hankyoreh

By Jung Tae-woo, staff reporter

On Oct. 23, Seoul Metropolitan Government regained the right to determine fares on Seoul Metro Line 9 and eliminated the minimum revenue guarantee system, which was criticized as being a means of providing unfair privileges to the operators.

Controversy over privilege erupted after the privately funded operator of the subway line unilaterally decided to raise fairs in April 2012. The changes to the city’s contract with the operator are expected to reduce Seoul’s financial outlay by around 3 trillion won (US$2.84 billion).

In a press conference held on the same day, Seoul Mayor Park Won-soon said that the city had signed a new agreement to this effect with Seoul Metro Line 9 Corporation, the private operator of the subway line.

“We view the restructuring of Seoul Metro Line 9 as an innovative model for privately funded projects in Seoul,” Park said. “The line will be operated to benefit the citizens of Seoul.”

Macquarie Korea Infrastructure Fund is no longer involved in the project.

The new agreement could possibly serve as an opportunity to bring about changes in privately funded projects around the country. In the altered version of the agreement, the minimum revenue guarantee system, which had been regarded as the most toxic clause in the agreement, has been removed.

That system has been replaced with a cost compensation system. According to the new system, when the actual revenue from the subway line is not enough to cover the costs of operating it, the operator is compensated for its losses.

In contrast with this, under the minimum revenue guarantee system, the city of Seoul had to cover the shortfall when operators earned less than 70-90% of the expected operating profits. The expected profits were based on an inflated estimate of demand for the subway.

Through this system, Seoul Metropolitan Government paid a total of 163.2 billion won (US$154.22 million) to the private operator since 2009, including the estimated amount for this year.

Another change in the agreement concerned raising the subway fare. Previously, the operator only had to report the raise to Seoul Metropolitan Government, but now it must receive the consent of the city. The revision means that Seoul has secured control over determining subway fares.

There was also a major reshuffle of the private-sector investors in the subway line. Macquarie Infrastructure and Hyundai Rotem sold their shares, making way for capital participation by a total of 11 investors. These include two asset management companies (Hanhwa Asset Management and Shinhan BNP Paribas Asset Management) and Kyobo Life Insurance, Hanhwa Life Insurance, and Heungkuk Life Insurance.

Macquarie Infrastructure and the other former investors had raked in profits through the minimum revenue guarantee system and subordinated loans. They reportedly sold their shares in the company for 746.4 billion won (about US$707 million).

Thanks to the changed agreement, Seoul Metropolitan Government expects to be able to lower the amount of financial assistance it is supposed to give to the privately funded operators over the next 26 years from 5 trillion won to 2 trillion won, which could result in as much as 3.19 trillion won in savings.

According to the previous agreement, the city had estimated that it would have to fork out a total of 5.17 trillion won (about US$4.9 billion). This would include 783 billion won from the minimum revenue guarantee system along with 4.39 trillion won in subsidies to compensate the operator for not increasing fares.

Seoul Metropolitan Government moved to create a 100 billion won citizen fund for Seoul Metro Line 9. Seoul residents will be able to invest a maximum of 20 million won in the fund per person. The fund will offer an average return of 4.3%.

“Seoul Metropolitan Government needs to address the question of who was originally responsible for the losses that the city incurred because of the original flawed agreement,” the Citizens’ Coalition for Economic Justice said in a statement. “Time must not be wasted in bringing about fundamental improvements in the system, including the Private Investment Act, which resulted in budget waste.”

“We also need to take active steps to change the agreement for the Umyeon Mountain tunnel, another privately funded project that has come under criticism for preferential treatment,” said Kang Hui-yong, a member of Seoul city council.

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