[Editorial] Concerns over corruption at public corporations

The Hankook Real Estate Trust Co. (HRET), a subsidiary of the Korea Appraisal Board (KAB), a public corporation, is a typical example of domestic public firms whose owners fail to clamp down on mismanagement and corruption.

The company narrowly escaped bankruptcy after Samsung Heavy Industries agreed to roll over maturing loans by the end of this month, but chances of its resurrection are remote. The Ministry of Construction and Transportation (MOCT) prolonged HRET¡¯s life thanks to mediation. Since neither the company nor its largest shareholder KAB can afford to pay its bills, HRET is in virtual state of bankruptcy.

If the company goes belly up, not only will there be a delay in the schedule for moving home buyers into an apartment complex it is building, but thousands of lease contractors for a shopping arcade in the apartment complex, as well as subcontractors and creditor banks, are expected to suffer more than 1.7 trillion won in losses. Set up in 1991, HRET is now undergoing a workout program due to poor management and has a total of 770 billion won in debts.

The company's financial woes are largely due to the indiscreet expansion of business projects, whose cost far exceeded its capital, and extremely sluggish apartment sales amid the 1997 currency crisis-related stagnation of the real estate market.

However, the fundamental cause was that the top officials of the company, who were drawn from among the ranks of politicians and former officials of MOCT and appointed for political reasons, held in trust real estate owned by financially troubled enterprises and were pressured by the political world or lobbied by related companies.

The mismanagement of the company was brought to light when two of its former presidents were arrested by the prosecution on suspicion of having illegally offered loans to Kyungsung Group in 1999.

While the two ex-presidents were in power, HRET gave privileged loans of 500 billion won to Kyungsung and privileged loans ranging from some 10 billion won to 100 billion won to 11 other companies.

Public corporations tend to fail in their investments because they do not adequately scrutinize the projected profitability of their ventures. An even more decisive cause is improper pressure from the political world.

The KAB paid special bonuses totaling about 1.6 billion won to its employees in 1998, even though it suffered a current term net loss due to the evaporation of 26.8 billion won from its investment in HRET. This is an unimaginable moral hazard at a private firm. The basic mistake was that the company, like HRET, was not turned over to the private sector, but was launched as a subsidiary of a public corporation.

Despite the mismanagement, the Board of Audit and Inspection looked into the company for the first time in 1999. The government should conduct a thorough inspection to determine who was responsible for its insolvency and the fact that it recorded the highest debt-to-equity ratio (2,000 percent) among public enterprises. The individual culprits, if any, should be duly punished.