KEPCO and critical infrastructure
Recent news of the Korea Electric Power Corp. (KEPCO) getting into 200 trillion won worth ($154.6 billion) of debt received much attention and rightly so. KEPCO's debt equals slightly more than 9 percent of South Korea's 2022 GDP, which stood at $1.665 trillion. The debt is a staggering sum considering KEPCO has raised fees cumulative to 30 percent in the past year and relied on a decrease in global energy commodity prices, in order to post a Q3 profit of 1.99 trillion won — profit that could easily dissipate with another rise in commodity prices.
KEPCO's debt level comes with a number of consequences. Firstly, such high levels of debt may preclude the utility from making necessary upgrades to the system and maintaining current levels of efficiency. Secondly, higher debt levels mean a greater share of KEPCO's revenue must be used for interest payments on its debt. Lastly, taxpayers are ultimately responsible for this debt through taxpayer-funded support, as KEPCO is a state-owned utility.
A greater concern regarding KEPCO's precarious situation may be the utility's importance to future economic growth. The Korean economy already skews toward export-led, manufacturing growth engines that are energy intensive, namely semiconductors, automobiles, steel and petrochemicals. Yet, the government's plans to lead the world in new areas such as cutting-edge technology, AI, carbon reduction and a clean energy transition, will likely require greater energy intensity and major infrastructure investments. Such changes will be increasingly difficult for debt-saddled KEPCO.
Furthermore, KEPCO's troubles are accompanied by a shrinking population and a steep demographic decline that is quickly turning South Korea into a super-aged society where the tax burden on younger generations may become untenable.
South Africa’s state-owned utility Eskom provides a stark example of how badly things can turn if debts mount. The company is dealing with crippling system deterioration and regularly implements electricity outages that strangle economic growth. Its debt load is approximately $25 billion, merely one-sixth that of KEPCO, yet to support the ailing utility, the South African government initiated a partial bailout using taxpayer money earlier this year.
A country's electrical grid and transportation network are critical infrastructure. Critical infrastructure can be defined as the essential services and related assets that underpin society and serve as the backbone of a nation's economy, security and health. The disruption or incapacitation of such a system can be highly detrimental to a society. This is why Seoul Metro, like KEPCO, is a cause for concern.
Recently, Seoul Metro workers went on strike to protest the company's plan to deal with its own massive debt. A proposed manpower reduction of 13.5 percent by 2026 has roiled workers. Seoul Metro currently runs deficits hovering around 1 trillion won per year and has a cumulative deficit of 17.68 trillion won ($13.65 billion) as of last year. The company has received taxpayer-funded support from the Seoul Metropolitan Government to help paper over its debt struggles, but officials claim more than 60 percent of Seoul Metro facilities and equipment are outdated, which will require hefty investments to rectify if accurate.
Contrary to Seoul Metro’s predicament, Transport for London currently enjoys budget surpluses close to $1 billion per year. To meet operating costs, the operator charges ￡6.70 for a single journey ticket on the London Underground, though contactless payments are less. This is far more than Seoul Metro’s single journey cash ticket of 1,500 won (about ￡0.92).
In addition to KEPCO and Seoul Metro, many South Koreans were shocked on Nov. 17 this year when the government's civil service system network crashed. Residents and public servants were unable to print necessary documents such as resident IDs and familial relations certificates, which are needed for many crucial services like obtaining bank loans or closing real estate transactions. The system apparently crashed due to network server upgrades that did not go as planned.
KEPCO's level of debt, the woes of Seoul Metro and the crash of the government's civil service system clearly indicate that politicians and the public must get a better grasp of the implications and consequences of under-appreciating and under-funding critical infrastructure. One can appreciate the general malaise by South Korean politicians when it comes to increasing energy and transportation fees for the general public. The populist refrain is that increasing fees will be a financial burden on residents.
However, South Korea is a country with no primary energy resources of its own, making it import dependent. It also depends on efficiently operated public transportation in its overcrowded capital. These systems are the foundation and the building blocks for a vibrant and growing economy. Would it not be better to have residents pay higher fees that better reflect operating costs than trying to hide those costs through taxpayer-funded support programs and interest-bearing debt?
Charging companies and residents the full cost of energy consumption and transportation costs is rational. Moderately reduced fares for the elderly or vulnerable could still be offered within reason, and businesses could reimburse the transportation fees of their workers as a new benefit to retain or attract talent.
South Korea’s policymakers and residents need to rethink how to fund critical energy and transportation infrastructure in the country, as well as how to build more resilient administrative networks. As the population declines and we become super-aged, the massive, accumulating debts of infrastructure systems will be unsustainable and strangle any hope of real economic growth. Policymaking not populism is necessary, before South Korea loses its competitive edge in the high-tech economy of tomorrow.
Sean O’Malley (seanmo@dongseo.ac.kr) is a tenured professor of international studies at Dongseo University, where he teaches classes on international relations and regionalism. His most recent paper on critical infrastructure systems will be published in the upcoming issue of the Journal of Territorial and Maritime Studies.