Public Procurement Service

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
In order to maintain a sustainable and sound market economy and also nurture Small and Medium-sized Enterprises (SMEs), it is essential to build a mutually-cooperative network between large enterprises and SMEs by ensuring a fair trade relationship. To this end, under the national policy of Protection of Rights and Interests of the Economically Vulnerable, the Korean government has been making various efforts to prevent the unfair business practices between prime and subcontractors and to eradicate any wrongful top-bottom relationship made upon superior conditions set in the contracts or trade activities. In particular, it is highly important to ensure a fair trade relationship between prime and subcontractors in the field of software industry and construction industry in which many economic parties participate and hierarchical production structure exists. In this regard, the Korean government has established relevant laws and policies such as Act on Fair Transactions in Subcontracting, Framework Act on the Construction Industry and Software Industry Promotion Act, in order to effectively protect the rights and interests of the subcontractors. However, it is true that wrongful business practices against subcontractors including improper reduction of cost, delay in payment, establishing a side contract, etc., have been prevalent. According to an inquiry conducted by the Fair Trade Commission in 2011, there was a significant gap in terms of total assets held by prime and subcontractors. While 36.2% of prime contractors had total assets worth more than 100 million USD, most subcontractors, 75.2%, were reported to possess total assets less than 20 million USD. Also, looking at the subcontracting activities in the construction industry for the second half of 2012, there had been a high portion in unlawful activities with respect to payments for subcontractors: no notification to subcontractors on reduction in payment (21%), unfair reduction in subcontracting payment (20.2%) and setting an improper amount of subcontracting payment (8.6%). In addition, the rate of cash payment only accounted for 57.2% of total payment. It was noted that such unfair activities would take away the growth potential of subcontractors which are mostly SMEs, and it would be difficult for them to secure the fair share of profit. What was worse is that such activities may adversely affect not only subcontractors, but also other socially and economically vulnerable groups including employees, etc. Under the laws stated in the paragraph 1, project owner entities have been making a payment to subcontractors in cases where prime contractors go bankruptcy or become insolvent. In the public sector, each project owner entity has been responsible for reviewing the contents of subcontract before and after the establishment of subcontract, and verifying whether or not all the related payments for the subcontract have been made properly. Despite its efforts to manage the subcontracts more effectively, it was found to be difficult to manage them as the most of such management was conducted in a paper-based method, and considerable cost for the management was borne by each project owner entity.

B. Strategic Approach

 2. What was the solution?
The planning of development for the Subcontract Management System for Government Contracts (SMSGC) began from the second half of 2012, and it was finally established in December 2013 with opinions gathered from all the parties concerned to support the subcontracting management activities regulated by related laws, for which project owner entities are responsible. The SMSGC offers one-stop online services from subcontracting to payment for project owner entities, prime contractors and subcontractors so the management can be carried out in more consistent and systematic manner. The Fair Trade Commission has been providing the standard subcontracting form which enables both prime and subcontractors to conclude the subcontracting on an equal footing. However, according to a survey in 2012, it was found that only 68.7 % of subcontracts were completed with the standard form. In order to encourage its usage, the SMSGC has adopted e-Subcontracting based on the standard form. After conclusion of subcontracting, the e-Subcontract is stored in the system to protect the rights and interests of subcontractors in cases where there are any possible conflicts between prime and subcontractors. After the prime contractors receive upfront payment and payment upon completion of each stage of project from project owner entities, the prime contractors are able to make a payment to subcontractors through the SMSGC. The payment is transferred to the accounts of subcontracts which are already registered in the system. By doing so, the project owner entities can check through the system whether or not the payment against subcontractors, employees, etc., is made within a legal deadline. In addition, when the payment is completed, its information is notified to subcontractors, employees, etc., on a real time basis. The SMSGC was built on the basis of opinions gathered from all stakeholders including public organizations or project owner entities, prime and subcontractors, civil societies, etc., from the planning stage of development. With a thorough analysis and assessment of its demand from all parties concerned, the services within the system including subcontracting, payment management, past performance records, statistics management, etc., were developed. The Korean government conducts an annual assessment on the performance of each public organization. In order to promote the use of SMSGC in the public organizations, in concert with relevant ministries including the Ministry of Security and Public Administration, Ministry of Trade, Industry and Energy, etc., the Public Procurement Service (PPS) included the usage rate of the system in the evaluation index. PPS, a developer and operator of the system, is a leading organization with taking advantage of the system for the most of construction projects under its direct management. The volume of construction projects under PPS management reaches around 3 billion USD annually.

 3. How did the initiative solve the problem and improve people’s lives?
Since PPS introduced the Korean ON-line E-Procurement System (KONEPS) in 2002, the KONEPS has been recognized as a procurement system transforming the perspective of society toward the procurement administration which was vulnerable to corruption in the past. Leveraging its experience of developing KONEPS, PPS established the Subcontract Management System for Government Contracts (SMSGC) and expanded its use to the public sector. As a result, the SMSGC has become a new paradigm for the management of subcontracting activities. Public organizations can easily manage the subcontracting activities through the SMSGC by verifying subcontracts and checking if the payments for subcontracts are properly made, etc., with the linked information from KONEPS. There were systems which already have been used for subcontracting management prior to the launch of SMSGC: KONEPS, National Financial Information System, Knowledge Information System of Construction Industry, etc. The SMSGC was integrated with these systems even from the planning stage of development to provide the one-stop service. Also, it has served as a momentum to establish a cooperative network among ministries including the Fair Trade Commission, Ministry of Land, Infrastructure and Transport, etc., by integrating the subcontracting management activities of the software and construction industry into a single platform.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
In August 2012, PPS set up the task force team responsible for establishing the Medium-and Long-term Development Strategy for Procurement Informatization. As there was a need for a new cooperative networking system between public and private sector, the establishment of SMSGC based on KONEPS was selected as one of 19 tasks to be implemented after thorough discussion with experts and survey with all stakeholders in December 2012. The goal of SMSGC was to improve unfair practices conducted in the subcontracting activities and to prevent any unfavorable treatment subcontractors, mostly SMEs, could face with. Approximately 800 thousand USD was allocated to complete the project by the end of 2013. The Soft I Tech Co., Ltd. was selected as a developer through competitive bidding and began the project in April 2013. Within a 7 month period from April to November 2013, the project developer completed the designing of system, and in accordance with the related regulations, carried out the influence valuation of personal information data, evaluation of web standard and web accessibility, etc. The project was completed in December 2013 and successfully started to provide services since then. The importance of establishing the SMSGC was reaffirmed in the Economic Ministerial Meeting convened in June 2013. During the meeting, the Korean government announced the Measures for Co-Prosperity of Large and SMEs and decided to support the establishment of SMSGC. The meeting was held with the participation of ministries which deal with laws and regulations of subcontracting activities: Ministry of Strategy and Finance, Ministry of Sciences, ICT and Future Planning, Ministry of Trade, Industry and Energy, Small and Medium Business Administration, etc. In addition to the government-wide efforts, the development of SMSGC was also made possible by all the parties concerned. In order for the system to be operated as smooth as possible, PPS interviewed 12 related companies for the verification of designing and analysis of subcontracting workflows from May 2013 to July 2013. Also, the briefing sessions with all the stakeholders including public organizations, prime and subcontractors were held frequently to gather opinions and suggestions before and after the establishment of system. After the launch of system, PPS continuously offered briefing sessions, training courses, etc., to promote the use of system. For a 3 month period (December 2013-February 2014), PPS provided the training courses for central & local government agencies and public organizations nationwide. The multiple communication channels including electronic display, homepage, FaceBook, YouTube and others were used in April 2014 to raise public awareness and to promote dissemination. Also, since June 2014, PPS has been operating regular training courses for prime and subcontractors, through which they can be easily adapted to use the system. To further expand its use by government agencies, the guideline is continuously being made by PPS. What’s more, PPS in cooperation with related ministries decided to offer incentive for public organizations which are active in utilizing the system. In August 2014, the rate of usage of SMSGC was newly included as the performance index for annual assessments on public organizations such as Collective Assessment on Local Government Agencies conducted by the Ministry of Security and Public Administration, Shared Growth Assessment on Public Organizations implemented by the Ministry of Trade, Industry and Energy, etc.

 5. Who implemented the initiative and what is the size of the population affected by this initiative?
PPS set up a task force team (TFT) to develop the SMSGC within the organization. The team was formed with internal staff from e-Procurement Service Bureau and specialists in each area: IT project operation & management, project management on construction, software contract, etc. The TFT led preliminary meetings and operated a cooperative network with all stakeholders including a system developer, related ministries, financial authorities, construction and software industries, etc., and ran the pilot system. In particular, the TFT worked closely with related ministries before the establishment of SMSGC as they are the ones who are responsible for enforcing laws and regulations of subcontracting activities. The TFT collaborated with the Fair Trade Commission, Ministry of Strategy and Finance, Financial Services Commission, Ministry of Employment and Labor, Ministry of Land, Infrastructure and Transport, and Ministry of Sciences, ICT and Future Planning. Along with the ministries, the local government entities and public organizations were active participants in the entire development process of SMSGC as they would be the actual users of the subcontracting system for approval of subcontracting, verification of the subcontracting payment being made and other subcontracting management activities conducted by the system. In addition, the related associations and construction & software industry couldn’t be ruled out during the development process. Even though it was expected that they could benefit from more streamlined administrative works in the subcontracting activities through the system, they could also be the most sensitive groups who are subject to the conflict of interest due to the exposure of their business information in the system. Therefore, it was very important to reflect their opinions and suggestions prior to the establishment of SMSGC.
 6. How was the strategy implemented and what resources were mobilized?
For the establishment of SMSGC, the PPS task force team (TFT) was launched with specialists in the field of computer, IT, procurement administration, construction supervision and contracts. Also, PPS Construction Supervision Division executing the subcontracting management and Construction Business Management Division responsible for construction contracts had participated actively in the process of designing and development. The system was fully funded by the Korean government. The budget of system was set to be around 800,000 thousand USD, which were subject to approvals from the Ministry of Strategy and Finance and National Assembly. Thanks to strong support from the National Assembly, it was approved in a very swift manner.

 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
Prime and subcontractors can establish a subcontract electronically through the SMSGC with the standard subcontract form which is recommended by the Fair Trade Commission. Information of payment or contract performance guarantee which is required for the subcontract can be verified through the SMSGC as the system is linked with the related surety companies. Details of subcontract established are notified to the project owner entities, and they are able to use the information for the management of subcontracting activities such as checking if the subcontract payment is being made, restricting the withdrawals, etc., when they make related payments to the prime contractors. Also, the information of subcontract established is automatically informed to the Knowledge Information System of Construction Industry (KISCON). In addition, the SMSGC is making the verification of payment being made much easier than before. The prime contractors can request to the project owner entities for payments including the subcontract payment, labor cost, etc., through the system when the payment request is made by subcontractors. Then, the project owner entities transfer the payment to the accounts of prime contractors, which are already registered in the system. With the transferred payment, prime contractors also follow suit by wiring the payments of subcontract and labor cost to the accounts of subcontractors. All these activities can be monitored by the project owner entities, which allow them to confirm if the payment is being made properly. Based on subcontracting performance record stored in the SMSGC, the certificate of performance record, upon the request made by a subcontractor, can be issued with an electronic document form (XML) through the Korea ON-line E-Procurement System (KONEPS) after the verification of project owner entity and prime contractor is completed. For the purpose of authenticity, the certificate is printed with special barcodes to prevent from forgery and alteration. What’s more, subcontractors or even a worker can easily access to the progress of payment being made on a real time basis through text message or web service offered by the SMSGC. In particular, taking advantage of mobile devices including Smartphones, users of SMSGC can conveniently look up the information of specific subcontract, payment being made on time, labor cost being paid, etc.

 8. What were the most successful outputs and why was the initiative effective?
Since the launch of SMSGC in 2013, PPS has selected the expansion of its use as one of main tasks to be conducted in 2014. In order to promote and monitor the use of SMSGC, PPS has been managing data for the number of organizations & projects using the system and total volume of projects. As of the end of August 2014, 427 public organizations and 1,550 companies were registered as users in the SMSGC. Based on the number of project owner entities which had experiences in the contracts of construction projects worth more than 1 million USD or software projects over 300 thousand USD in 2013, 40% of them were found to be using the SMSGC. The users were divided into central government agencies (24.1%), local government entities (41.9%), educational institutes (14.5%), public entities (14.3%), and others. There were 295 projects amounted to be more than 2 billion USD under the management of SMSGC. Among these figures, a total number of 237 subcontracts were made through the SMSGC electronically, which were worth more than 170 million USD. In particular, the number of payment transferred through the system reached 633 times valued at 82 million USD.

 9. What were the main obstacles encountered and how were they overcome?
There was concern that it would be difficult for prime contractors to use the payments received from the project owner entities at their discretion. Also, it sparked the strong opposition from the construction Industry. However, by holding continuous meetings with the industry & related associations, PPS was able to gain consensus and convince them that it was an essential way to ensure the fair trade between prime and subcontractors. Internally, PPS requested for the authoritative interpretation to the Fair Trade Commission which is an authority in charge of subcontracting regulations and verified the SMSGC would be set up on a proper legal footing. In the early stage of development pursued by PPS, other ministries including the Ministry of Land, Infrastructure and Transport, etc., were planning to establish their own systems as there were raising concerns over the unfair trade practices in subcontracting activities. However, as having systems under each ministry would prompt the inconvenience of users and overlapped investment, PPS has consulted with related ministries, and they have come to a conclusion that the subcontracting management was to be integrated into the SMSGC Moreover, as the core function of SMSGC is to ensure the payments to be made properly before and after the subcontract is established, it was essential to closely collaborate with the financial authorities. In the early stage of designing, PPS decided to link the information of commercial banks in concert with the Korea Financial Telecommunications and Clearing Institute (KFTC). However, the KFTC had notified PPS that it would be difficult for the institute to be involved with the establishment of the SMSGC in September 2013. Hence, PPS had directly consulted with 15 commercial banks and came to an agreement with them to link the financial information via a Value-Added Network (VAN) service provider.

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
The SMSGC has changed the conventional way of managing subcontracting activities and brought about positive effects. The impact of SMSGC can be summarized as follows: First, transparency in managing the payments for subcontracts has been strengthened. In the SMSGC, upfront payment and payment upon completion of each stage of project are being managed as the categories of subcontract payments, labor cost, etc. When these payments are made to subcontractors by prime contractors, they have to be approved and verified by the project owner entities through the SMSGC, thus making it possible for the payments to be paid properly as the progress can be viewed and managed on a real time basis. By doing so, the SMSGC was able to contribute to prevent any unfair subcontracting activities including delay in payment, noncash settlement, payment unpaid, etc. As of the end of August 2014, 295 projects whose volumes amounted to be around 2 billion USD were managed by the SMSGC. A number of transactions through the system reached 426 times to pay about a total of 30 million USD to subcontractors, construction workers, etc. Second, the days of making payments to subcontractors have been dramatically reduced. According to related laws and regulations of subcontracting, there are legal deadlines for the payments of subcontracts, labor cost and others. For example, in case of payments for subcontracts and materials & equipment, they shall be paid to subcontractors in 15 days. The legal deadline for labor cost is given for 5 days. However, in reality, there were many cases of delay in payment and noncompliance with the legal deadlines. This has prompted subcontractors, mostly small & medium-sized enterprises, to suffer from doing daily businesses. With the introduction of SMSGC, the statistic shows that the subcontract payments, in average, were paid 10 days faster than the legal deadline of 15 days (8.7 days faster for upfront payments and 10.9 days shortened for payments upon completion of each stage of project). In case of labor cost, it took about a day to pay each worker. In other words, the labor cost can be said to be paid nearly on a real time basis. Third, the SMSGC has contributed to encouraging contractors to use the Standard Subcontract Form electronically. Prior to the establishment of SMSGC, there were cases where the subcontracts are made verbally or with the unfavorable conditions to subcontractors. Also, establishing a side contract was prevalent between prime and subcontractors. Consequently, it was difficult for subcontractors to be protected with their legal rights regulated by laws and regulations as they were deemed to be in a top-bottom relationship with prime contractors. However, as the subcontracts in the SMSGC are established electronically based on the Standard Subcontract Form, the subcontracts with disadvantaged conditions for subcontractors are being prohibited and nullified. Also, the system enables contract amount to be modified in accordance with the change in designing or task of project, thus contributing to protecting the rights and interests of subcontractors. Fourth, the cost-saving was achieved through the SMSGC. Before the establishment of SMSGC, Considerable expenses in transportation or labor for establishing a subcontract, issuing the certificate of subcontract performance record and others incurred. However, these expenses were found to be reduced dramatically as the subcontracts and certificates are made available electronically through the SMSGC. Last but not least, the SMSGC has contributed to protecting the rights and interests of socially vulnerable. In the past, general constructions workers, who usually struggles to make their ends meet, were informed just verbally by their contractors about the progress of payment, or they just had to wait for the payment to be paid out without any notification. However, as the SMSGC is open to every user and provides the information on a real time basis, the general construction workers are able to view the progress of payment and request for the payment accordingly.

 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
PPS has been promoting the use of SMSGC as it minimizes the transaction cost and supports users to complete their tasks conveniently, which are attributable to its electronic process unlike before. These are some of main factors to motivate project owner entities, prime and subcontractors to use the system continuously. Also, thanks to the process, the SMSGC can be said to be eco-friendly because all the related documents are available through e-documents: subcontracts, performance record, etc. In order for construction and software industry to be further developed, there was a need for change in so called top-bottom structure of such industries. In this respect, the SMSGC is expected to ensure the parallel relationship among prime and subcontractors by securing fairness, transparency and proper payment, thus resolving any conflict among the parties and breeding the culture of co-prosperity and mutual development in the society. The SMSGC was established by reflecting various demand or opinion from all the parties concerned from the early stage and developed into the nation-wide system. As a result, more organizations are expected to use the system in the near future. Main project owner entities including the Ministry of Defense, Korea Land and Housing Corporation, local government entities and many others are mapping out a plan to take advantage of the SMSGC. In line with this trend, PPS will continuously encourage many other organizations to use the system by providing incentives.

 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
There have been problems where large enterprises or prime contractors take advantage of their superior economic power to press for unfavorable conditions to subcontractors. The SMSGC was established as a strategic tool to prevent such activities. It can be said that it was a new and creative approach to solve the problems. It is expected that private sector would also benefit if the flow of resources in private investment projects is managed in a transparent manner as the SMSGC does. As of 2013, the total volume of public procurement in Korea reached about 113 billion USD. The budget for public procurement is used first to pay the prime contractors for their labor, supplied materials, etc. However, it is true that there are some cases where the budget is not executed properly compared to the private sector. In this regard, it is highly recommended that the project owner entities or public organizations make continuous effort as the development of SMSGC, in order for the fair trade practices to be deeply rooted in the society.

Contact Information

Institution Name:   Public Procurement Service
Institution Type:   Government Agency  
Contact Person:   Sungchan Ahn
Title:   Assistant Director  
Telephone/ Fax:   82-70-4056-7524
Institution's / Project's Website:  
Address:   189 Cheongsaro Seogu
Postal Code:   302-701
City:   Daejeon

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