Chapter

6 Institutional Framework for Decision Making in Korean Public Enterprises: Some Implications for Developing Countries

Editor(s):
Paul Streeten
Published Date:
September 1988
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I. Introduction

The appropriate institutional framework for decision making in public enterprises has been a theme for discussion in many countries, both developed and developing. Typically, this discussion revolves around issues related to political and public accountability of the operations of public enterprises, on the one hand, and to the degree of authority to be delegated to public enterprises and the manner in which the delegated authority is to be exercised, on the other. These discussions, not infrequently, move in a seesaw fashion, tilting now toward a “let the managers manage” orientation and now toward a stricter control of public enterprises.

The crux of this discussion hinges on how to establish the means of proper accountability while ensuring operational autonomy for the enterprise. Accountability should not only (a) prevent the abuse of delegated power but also (b) ensure that “power is directed toward the achievement of broadly accepted national [or corporate] goals with the greatest possible degree of efficiency, effectiveness, probity, and prudence.”1 More often than not, discussion merely emphasizes the need for establishment or reinforcement of the missing or weak accountability links of category (a). Such a development obviously tends to introduce greater control over public enterprises, often without providing for a commensurate delegation of authority, thereby limiting autonomous decision making in public enterprises. Particular emphasis is put on accountability for financial administration as a means by which government authorities may exercise their power (by, for example, approving by-laws; appointing and removing directors, board chairmen, and chief executive officers; and issuing policy directives).

This paper illustrates, on the basis of the experience of the Republic of Korea, the changing character of the relationship between the government and public enterprises, as it emerges in tandem with overall structural adjustments in the economy designed to create greater stability and efficiency. A shift in the relative emphasis on accountability and autonomy of public enterprises characterizes the recent changes in the institutional framework for decision making in Korea. These changes have relevance for developing countries that experience a similar urgency for modifications in the structure of their policies.

II. Basic Setting of Public Enterprises in Korea

In the wake of the Republic’s founding in 1948, two factors were responsible for the public ownership of key enterprises in Korea. First, the new government had to take over, upon liberation, public or private enterprises formerly owned by colonial powers. Many of these enterprises were divested by 1960. Second, and perhaps most important, the Government of Korea pursued interventionist economic objectives in various policy contexts, some of which stimulated the growth of public enterprises that formed “leading sectors” in order to spur growth in related sectors.2

Though Korea has recently been cautious in creating public enterprises, and indeed since 1968 has favored the privatization of many such enterprises, the role of public enterprises has been crucial, particularly in the first decade of rapid economic growth—the 1960s. As Jones and SaKong ((1980), p. 141) note, “A minor paradox of Korean development is that an ostensibly private-enterprise economy has utilized the intervention mechanism of public ownership to an extent which parallels that of many countries advocating a socialist pattern of society.”3 In 1984, total value added of public enterprises (90 enterprises at the central government level and 108 at the local level) amounted to U.S. $8.1 billion, or about 10 percent of gross domestic product (GDP). In terms of employment, they represent 2.6 percent of non-agricultural employment, indicating the relatively higher capital intensity in public enterprises. Out of 90 public enterprises at the central government level, 5, with a 5.5 percent share in the nation’s total value added and foreign debt, are under ministerial management (i.e., the Office of Monopoly of the Ministry of Finance, which produces cigarettes and ginseng, and the Office of Railroad Administration of the Ministry of Transportation, which runs the nation’s railway system); 25, with a 23.4 percent share, are government-invested enterprises (GIEs) with over 50 percent direct equity participation by the Government; 54 are subsidiaries of these government-invested enterprises (which, by definition, have no more than 50 percent equity participation by the Government); and 6 are government-backed enterprises. (Tables 1 and 2 show the breakdown of public enterprises and the magnitudes of 25 government-invested enterprises.) Out of 25 GIEs, only 3 were created in the 1980s. They are (i) Korea Electric Power Corporation (KEPCO), which emerged as a GIE by buying out all the stock held by nongovernment stockholders to make KEPCO a wholly owned public enterprise, principally to provide long-term capital that nongovernment stockholders were unable to provide; (ii) Korea Telecommunication Authority, which was transformed from one of the monopoly ministerial operations under the aegis of Ministry of Communication into a wholly owned public enterprise; and (iii) Korea Gas Corporation. In contrast, several major public enterprises, such as the Korea Oil Corporation, were privatized during this period in accordance with the Government’s policy of restricting the number of public enterprises. Those ceasing to exist as GIEs included the Korea Fisheries Development Corporation, the Dae Han Reinsurance

Table 1.Korean Public Enterprise, by Type As of December 31, 1984
TypeCharacteristicsNumberEmploymentBudgetSales

(1982)
Government enterprisesGovernment department type (Office of Monopoly, Office of Railroad, etc.)thousandsmillionU.S. dollars
5784,1963,585
Percentage share37.915.319.1
Government-invested enterprisesGovernment holds at least 50 percent of stock (Korea Development Bank, Korea Electric Power Corporation, etc.)2513414,6258,952
Percentage share47.953.547.7
Subsidiary companies of government-invested enterprisesIndirect government investment through government-invested enterprises54412,8492,402
Percentage share4.610.412.8
Other government-backed enterprisesGovernment holds less than 50 percent of stock6275,6953,815
Percentage share9.620.820.4
Total9028027,36518,754
Percentage100100100
Source: Republic of Korea, Economic Planning Board.
Source: Republic of Korea, Economic Planning Board.
Table 2.Size of Government-Invested Enterprises As of January 1, 1985
EnterpriseEmploymentPaid-in CapitalBudgetPrimary Service/Product
thousands million US. dollar’s
Korea Development Bank2,0107061,027Long-term loans, investment guarantees, and international banking
Small and Medium Industry Bank7,494190445Providing credit guarantees, loans, and discounts to small and medium industries
Citizens National Bank10,31468527Promoting household savings; expanding financing to small enterprises and low- income groups
Korea Housing Bank7,13741424Fund-generation financing for both public and private housing sectors
Korea Securities Exchange34749Regulation of securities sales; review of new stock offerings
Korea Electric Power
Corporation23,7891,9376,599Fund-generation financing for both public and private housing sectors
Kotea Coal Corporation14,230105393Coal production
Korea Integrated Chemical Stock Company831068Urea and chemical fertilizer production
Government Printing Office5541052Textbook production and supply
Government Mint2,095866National mint
Korea Mining Promotion Corporation4309026Technical guidance, mine assessment, and mineral credit financing
Petroleum Development Corporation4022723Petroleum resource exploration and development, domestic oil supply, and demand stabilization
thousands million U.S. dollars
Korea Highway Corporation2,519150262Planning, construction, and management of expressway
Korea Housing Corporation Corporation2,418228586Low-income-housing construction
Industry Site and Industry Site and Water Resource Development Corporation1,453559514Industrial site and special Regional development
Korea Land Promotion Corporation999259306Land acquisition and supply
Agriculture Promotion1,84112167Irrigation development and land reclamation
Agriculture and Fishing Development Corporation5391239Assisting processing and marketing distribution of agricultural and fishery products; research
Korea Telecommunication Authority47,4692,1823,531Dredging and filling
Labor Welfare Corporation1,3194432Providing industrial accident insurance, industrial safety/ health-related services
Korea Trade Promotion Corporation565134Overseas marketing and information services
Korea Tourism Corporation5933466Tourism
Korea Broadcasting System4,62791430Radio and TV broadcasting services
Korea Gas Corporation46628185Gas production and distribution
Overseas Development Corporation22615Overseas labor supply services
Total133,9196,89315,736

Corporation, the Dae Han Salt Corporation, the Dae Han Dredging Corporation, and the Pohang Iron and Steel Corporation.

Table 3 presents a comparison of the values added by public enterprises and private enterprises. Wages account for a preponderant share of value added by private enterprises, followed by financing charges; while for public enterprises, the order is wages, depreciation allowance, and profit before taxes. In terms of linkages, 25 GIEs generally show greater forward linkages than private industries, indicating the former’s strategic role in the overall industrial structure. Some enterprises have been transformed from the status of GIEs to subsidiaries by effectively reducing the Government’s direct equity participation in order to give a greater degree of management independence to enterprises. A notable example in this category of public enterprises is the Pohang Iron and Steel Corporation (POSCO), the nation’s largest integrated iron and steel mill, with over 11 million tons of annual production. In this case, the Government’s equity share was lowered from 50.1 percent in 1975 to 41.6 percent in 1976. With its newly acquired autonomy in operation, POSCO has emerged as one of the most competitive steel mills in the world, according to the trade journal Iron Age, as well as the biggest corporate taxpayer in the nation for the last four years.

III. Framework for Control of Public Enterprises

In Korea, the institutional framework for control of public enterprises has undergone fundamental changes. Until 1962, when the Law for the Budgeting and Accounting of GIEs (with varying degrees of government ownership) was promulgated, public enterprises were generally under non-uniform, multiple layers of control in accordance with the laws by which they were established and the ad hoc decrees and other regulations that pertained to their sectors. The 1962 Law provided public enterprises with uniform procedures for budgeting and expenditures in an overall perspective of national economic management. This law was enacted during the first year of the nation’s first five-year economic development plan and was presumably an attempt to ensure strict financial accountability for public enterprises’ expenditures right at the inception of highly interventionist economic development planning. It was essentially oriented toward expenditure; was based on the budget system for public administration; and gave little, if any, regard to the dynamism of enterprise management. As the 1962 Law covered finance and accounting only, leaving out supervision and exercise of stockholders’ rights, a more comprehensive law for the management of public enterprises was introduced in 1973 to eliminate these shortcomings. It contained the following provisions:

Table 3.Composition of Value Added by Public and Private Enterprises1(In percent)
Public EnterprisesPrivate Enterprises
ManufacturingConstructionServiceManufacturingConstructionService
industriesindustriesindustriesAverage2industriesindustriesindustries
Wages and salaries26.735.836.335.848.463.867.6
Depreciation allowances32.47.530.327.417.98.18.4
Gross profit before taxes22.536.618 920.44.06.715.0
Financial charges17.719.513.415.025.816.02.2
Duties and fees0.20.30.90.62.02.03.8
Rentals0.50.30.50.51.93.43.1
Total100.0100.0100.0100.0100.0100.0100 0
Source: Bank of Korea (1983).

Data for 1982. Details may nor add to totals shown on account of rounding.

Includes publicly owned financial instil utioos.

Source: Bank of Korea (1983).

Data for 1982. Details may nor add to totals shown on account of rounding.

Includes publicly owned financial instil utioos.

  • (i) the establishment by the Government of the Management Committee for Equity Participation in the Ministry of Finance to act as the central body for the formulation of basic policies for public enterprises;

  • (ii) the detailed elaboration of the qualifications and the number of board directors and executives, and the manner in which they are appointed;

  • (iii) the imposition on the chief executives of public enterprises of self-evaluation of performance and the requirements for reporting upon their self-evaluation to the ministers concerned;

  • (iv) the introduction of annual management review of public enterprises by the Ministry of Finance and its designates;

  • (v) the standardization of the materials and commodities public enterprises use, as well as the categorization of those materials and commodities according to function, properties, and organizational units involved;

  • (vi) the requirement that chief executives of public enterprises formulate demand and supply plans for necessary materials and supplies so that procurements of any materials and commodities other than those listed in the plan be reported to the minister concerned and to the Ministry of Finance;

  • (vii) the requirement that chief executives of public enterprises conduct an annual inventory survey of materials and products; and

  • (viii) the establishment of a legal basis for conducting extraordinary investigations on inventories by the Office of Supply with the consent of the Ministry of Finance.

These and other provisions stipulated in the law greatly reinforced the control aspect of accountability at the expense of its contributory aspect, as they substantially encroached on the domain of operational autonomy.

The 1976 directives for the supervision of public enterprises that were issued by the Ministry of Finance, for example, had 41 items that required approval by, and reporting to, the Government, involving over 300 reporting documents a year.

For manufacturing enterprises, such stringent control by the Government was found to be cumbersome, particularly when those enterprises needed to make prompt decisions in order to adapt to change. In addition, the orientation of the Ministry of Finance’s Committee for Management of Government Equity Participation turned out to be too narrowly focused on financial control issues rather than on the issues related to the attainment of corporate objectives in a wider and dynamic sense.

During the time the economy was on an upward spiral of growth, the gravity of poor performance of public enterprises was not properly appreciated. As the Korean economy began to suffer from stagflation in the late 1970s and early 1980s, however, the causes of poor performance of public enterprises emerged as a high-priority agenda item for action by the Government as an integral part of the Economic Stabilization Program and Structural Adjustment Programs (for which the World Bank lent a sizable amount of money).

Against this background, the Government of Korea introduced the Basic Law for the Management of Government-Invested Enterprises, promulgated on December 31, 1983. This law provides the following:

  • (i) ensuring autonomy of operation in GIEs by de-emphasizing control in an effort to help evolve a responsible management system;

  • (ii) establishing the Committee for the Performance Evaluation of GIEs in the Economic Planning Board (EPB)— the central planning and budgetary authority, created in 1962 by absorbing, among others, the Bureau of Budgets from the Ministry of Finance—to deliberate on matters related to the management of GIEs and to decide on formulation of basic guidelines for the establishment of management objectives and of common guidelines for budgeting and performance evaluation. This Committee is chaired by the Minister of Economic Planning Board (EPB) (who concurrently holds the nation’s only deputy prime ministership), with the Minister of Finance and other concerned ministers, plus no more than five individuals, appointed by the President of the Republic on the basis of their intellectual and experiential background, as members;

  • (iii) establishing the GIEs Performance Evaluation Task Force, staffed mostly by nongovernmental experts, to undertake reviews of performance evaluation in accordance with the methodology approved by the Committee for the Performance Evaluation of GIEs;

  • (iv) requiring the EPB Minister, who acts as the Chairman of both the Economic Ministers Council and Roundtable (an informal consultative gathering), to issue basic guidelines for the formulation of management objectives by the end of June every year so that the chief executives of GIEs can submit, as required by law, their management objectives to the minister concerned. After review and adjustment where necessary, the minister must submit it, in turn, by the end of September, to the EPB Minister, who adjusts it, where necessary, and notifies the minister concerned and the GIEs before the end of October;

  • (v) requiring chief executives of GIEs to submit, by the end of March, to the minister concerned and the EPB Minister their own annual performance evaluation reports, which become a basis for the governmental review of GIE performance evaluation of GIEs;

  • (vi) requiring that the method of performance evaluation be developed by the EPB Minister and be amenable to objective performance measurement in terms of the public interest, achievement of management objectives, and efficiency;

  • (vii) requiring the EPB Minister to make review of performance evaluation of GIEs and to make a report to the President of the Republic on the results of the review by June 20;

  • (viii) empowering the EPB Minister to ask the minister concerned for corrective measures if such are found necessary, including the recommending of dismissal of members of the enterprise’s board and requiring ministers concerned to take appropriate actions accordingly;

  • (ix) establishing boards of directors responsible for such decisions as annual budgets, adjustments to those budgets, and operational plans, while ensuring that no one can serve as chairman and chief executive officer concurrently, so that a check-and-balance system between policymaking and execution can be introduced;

  • (x) requiring GIEs to procure from the Medium and Small Industry Cooperatives products that the Minister of Trade and Industry determines that members of the Cooperative will produce, so that GIEs would help to promote the growth of the nation’s small and medium industries; and

  • (xi) eliminating many of the control measures the 1973 Law had stipulated.

Since only two and a half years have passed since the enactment of the Basic Law for Public Enterprises, it is still too early to evaluate the results of the new approach. Some evidence has begun to emerge, however, pointing to both positive and negative aspects. These are discussed in the following section.

IV. Review and Implications of New Approach

First, the focal point for decision making for public enterprises has been effectively shifted from the Minister of Finance and the minister concerned to the EPB Minister. By virtue of his central planning and budgetary responsibilities, the latter can conceivably take a more comprehensive overview of the role and objectives of GIEs in making decisions relating to investment by them, as well as in evaluating their performance. For GIEs, the EPB has emerged as the super master, albeit in a cooperative, rather than an adversarial, relationship. The Bureau of Appraisal and Evaluation of the EPB acts as secretariat to the Committee for the Performance Evaluation of Government-Invested Enterprises, in addition to being responsible for monitoring major government projects, mostly concerning infrastructure. Since it relies heavily on the Korea Development Institute and other nongovernmental experts for professional expertise, instead of attempting to create its own professional expertise, the Bureau has assumed the nonthreatening posture of a “control agency.”

Second, a considerable array of responsibilities has been shifted from the government to GIEs, particularly to Boards, which have yet to emerge as functioning policymaking units. Such delegation of authority exemplifies the Government’s resolve to stay away from management of public enterprises by calling for little reporting on their routine operations.

Third, the new approach mandates that the chief executives of GIEs undertake their performance evaluations as a part of their managerial decision making, as well as the principal basis for EPB evaluation. The evaluation system creates both visibility (because evaluations are reported to the President and then made available to the public) and incentives, in the form of higher bonuses for all employees of GIEs that receive higher performance ratings. The imposition on GIEs of self-evaluation can contribute to improved accountability, through elaboration of a system of performance measurement, in order to achieve the desired goals with efficiency and effectiveness.

Fourth, the new approach tries to put emphasis on professional management by requiring that new employees be hired on the basis of demonstrated evidence of qualifications, thereby minimizing political influence in this regard.

Fifth, the new approach tries to introduce some kind of interactive and iterative processes between the Government and GIEs by allowing the apex committee—the Committee for the Performance Evaluation of Government-Invested Enterprises—to invite executives and employees of GIEs to testify or to make observations on matters of importance for the Committee’s decision, as well as by incorporating the views of GIEs in the Manual for Performance Evaluation containing both the generic set of criteria applicable to all GIEs and those that are sui generis to particular GIEs.

V. Concluding Remarks

While the situation in Korea is obviously different from that of other countries, its experience in evolving an institutional framework for decision making in public enterprises sheds light on alternative solutions to similar problems faced by other developing countries. What the Government of Korea set out to accomplish through the introduction of a new institutional framework for decision making in public enterprises was to create synergism from what Mascarenhas (1982) has called the “policy efficiency” of the government, on the one hand, and the “operational efficiency” of public enterprises, on the other.4

Whether such “an exercise in artful government,” as Musolf 5 has aptly called it, will culminate in a new institutional and policy framework for the enterprise system in Korea, with a fruitful balance between autonomy and accountability, remains to be seen. The basic policy postures the Government of Korea has adopted appear, however, to be very promising. These postures relate to (1) the renunciation of the role of managerial decision maker by reducing, rather than maintaining, reporting and approval requirements, and (2) the introduction of interactive and iterative processes between the Government and public enterprises in setting appropriate bases for performance evaluation. These profound changes in perspective are likely to provide greater autonomy to enterprises and to enhance their accountability.

The Economic Planning Board has now become the linchpin of the new institutional framework. This basic change should provide the public enterprise managers with a broader perspective within which to formulate their management policies and, at the same time, should make it possible for the EPB to make an informed judgment about the role and performance of the public enterprise system without demanding a great deal of operational information.

Bibliography

The views expressed in this paper are solely those of the author and should not be attributed to the World Bank.

Canada, Royal Commission on Financial Management and Accountability (1979), p. 21.

The first Constitution of the Republic (1948) took an explicit socialist bent in regard to the public ownership of enterprises in such key sectors as transportation, communication, finance and insurance, electricity, irrigation, water works, gas, foreign trade, and others related to public welfare. The 1954 amendment to the Constitution, however, manifesred a shift from such a line by, first, dropping the clause reserving specific industries for public ownership and, second, stipulating that “private enterprises shall not be transferred to state or public ownership except in cases specifically designed by law to meet urgent necessities of national life; nor shall the management or operation be controlled by the state or by juridical persons organized by public law.” See Jones and SaKong (1980), p. 146.

Ibid., p. 141.

Mascarenhas (1982), pp. 47-48.

Musolf (1959), p. ix.

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