The prize goes to the lowest bidder

It is common sense in the world of business that bidders with the lowest price proposals are often chosen as winners of certain projects or deals as they remain more price competitive.

This common sense, however, is an exception in the local construction industry. Controversy is rising over the government’s plan to expand the lowest price award system, in which the lowest bidder wins a certain public construction contract. Lawmakers as well as small-sized building firms are arguing that the government’s plan should be put on hold.

On Monday, the National Assembly’s Strategy and Finance Committee held a meeting and reviewed the government’s proposed plan of expanding the lowest bidding system by applying it to those construction projects worth more than 10 billion won ($8.8 million) instead of the current 30 billion won starting from January, next year.

The review was held as lawmakers introduced a bill to cancel the government’s plan on expanding the system that was already approved and revised in July last year. The committee reviewed the bill submitted by lawmakers taking into consideration the government’s original plan but no result was announced as lawmakers fiercely opposed the plan. The committee will hold a review again next week.

The government’s move to push the plan forward comes as it believes the system would allow the government to not only save money on construction projects but also help boost competition in the local construction industry. The system was first adopted in the country in 1999 in different stages by construction volume.

“The system follows the market principle of boosting competitiveness and giving final orders to the bidders submitting the lowest prices,” said Kwon Oh-young, an official from the Ministry of Strategy and Finance. “The system will also save the country’s construction budget by around 500 billion won every year.”

Ruling and opposition party lawmakers as well as construction firms, however, are strongly opposing the plan, arguing that expanding the system would only throw a wet blanket on the already sluggish construction market as the economy remains gloomy. Also, concerns are especially high for smaller construction firms as they believe expanding the system would only benefit large construction companies as they are more financially stable and have the ability to bid at lower prices.

“Excessive competition among construction firms to win government construction bids would only lead smaller companies to operate with deficits,” said Lim Choon-soo, an official from the Construction Association of Korea. “There will be no room for improvement.”

The association expects the annual volume of construction orders to drop by 710 billion won. In the meantime, there are also criticisms that lawmakers are supporting construction companies as legislative and presidential elections are approaching next year and each party is hoping to win more public votes and support. Some lawmakers are even proposing the idea of expanding the system after two years, though the Finance Ministry flatly denied such a possibility yesterday.

“The plan will be pushed as scheduled,” the Finance Ministry said in a statement.

Amid such controversy, last week, the Finance Ministry was supposed to hold a public hearing inviting construction firms but the event got canceled as 1,500 employees from construction companies gathered and protested against it. The ministry later on proposed a supplementary measure to divide construction firms into six different groups and restricting firms when they apply for public construction bids. The measure comes as part of efforts to make up for the growing concerns that smaller construction firms would lose competitiveness against larger firms when they make bids on smaller scale construction projects.

“Developed countries such as the United Kingdom, the United States and Japan have been turning to the so-called best-value bidding system from the lowest bidding system ever since mid-1990s,” said Han Chang-hwan, an official from the Construction Association of Korea. “The countries were aware that it costs the government more money to maintain the low-quality of construction work should they choose the tender with the lowest bidding price.”

The local construction industry has been sluggish as it has been suffering from lack of work and mounting debt. The volume of orders received by local construction firms dropped from 120 trillion won in 2008 to 103 trillion won last year, and orders are expected to drop significantly this year as well. Sales also dropped four percent to 256 trillion won last year compared to the previous year’s 267 trillion won, according to the Financial Supervisory Service. Among the construction firms, around 29.8 percent of construction firms have reported a deficit in operation in the first half of this year, which is a 6.9 percentage point increase from the previous year.

“The construction industry creates jobs and has great effect on production,” said Shim Kyu-beom, a researcher at the Construction and Economy Research Institute of Korea. “The government should ease regulations rather than restricting them so that the industry can revive.”

By Lee Eun-joo [angie@joongang.co.kr]