WTO Examines Korea’s Procurement Policies

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In mid-October, the WTO conducted its 7th review of Korea’s trade policies and practices. This post highlights elements of the Trade Policy Review (TPR) that relate to Korea’s government procurement, including: the decline in purchases of foreign products despite opening more procurement to foreign suppliers, the use of procurement to support the small business sector, Korea-specific requirements for network equipment and the Korea Fair Trade Commission’s actions against bid-rigging.

Korea has been a party to the WTO Government Procurement Agreement (GPA) since 1997. When it implemented the revised GPA in January 2016, it expanded its procurement commitments by adding entities, including the Fair Trade Commission and several other central government entities, Ulsan Metropolitan City and the local government entities in three metropolitan cities (Seoul, Busan and Incheon). It also reduced the threshold that applies to goods and services purchased by other entities and added several service categories and the coverage of build-operate-transfer contracts.

Even with this expansion, according to the TPR, “the already small share of foreign supplies continued to fall” and foreign suppliers accounted for only 0.9% of the Public Procurement Service’s (PPS) total purchases in 2015. Central government agencies must use the PPS, the central procurement agency, to procure goods and services above ₩100 million (US$88,000) (and foreign goods and services over US$200,000), and above ₩3 billion (US$2.6 million) for construction. More than 70% of Korean procurement involves direct purchases by public institutions, not centralized purchasing by PPS.

The TPR pointed out that Korea continues to use government procurement as “an instrument of economic policy” to promote small- and medium-sized enterprises (SMEs). Under the GPA, Korea excludes set-asides for SMEs, based on a variety of measures, including the Act Relating to Contracts to Which the State is a Party and its Presidential Decree, which apply to central government entities. The Small and Medium Business Administration provides the list of set-aside products to be procured through competition among SMEs. The current list includes 204 products that will be set-aside for SMEs until 2018.

In 2015, Korea revised its approach for defining SMEs from looking at production inputs to the type of firm “to boost growth and create jobs”. The criterion is the average sales in the past three years and varies by industry. For example, the average sales for manufacturing industries is set at ₩150 billion, but is only ₩80 billion for the transportation industry.

Korean authorities had found the SME definition that they used until 2014 did not adequately capture the level of a company’s output, as it focused on production inputs, such as number of employees or paid-in capital. They also found that it led to the so-called “Peter Pan Syndrome”, a company “artificially refuses to grow and a grown company continues to be considered as an SME”.

The PPS handles procurement from SMEs and other socially disadvantaged sectors, such as regional companies and women-owned businesses. Korea employs various means to facilitate SME participation. For example, to support liquidity, SMEs are entitled to an upfront payment of up to 70% of the value of a government contract.

The TPR also singled out Korea’s Network Verification Scheme (NVS), launched in 2014, as providing new Korea-specific requirements that apply to network equipment, such as routers or switches, procured by Korean government entities. Under the NVS, the Korean government requires mandatory in-country testing of such procured equipment by its National Intelligence Service, even if the product has been tested and certified outside Korea by the inter-governmental Common Criteria Recognition Arrangement (CCRA). Both Korea and the United States are members of the CCRA, which sets cybersecurity standards for government-procured IT equipment. Under the CCRA, products certified at a CCRA-accredited laboratory should be accepted as meeting the certification requirements of any member country. The Office of the U.S. Trade Representative cited this practice in its 2016 trade barrier report.

With regard to anti-corruption activities, the TPR examined the role of the Korea Fair Trade Commission (KFTC). The Commission operates a monitoring system for detecting and preventing bid-rigging in the public sector. In 2013, it created the Bid Rigging Investigation Division to handle handling bid-rigging involving government contracts. Between 2011 and 2014, the KFTC uncovered 121 bid-rigging cases. In 2014, the KFTC found 56 cases of collusion in public bids involving infrastructure projects, e.g., Daegu Metropolitan Transit, the Gyeongin Canal, Busan Subway, and Honam High-Speed Train, and levied penalty surcharges totaling ₩769.4 billion.

The TPR also describes Korea’s procurement legislation, procurement methods, the replacement of awarding bids based on lowest price with best value awards, as well as the functions of the PPS.

Korea’s TPR will be completed when it replies to more than 700 questions from WTO members. It is expected to finalize its replies in about a month.

Jean Heilman Grier

October 18, 2016

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