Should Macquarie bear blame for‘Line 9 fiasco’?
By Kim Tong-hyung
It’s a fact that Seoul’s newest subway network is economically not feasible. But the debate on how it came to this and who should shoulder the financial responsibility to keep the transit system running is hardly clear-cut.
The Seoul Metropolitan Government, led by civic activist-turned-mayor Park Won-soon, obviously prefers a simplified argument: Metro 9, a consortium of 12 firms that operates Subway Line No. 9, is displaying excessive greed in attempting a 50 percent fare hike from the current 1,030 won to 1,550 won. Taxpayers burdened much of the constructions costs and are also paying for most of the operation losses.
City officials also wouldn’t mind Macquarie Korea Infrastructure Fund, the main shareholder of Metro 9, to be labeled as the next Lone Star Funds, a ``meoktwi’’ (eating and fleeing) foreign capital exploiting opportunities to make a killing off Korean assets on the least amount of investment input.
The Texas-based private equity firm earned that reputation after its disputed acquiring of the Korea Exchange Bank (KEB) in 2003, despite questions over its eligibility as a financial investor. After years of regulatory delays and political debacles, Lone Star punched its ticket out of Korea after selling KEB to the Hana Financial Group in the Korean banking industry’s biggest merger and acquisition (M&A) deal ever.
No matter how hard city officials try to paint the picture in black-and-white, the controversy over Line No. 9, which opened in 2009 and connects southern Seoul with Yeouido and Gimpo Airport, is not what one would call plain as a pikestaff.
The contract between Seoul city and Metro 9 has a so-called minimum revenue guarantee (MRG) clause that requires the municipal government to protect the company from excessive losses.
For the first five years of operation, Seoul city will ensure that Metro 9 earns at least 90 percent of a previously-agreed level of forecasted income, compensating the rest of the money if revenue falls below that line. The MRG base is drawn at 80 percent between the sixth and 10th year then 70 percent in the five years after that.
The Seoul city government said it has so far spent more than 70 billion won (about $61.5 million) to plug Metro 9’s losses, a fact municipal authorities repeatedly bring up as they ask the company ``how dare you?’’
But preventing Metro 9 from raising fares would mean that the rest of the city’s taxpayers will continue to be forced to finance cheaper rides for commuters in southern Seoul.
And enough with all the talk about Macquarie Korea Infrastructure Fund and the evilness of foreign capital _ the contribution of the Australian financial group is barely beyond lending its name.
Macquarie owns only 3.9 percent of the fund, while Korean financial companies and institutions like the Shinhan Financial Group, Korea Life Insurance, Military Mutual Aid Association and the Government Employees’ Pension Service combine for a 60 percent stake. Individual investors own 20 percent of the fund.
It seems inevitable that the feud between Seoul city and Metro 9 revisits an old debate about the user-pays principle in public services: Should all citizens share an equal burden to keep Line No. 9 up and running or should users accept expensive tickets?
One Seoul city official, who didn’t want to be named, admitted that keeping Line No. 9 fares at the current price could be a hard sell to taxpayers in the northern part of the city when they are rarely sympathetic for their wealthier southern neighbors.
``Line No. 9 will eventually be expanded to the Jamsil district, making a transit system that penetrates all of the Gangnam (southern Seoul) area. So it’s hard to deny that the presence of the new transit system benefits the people in Gangnam exclusively, both in transportation convenience and the rise in property prices in residential areas around the stations,’’ he said.
``So when people in Gangbuk (northern Seoul) ask why we are taking money from them and pouring it over there (Gangnam), it’s hard to come up with a convincing response.’’
The debacle over Line No. 9 also raises further questions on whether private financing schemes are a reliable method for expanding and operating public systems and social infrastructure.
While Line No. 9 was billed as a private financing scheme, critics ridicule that the term ``private financing’’ has been used rather liberally as taxpayers funded more than 80 percent of the 3 trillion won-plus project. Subways are never to be confused with a highly profitable business, and it would have been impossible for the city to lure private investors without absorbing most of the costs.
This also assured that the city government would have a dominant say over ticket prices. While the original contract set ticket prices at 1,400 won a person for 2009 and 1,800 won for 2012, city authorities have suppressed fares at a much lower level to counter consumer price inflation.
This explains why Line No. 9 earns just 50 percent of the profit predicted in the contract despite the number of riders reaching 95 percent of expected commuters.