By Kim Hyun-cheol
Staff Reporter
Korea Railroad Corporation (KORAIL), a state-run railroad and train company, announced Wednesday that it will acquire Airport Railroad Co. (AREX), a private firm that operates the railway linking Incheon International Airport and Seoul for 1.2 trillion won ($979.3 million).
The decision, however, is expected to stir up criticism that the government is worsening management of KORAIL by putting the burden of a failed privately-run infrastructure project on it.
As part of the rationalizing scheme for Incheon Airport management by the Ministry of Land, Transport and Maritime Affairs, KORAIL signed a memorandum of understanding on the deal with Hyundai Engineering & Construction, the representing seller of AREX, on the purchase of its 88.8 percent stake.
This is the first case of a state-run firm buying a private entity in the same business. The purchase price for AREX was lowered from the 1.3 trillion won requested by the sellers.
The deal will be finalized within this month if the agreement is approved by a special board of both parties.
The ministry said the takeover will substantially lower the government's subsidy on the AREX management. "The deal will pull down the subsidy on deficit-ridden AREX from 13.8 trillion won to below 6.7 trillion won until 2039," a ministry official said.
It is a win-win deal for both the government and KORAIL, according to the railway company. "The government can save a lot of financial burden because its subsidies for AREX will be sized down if the business comes under public management. And KORAIL can also diversify its business areas," a KORAIL spokesman said.
The government accounts for 1.9 trillion won out of the 5 trillion won investment in the AREX project. If profits are less than 90 percent of what was initially expected, the government is supposed to cover the gap for 30 years.
Currently, the Incheon Airport Railroad is partly in operation. Of the whole 61-kilometer track between the airport and Seoul Station, the first-phase line to Seoul's Gimpo Airport was launched in March 2007, with the rest aimed to be completed by the end of next year.
Established in a government plan to privatize the management of Incheon Airport, however, business showings of the railroad track proved to be a failure. Since opening, the number of railroad passengers has been only 6 to 7 percent of what the government originally predicted.
According to a report from the ministry, the number of passengers on the first line totaled 13,000 in 2007 and 17,000 last year, far less than the government's forecast of 210,000 and 230,000, respectively. Over the two years, a total of 267 billion won of subsidy was injected in AREX management.
Critics say the takeover is likely to further worsen the financial status of KORAIL, in a vicious circle in which a faltering firm buys another. KORAIL currently has an accumulated deficit of 2.4 trillion won.
"Responsibility of failure in the privately invested social infrastructure project should be on construction firms and the government as its key investors, not on KORAIL," Rep. Kim Sung-soon of the main opposition Democratic Party said.
The Korean Railway Workers' Union asked the deal to be "immediately halted" in a statement Wednesday, saying no efforts have been taken to clear various suspicions involving the project from its beginning so far.