ind. Sys. 823
24 Hyundai Dept. Store 801
25 Samsung Corp. 750
26 Pungsan 729
27 HITE Brewery 701
28 Shinsegae 697
29 Kumkang Korea Chemical 677
30 Inchon Iron & Steel 635
Source: Korea Stock Exchange.
 <Table 4> Financial Ratios of the “Big Six”
(Unit: %, times)

Classification Name of Company 1996 1997 1998 1999 2000

KT & G 8.63 9.24 11.23 11.01 9.76
POSCO 9.49 -2.27 9.87 17.15 17.36
KOGAS 16.36 -48.76 13.03 10.14 4.04
Net Income to KT 0.21 0.60 2.93 2.81 8.84
Stockholder’s
Equity Ratio KEPCO 3.15 -3.62 6.29 4.84 5.63
Doosan H&C 15.21 -7.90 4.41 1.56 -1.49
Weighted Average of Listed
2.96(627) 16.04(630) -8.69(625) -8.17(570) 0.25(628)
Companies
Weighted Average Excluding
1.99 -22.74 -15.25 -15.08 -3.41
“Big Six” Firms
KT & G 469.21 467.03 443.77 1729.72 912.41
POSCO 2.75 0.97 3.13 8.07 7.60
KOGAS 3.09 -1.55 1.78 2.49 1.50
Interest KT 3.27 2.11 3.02 4.01 4.80
Coverage Ratio KEPCO 2.02 -0.16 2.91 3.23 2.95
Doosan H&C 4.91 0.67 2.18 1.27 0.50
Weighted Average of Listed
1.31(627) 0.36(630) 0.75(625) 0.70(570) 1.30(628)
Companies
Weighted Average Excluding
1.18 0.34 0.62 0.48 1.04
“Big Six” Firms
KT & G 24.79 31.53 24.85 29.01 38.08
POSCO 118.50 160.48 118.85 89.59 88.41

KOGAS 230.23 555.79 273.70 184.22 259.02

Debt/Equity KT 189.34 223.98 192.33 75.69 103.32

Ratio
KEPCO 112.89 185.23 175.23 111.50 102.70

Doosan H&C 186.91 243.66 127.35 139.11 113.50

Weighted Average of Listed 415.35(6
265.31(627) 316.43(625) 199.73(570) 205.52(628)
Companies 30)
Weighted Average Excluding
326.41 532.08 382.75 246.20 253.14
“Big Six” Firms

Source: KDI.
2. Corporate Governance of SOEs

 GOCs: (essentially) 100% owned by government, except for KEPCO

 
 GICs
 Mixed ownership for most public enterprises with high commercial elements
 Decreasing government ownership and increasing foreign ownership
 
 Dominance by the line ministry, priorities given to policy objectives
 Generally perceived as a policy instrument of the line ministry
Line ministry playing a dominant role in making key decisions, appointing directors
and CEOs
Separation among industrial policies, regulatory policies, and commercial operation
of a public enterprise or a government agency is generally unclear
 Roles of the line ministry
 Shareholder
 Promoter of industrial policies
 Regulator (in network industries)
 
  Other government agencies involved
 Ministry of Planning and Budget: Agency in charge of privatization, internal
restructuring for improving efficiency
 Ministry of Finance and Economy: Manager of government properties,
including shares of public enterprises
 Office of Inspector General: Auditor
 National Assembly: Auditor of all public institutions, including public
enterprises
 
 Still, commercial SOEs perform better than large non-SOE firms
3. Recent Developments in Privatization of SOEs

 1997 Special Act on Privatization

 Transforming KT, KT&G, and KOGAS into GICs, and allowing stronger profit orientatio
n
 Prohibiting chaebol takeover by requiring a 15% ceiling on individual ownership
 Establishing an Anglo-Saxon style governance structure
 

 Divestiture
 Full privatization: KT, Korea Textbook, Korea Technology Banking (KTB), Korea Chemi
cal, Daehan Oil Pipeline
 Partial sales of shares: KT&G, KEPCO, KOGAS, Korea Heavy, POSCO, etc.

 
 Government ownership and control of the financial sector has increased since 1998
4. Worker Participation in Privatization of SOEs

 Employee stock ownership system in Korea

 Up to 20% is allowed to be set aside for workers' associations.
 Discounts are not allowed for shares of SOEs to be privatized.
 Discounts of up to 30% were allowed before 1994.
 Mandatory deposit period of 1 year.
 Early withdrawal is allowed if certain conditions are met.
 
 Members of the ESOA of a company can purchase company shares only in one of the
following cases:
 Purchase of shares set aside for the association in public offerings
 Purchase of shares held by dominant shareholders of the association
 The company gives bonuses or retirement funds in the form of the shares of the company
 Purchase of shares by the association in the market
 Purchase of shares sold by members of the association who withdraw their shares from the
association
 Tax incentives for the investments in and contributions to the employees' stock
ownership programs
 Tax deduction on contributions by the firms
 Tax benefits for investment in and earnings from the shares in ESOP
 

 As of June 2001, 680 listed companies have ESOAs

 1,012 non-listed companies have ESOAs
 Average share held by each association is less than 1%
 
 <Table 5>Statistics of Employee Stock Ownership Associations (ESOAs)

ESOA

End of Year
Listed Company Unlisted Company Total
or Month

Companies Members Companies Members Companies Members

1990 666 864,333 118 81,279 784 945,612

1991 681 863,886 132 103,878 813 967,764

1992 684 832,741 149 116,710 833 949,451

1993 689 817,957 165 120,107 854 938,064

1994 696 864,969 203 183,471 899 1,048,440

1995 719 927,619 239 193,726 958 1,121,345

1996 757 957,429 205 159,078 962 1,116,507

1997 773 947,648 236 160,303 1,009 1,107,951

1998 743 881,773 268 96,308 1,011 978,081

1999 709 737,147 456 114,930 1,165 852,077

2000 696 748,612 850 159,912 1,546 908,524

  All "Big Six" have ESOP
 POSCO, KEPCO, and KT gave discounts to their ESOA members until 1994

 
<Table 6> Examples of Public Enterprises that Gave Discounts to ESOA
 

ESOA
Name Total No. of Selling Price/
Founding
of Stocks Issued No. of Stocks Public Offering
Compa (in thousand No. of Stocks Price
Date Assigned
ny stocks) % Assigned per (won)
(in thousand
Capita
stocks)

POSCO 1988. 5 91,789 6,256 10.1 450 10,500/15,000

KEPC
1989. 6 608,334 25,550 4.2 813 9,100/13,000
O

KT 1993. 10 287,917 5,758 2.0 94 18,000/25,000

 
 <Table 7>Key Statistics for ESOAs of the “Big Six”

Total No. of Ratio of

Founding Total No. of No. of
Stocks Deposit No. of
Name of Public Enterprise Date of Stocks Issued ESOA
Deposited (B/A) Employees
ESOA (A) Members
(B) (%)

KEPCO 1989. 7. 24 640,100,876 - - 35,210 21,945

Korea Telecom 1993. 12. 6 312,199,659 923,685 0.3 45,962 41,197

Korea Gas Corp. 1999. 9. 20 77,284,510 4,104,317 5.3 2,373 2,359

Korea Tobacco & Ginseng

1999. 10. 8 190,991,897 5,257,176 2.8 4,814 4,814
Corp.

Korea Heavy Industries and

2000. 11. 13 104,200,000 8,765,694 8.4 6,335 6,335
Construction co.

POSCO 1988. 2. 26 96,480,625 44,960 0.05 2,373 10,412

 Employee buy-out denied to Korea Power Engineering Co. (KPECO), a

subsidiary of KEPCO

 KPECO is currently 98% owned by KEPCO and 2% by the government

 KPECO is up for sale

 ESOA members of KPECO proposed to buy 51% of shares

Role of ESOA in the governance of the firm is limited

 There is considerable uncertainty as to the nature of the ESOA as a corporate

governance agent

 ESOA played no role in governance of private firms

 ESOA played no role in governance of SOEs

5. Problems and Issues

 ESOP system in Korea is undeveloped and inadequate in many respects.

 ESOP is a new and unfamiliar institution in Korea.

 Employees have little incentives to participate in ESOP or maintain long-term

ownership

 Employees' buy-outs are not a realistic option for privatizing large SOEs in

Korea being privatized.

 The nature of ESOA as a corporate governance agent is very unclear