Exemptions allowing sole-source deals with retiree-linked firms to be scrapped

Seoul, Gyeonggi Province to pilot direct designation of innovative products

Fast-track evaluation expanded, designation procedures streamlined

The government has conducted a comprehensive review of 60 contract exemptions applied by public institutions under standards that differ from the National Contract Act, deciding to abolish 18 and revise four. The overhaul targets exemptions that restrict competition or risk infringing on the rights of procurement companies, while new exemptions will be subject to a maximum three-year review period.

The central building of Government Complex Sejong in Eojin-dong, Sejong [Newsis]
The central building of Government Complex Sejong in Eojin-dong, Sejong [Newsis]

The Ministry of Economy and Finance said Tuesday it held the fourth session of the Procurement Policy Deliberation Committee, chaired by Second Vice Minister Heo Jang, and approved plans to overhaul public institution contract exemptions and improve their management framework, along with a revision plan for Type I innovative products.

Public institution contract exemptions allow institutions to apply standards and procedures that differ from the National Contract Act, upon approval from the minister of economy and finance. The government conducted a full review in July and August after determining that some long-running exemptions were undermining competition and fairness or had lost their effectiveness.

The review found 60 contract exemptions currently in operation. The government will abolish 18 of them — those that impede fair competition, fail to reflect changes in the procurement environment, or have become ineffective.

Four exemptions that are still considered necessary but risk infringing on the rights of procurement companies or could be applied arbitrarily under broad delegated authority will be revised and reapproved. The remaining 38 will be kept as they are.

Among the exemptions targeted for abolition are those that restrict competition, including sole-source contracts with firms that have special relationships with the contracting institution.

Examples include sole-source contracts with retiree-linked firms, justified on grounds of stable maintenance of heating and cooling systems at branch offices, and sole-source consulting contracts for legal, accounting and tax services concluded without price estimates, citing industry custom. Exemptions that significantly narrowed the conditions for adjusting contract amounts due to design changes or price fluctuations are also included in the overhaul.

By contrast, 38 exemptions with a clear rationale will be retained — including those that strengthen regional cooperation, such as supporting employment and businesses in Gangwon Province's former coal-mining areas and communities near nuclear power plants, those that improve the quality of public-facing services at highway rest stops and airports, and those that ensure a stable supply of essential public services such as electricity.

The management framework for contract exemptions will also be comprehensively restructured. Approval criteria will be made more specific, covering cases related to public safety, improvement of public-facing service quality, support for national policy, and the introduction of innovative technology.

The duration of all new exemptions will be capped at three years, with a "3+3 year" review cycle introduced that allows, in principle, only one extension. Exceptions to the time limit will be permitted when continued exemptions are unavoidable for specific policy or project purposes.

Institutions granted exemption approval will be required to submit annual reports on usage volume and amounts to their supervising ministry and the Ministry of Economy and Finance. When an approval request is deemed significant — such as when it involves creating a new contract system, restricting competition or fairness, or risking infringement of procurement companies' contractual rights — it will undergo prior review by an advisory committee of experts. The operational status of contract exemptions will also, in principle, be made publicly available.

The Type I innovative product regime will also be revised. The innovative product program was introduced in 2020 to help innovative companies enter early-stage markets by leveraging public procurement demand.

A cumulative total of 3,078 products had been designated through last year, with annual public procurement sales reaching 1.1 trillion won ($795 million). The government said it will improve the designation framework and procedures to build a system more closely aligned with on-the-ground needs and to promote linkages between regional and local government research and development.

The authority to designate innovative products, currently granted only to heads of central government agencies, will be extended to local governments. The Seoul Metropolitan Government and Gyeonggi Province will pilot the direct designation of innovative products first, after which the government will seek to institutionalize the arrangement by amending the enforcement decree of the Public Procurement Service Act. This will allow local governments to directly connect their own R&D outputs to the innovative product designation system.

Designation criteria will also be tightened. Products previously designated as superior procurement goods or with a history of multi-supplier contracts will in principle be excluded from new designations or designation renewals. The government will avoid designating products with long track records of high sales and will instead prioritize prototypes with no commercial transaction history. Application eligibility for CMO products will be unified to the collaborating entity, restricting original equipment manufacturer applications.

A fast-track process that exempts products already verified through government pilot programs from some or all public interest, innovation and field evaluation requirements will be expanded.

The designation process will also be shortened by conducting public interest and innovation evaluations simultaneously and holding Procurement Policy Deliberation Committee sessions on an as-needed basis. The existing two-stage renewal system — one year for the first extension and two years for the second — will be restructured into a single renewal framework of up to three years.

"The government will continue to drive innovation in the procurement contract system by supporting smooth entry of innovative products and technology into the public market, while boldly reforming unreasonable and outdated practices and institutions," Vice Minister Heo said.


y2k@heraldcorp.com