Construction And Engineering Markets In Korea Construction Essay

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The construction and engineering sector in Korea has advanced significantly in terms of technology, safety and security since the Korean government opened the markets to foreign competition in January 1996 and allowed foreign construction companies to bid on private projects. In January 1997, foreign companies became eligible to bid on public projects including the massive Social Overhead Capital (SOC) projects designed to improve basic infrastructure in Korea on the basis of build-operate-transfer (BOT), build-transfer-operate (BTO), and build-own-operate (BOO). The Korean government has changed its policy for implementation of public projects from a government-centered or government-financed scheme to a private sector-oriented or private investment-initiated scheme.

While these market opening measures represent a step forward in liberalizing the construction and engineering markets in Korea, barriers to market participation remain. Except for a few exceptions, most foreign construction and engineering companies report that the difficulties encountered so far have largely been cultural, not legal, and certainly not borne out of a desire by the Korean government to keep the market closed. It will be especially important for Korea to bring its program for public-private infrastructure projects into greater conformity with the international standard. Korea will benefit considerably from a program that: 1) creates a bidding process which is more familiar to foreign investors; 2) increases the opportunities for attracting off-shore financing and new technologies; and 3) applies a more transparent and analytical framework to the project evaluation process.

Several foreign companies report a genuine willingness by officials at the Ministry of Construction (MOCT) to learn about contracting practices in other countries, particularly the U.S. These companies feel that the MOCT is trying to overcome some constraints of the existing system in order to achieve more innovative and economically advantageous infrastructure projects. Important issues such as the manner in which companies are pre-qualified and ranked for projects are now being addressed by the MOCT.

As domestic construction and engineering companies struggle to survive, increased competition is taking place in the infrastructure and housing sectors. The U.S. has dominated the imported engineering services market in Korea with an average market share of 40 percent over the last five years. However, the Korean government and Korean private sector companies are now looking more closely at European and Japanese suppliers of engineering services that are willing to provide financial assistance packages and transfer technologies as part of their project engagement. U.S. industry should therefore be prepared to compete for commercial contracts by impressing Korean private sector contractors with the capacity of American companies to share project costs, engage in technology transfer, and team together in third country markets.

1. Bidding Procedures

The bidding procedure in Korea remains difficult to understand for foreign construction companies. Most of the complaints regarding bidding procedures arise from the lack of clear information and the lack of technical expertise on selection committees which conduct the technical review and questioning of bidders.

By adopting a more open competitive bidding process, consistent with the international standard, including advertisement, pre-qualification and evaluation based on transparent criteria, the Korean government would be able to select a project proposal that is the most economically advantageous (based on both innovative technical design and competitive financing). This more open and transparent bidding process would strongly encourage more foreign investment in Korea, greater technology transfer and more active participation by U.S. companies in Korean infrastructure projects.

From the standpoint of foreign companies, one common problem is that, unlike most other government-sponsored infrastructure project bidding around the world, the winner of a Korean public works bid will sit down with the relevant government agency awarding the bid only to discover that the Korean side wants to shave a few more points off the price. The foreign bid winner will discover that the relevant public official has been told it is part of his job to reduce the price, even after the government has accepted the price in the bid. There should be recognition, at least at the government level, that a bid contains the lowest competitive price of the bidder and that such price should form a part of the construction contract.

Recommendations

Bring Korea’s public-private infrastructure program into greater conformity with the international standard so American companies can offer more innovative technical designs and competitive financing for Korean infrastructure projects;

Improve transparency of bidding procedures and practices so that they are consistent with the international standard.

2. Over Regulation

Before submitting bids on projects, foreign companies are often required by a relevant Request for Bid, especially for public projects, to be registered with the Korean regional governments or the MOCT’s regional construction & management agencies. Three separate certificates of registration are available to foreign companies: a general construction registration certificate, a construction supervision registration certificate and an architectural design registration certificate. The requirements under each of the laws applicable to these registration systems are burdensome and involve hundreds of pages of documentation. It would be helpful for this process to be substantially streamlined.

Additionally, few of these laws, regulations and necessary application forms have been translated into English and there are a number of different agencies (each with a different interpretation of similar provisions of the law) that an applicant must visit prior to obtaining a license. Again, this procedure should be streamlined.

One problem that has emerged in obtaining a general construction supervision license is the requirement that a company prove it employs 20 engineers. Signed resumes of each engineer must be produced showing certain degrees obtained by each engineer. Foreign engineering and construction firms are free to hire locally qualified/certified engineers. However, some of the most experienced engineers do not have the necessary degrees required by the law; they have 30 years of experience in the field. This has been brought to the attention of the MOCT, which is now considering relaxing degree requirements for certain categories of engineers.

There are no mandatory restrictions on foreign architectural and engineering services specified in Korean law or regulation. However, procuring agencies (national, local and private) can specify particular conditions/requirements for architectural and engineering services depending on the nature of the project.

Recommendations

Streamline registration procedures for all three types of construction licenses;

Streamline registration procedures for all three types of construction licenses;

Implement a comprehensive registration system.

3. Bonding

Generally, bonding is substantially different in Korea. In a typical project in the U.S., a bid bond of 5% and then a 10 % performance and payment bond are required from the winning bidder. Bonding protection is inadequate in Korea, and Korean government agencies as clients typically require only a 10 % performance bond. Thus, there is nowhere near the same kind of financial security obtained by a client in Korea before commencing construction.

As of July 1, 2000, the Korean government abolished the requirement to deposit US$250,000 with the Korean Construction Mutual Aid Association in order to obtain a certificate of registration from the Korean regional government. However, foreign companies as well as Korean companies are required to submit a certificate of the paid-in capital of 1 billion Korean Won (USD 830,000) or more to register as a general construction company with the Korean regional government. The requirement for registration as an engineering company and an architectural design company (architect) is to submit a certificate of the paid-in capital of 500 million Korean Won (USD 410,000) or more and 300 million Korean Won (USD 250,000) or more respectively.

Separately, foreign companies as well as Korean companies are required to submit a certificate of the paid-in capital of 500 million Korean Won (USD 410,000) or more to obtain a certificate of registration as a general construction management and supervision company from the Korean regional construction and management office.

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