Abolishment of Private Contract System by 2007

The government and the ruling Uri Party decided on September 3 that they will abolish the group private contract system beginning January 2007 after a two-year grace period.

At the National Assembly meeting in which Minister of Commerce, Industry and Energy Lee Hee-beom and Policy Commission Chair of the Uri Party Hong Jae-hyung participated, the government and the Uri Party agreed that considering that the private contract system has existed for over 40 years in the market, a two-year grace period is needed for a soft landing of the reformed system.

In addition, they decided to apply complementary systems starting January 1, 2005, in which public institutions are obliged to notify purchase target ratios (above 45 to 50 percent) publicly during the grace period.

According to the complementary system that they suggested, the sales support scope for small- and medium-sized companies, which is currently limited to agriculture and manufacturing areas, will be extended to the areas of services and construction. Also, when public institutions order large-scale work, they will have to procure competition items from several small- and medium-sized companies to prevent intense competition among them.

The complementary system also includes a “’pro’ small- and medium-sized company policy” in which large companies’ and foreign products’ participation are completely excluded from the order of the products that small- and medium-sized companies can produce directly with their own technology and capacity. It also guarantees practical sales route expansion of small- and medium-sized companies by allowing the companies (while excluding large companies) to compete with each other for small-size purchase orders of 200 million won or less.

Moreover, considering the concerns spreading over small- and medium-sized companies that most of the companies will go bankrupt because of the new competition system, the new system will prevent these companies from intense competition by introducing an eligibility screening system for low- or no-margin bidding. It will also prevent few companies from a market monopoly by categorizing the competition system grade-by-grade.

The government and the ruling party plan to submit the revised bill of small and medium industry promotion and product procurement promotion around October 25, which covers the above-mentioned new system.

In the meantime, the Korean Federation of Small and Medium Businesses (KFSB) asserted that if the abolishment timeline of the current private contract system is notified in the law without any practical and effective countermeasures, public institutions might postpone or avoid orders until the existing law is abolished, or the moral hazard of small- and medium-sized companies that want to take more orders in advance might proliferate.

KFSB plans to announce independently the revised proposal for small and medium business sales route support and a private contract system next week at the earliest.

Min-Hyuk Park Ki-Jeong Ko mhpark@donga.com koh@donga.com