Public companies sell assets to improve financials without much success

Korea Hydro & Nuclear Power Co.’s head office in Gyeongju, North Gyeongsang Province [Courtesy of Korea Hydro & Nuclear Power]

Debt-ridden South Korean public institutions, including the Korea Electric Power Corporation (KEPCO) and the Korea Railroad Corporation (KORAIL), have sold more than 370 billion won ($283.31 million) worth of assets in 2023 to help improve their financial position, according to a survey.

Despite the spate of asset sales, its impact remains limited with the total debt of these financially distressed organizations expected to reach 671 trillion won this year. The prevailing view is that, instead of one-time asset sales, a fundamental solution such as an electricity rate hike is needed to improve individual corporate profit margins.

According to data from Representative Koh Yong-jin on asset efficiency of public institutions required to prepare mid to long-term financial management plans submitted by the Ministry of Economy and Finance on Sunday, KEPCO sold its substation site in Munjeong to a medical foundation for 26.9 billion won in August.

The site was originally planned to accommodate a substation, but the company cashed it in to improve its corporate financial structure. KORAIL also recently cashed in on idle land worth 68.9 billion won, selling sites that were to be used for railroads, including the land for Gwangmyeong Station on the Shinansan Line worth 17.4 billion won and that for Jungang Station on the same line worth 4.4 billion won, to the Korea National Railway, among others.

Korea Midland Power Co. sold its Seocheon headquarters decommissioning facility for 25.1 billion won, while Kangwon Land liquidated Hi 1 Entertainment, a subsidiary established in Taebaek City as part of its regional development business, to acquire a building worth 9.2 billion won.

Additionally, Korea Hydro & Nuclear Power Co. sold its hydroelectric dam’s coastal land for 7.1 billion won, and the Korea Water Resources Corporation sold 67 employee housing units for 5.6 billion won. The assets sold by these public organizations in the third quarter of 2023 totaled 166.3 billion won. When combined with the first quarter’s 109.3 billion won figure and 95.1 billion won in the second quarter, the assets sold until the third quarter of 2023 totals 370.6 billion won.

But analysts note that the asset sales will have a limited impact on improving the companies’ financial structure. The current amount of asset sales is a mere 36 percent of 2022’s 1.28 trillion won total, when public institutions started intensifying efforts to improve their financial structure.

“The assets that public institutions are looking to sell to improve their asset efficiency are in the form of specialty properties such as government buildings and offices, so there is low demand,” a government official said. “The recent downturn in the real estate market has also slowed down employee housing sales.” Properties such as employee housing listed for sale on public asset disposal system On-Bid have been auctioned up to 14 times to no avail.

Experts agree that “asset sales are only a stopgap measure to reduce the astronomical public sector debt” and that “the structure itself which accumulates excessive debt must be improved.”

For example, KEPCO, which accounts for the largest share of public sector debt, had 204 trillion won in debt in the third quarter of 2023 according to its consolidated financial statements. It is equivalent to more than a third of the estimated total debt of 671.7 trillion won at 35 financially struggling public institutions this year.

KEPCO is bound to continue accumulating debt if its structure continues to fuel reverse margins by buying power at a high price and selling it below cost. Although the government raised electricity rates for large industrial users by an average of 10.6 won per kilowatt-hour while keeping those unchanged for residential and small businesses on November 8, analysts say it is a far cry from what is actually needed to tackle the systemic reverse margin structure.

Variables, including the Israeli-Hamas war, is making the situation worse, and the power industry forecasts that KEPCO will return to losses in the fourth quarter despite a brief turnaround in the third quarter.

As KEPCO’s capital has shrunk on mounting losses, observers note that its bond issuance limit for 2024 will be cut by more than 30 trillion won from this year.