Kaesong companies face looming cash crunch, with only gov’t “assistance”

Posted on : 2016-02-26 16:21 KST Modified on : 2016-02-26 16:21 KST
Government opting only to provide low-interest loans instead of compensation for tenant companies’ losses
Lee Joong-beom
Lee Joong-beom

With a meeting between the US Secretary of State and the Chinese Foreign Minister leading to an effort to swiftly conclude the sanctions phase and to discuss how to resume dialogue after sanctions, it is looking less likely that President Park Geun-hye will succeed in her attempt to pressure China into joining in harsh sanctions against North Korea, which was the ostensible reason for suspending all operations at the Kaesong Industrial Complex.

Instead, Seoul has turned out to be the only country taking a hardline stance on North Korea, and the suspension of operations at the complex has inflicted irreparable damage on the 123 tenant companies there and their 5,000 or so subcontractors. This means that concerns that the sanctions would hurt South Korea more than North Korea have become a reality.

Amid increasing concerns about a possible string of bankruptcies around the end of March, when tenant companies will have to start paying money owed to their subcontractors, there are signs of organized pushback from the tenant companies.

On Feb. 25, Hankyoreh reporting found that the pressure to make payments will peak for quite a few tenant companies at Kaesong around the end of March.

“For a significant number of tenant companies, the payment deadlines for their subcontractors are concentrated about a month from now,” said a source with the Corporate Association of Kaesong Industrial Complex. “Given their insufficient funds, we are concerned that they won‘t be able to make the payments. Since a lot of their subcontractors are small companies, there could be a cascade of companies facing a cash crunch.”

Consequently, the association has decided to hold its third general meeting on Mar. 2, which will be attended not only by 120 or so of the tenant companies but also by about 5,000 subcontractors. This is the first time that the association has welcomed all of the heads of the subcontractors to attend a general meeting.

“It doesn’t look like the government is going to compensate us properly,” said a source at one tenant company. “We’re at the point where we’ve got to bring together all the employees from our subcontractors and make a show of force.”

But the South Korean government is not even considering the option of providing “compensation” for the losses suffered by the tenant companies at the Kaesong Industrial Complex. The government insists on only using the word “assistance.”

On Thursday, the Government Joint Task Force for Providing Assistance to Tenant Companies at the Kaesong Industrial Complex met for the fourth time and agreed to provide 550 billion won (US$445.20 million) in special loans to help the tenant companies resume normal business operations.

The interest rates on the loans are lower than the market rate: 1.5% at the Inter-Korean Cooperation Fund, 2% at the SME Entrepreneurship and Improvement Fund and 3% at government-run banks, the Korea Credit Guarantee Bank and the Korea Technology Finance Corporation. The government added that this was more assistance than the 350 billion won in special loans it provided during the shutdown of the Kaesong Industrial Complex in 2013 (that shutdown was initiated by North Korea; the ongoing stop in operations was a unilateral decision by the South Korean government).

But a source at the Corporate Association of Kaesong Industrial Complex said, “Even with the 350 billion won in 2013, there was a lending limit for individual companies, which meant that the actual amount of money loaned was around 100 billion won,” the source said. This means that the 550 billion won in loans will not be very effective relief for the tenant companies.

Also, loans are money that the companies will have to pay back, which makes them fundamentally different from compensation.

“If the government only provides assistance and not compensation for our losses, it will be completely impossible to recover from the damage,” said another source at a tenant company.

The reason that the government is not taking steps for compensation is because there were no legal grounds for completely shutting down the Kaesong Complex. Compensation is provided for losses that are caused by legal actions.

But as Prime Minister Hwang Kyo-ahn explained to lawmakers in the National Assembly, the South Korean government is explaining the shutdown of the Kaesong Complex as “the outcome of high-level political actions by the president.”

The precedent that is offered for these actions is the May 24 Measures, sanctions against North Korea that were taken immediately after the sinking of the Cheonan corvette in 2010.

When companies involved with inter-Korean cooperation projects filed lawsuits against the government for compensation, the courts ruled that the May 24 Measures were actions that fell under “discretion resulting from high-level political decisions.”

“Even during the lawsuits for compensation after the May 24 Measures, the court rejected the argument that the measures were an ‘act of the state’ by the president,” said Song Gi-ho, a lawyer who is an expert in trade. “Even if it were an act of the state by the president, this would only apply in the case of actions that required high-level political decisions, such as the inter-Korean summit.”

“The May 24 Measures stated that no additional projects would be allowed to go forward, but this latest measure effectively eliminates a business concession that was already in place. This is not permissible, since it constitutes a unilateral violation of individual property rights and a direct limitation on corporate activity, which are guaranteed in the constitution,” Song said.

By Kim Jin-cheol, staff reporter

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