Exploiting Loopholes in SME Support System: Three Cooperatives and Seven Companies Fined 868 Million Won for Collusion in KEPCO Corrugated Pipe Bids

Allocation by Number of Members... 98.7% Award Rate Through Dummy Bidding
Strict Sanctions for Both Leading Cooperatives and Colluding Member Companies

The "qualified cooperative" system, introduced to support sales channels for small and medium-sized enterprises (SMEs), has in fact been exploited as a means for collusion that restricts competition in the public bidding market.

Allocation by ‘Number of Members’… 98.7% Success Rate Over Five Years

Email discussing the allocation ratio of bid quantities among cooperative representatives. Fair Trade Commission.

On July 26, the Korea Fair Trade Commission announced its decision to impose corrective orders and a total fine of 868 million won on three qualified cooperatives and seven manufacturing companies, after identifying that they had agreed in advance on designated winners and the allocation ratios of supply in a total of 394 corrugated pipe procurement bids placed by Korea Electric Power Corporation.

The parties involved in this unfair joint practice were the Korea Synthetic Resin Corrugated Pipe Cooperative (Corrugated Pipe Cooperative), the Korea Plastics Technology Business Cooperative (Plastics Cooperative), and the Korea PE Pipe Industrial Cooperative (PE Pipe Cooperative), along with the following seven member companies: Youngjin Industry, P&I, Sejin Engineering, Shin Ho, Green Autotech, Cov International, and Oju Industry. The fines imposed by business were 252 million won for the Plastics Cooperative, 141 million won for the PE Pipe Cooperative, and 128 million won for the Corrugated Pipe Cooperative. The seven member companies that participated were also fined between 20 million and 70 million won each, depending on the severity of their involvement and their sales volume.

Corrugated pipes, which are plastic conduits that protect power cables, are designated as competitive products for SMEs, allowing only SMEs or qualified cooperatives representing them to participate in public procurement bidding. While this system was initially established to promote the growth of small businesses, it degenerated into a collusion channel for stable commission income (about 2% of contract amount) for the cooperatives, especially after 2017 as market entrants increased and competition for contracts intensified.

According to the Korea Fair Trade Commission's investigation, the three cooperatives reached precise agreements from November 2017 to January 2023 to allocate contract quantities based on the number of member companies within each cooperative for both circular and spiral corrugated pipe bids. In 384 nationwide and regionally limited bids for circular corrugated pipes, annual allocation rates were set in advance. At each announcement, cooperatives whose accumulated contract amount fell short of the predetermined ratio were given priority as prospective winners. The other cooperatives, acting as "dummies," would submit higher bid rates than in previous auctions to support this arrangement. As a result, 379 out of 384 cases were awarded according to the agreement, corresponding to a 98.7% success rate.

For the 10 regionally limited spiral corrugated pipe bids, which were conducted in the form of competitive bids for desired quantities, prior agreement on allocation rates completely neutralized price competition and all 10 contracts were divided according to the agreed proportions.

“They Knew but Took Their Share” … Fair Trade Commission to Strictly Punish Colluding Members

Details of each consortium agreeing on allocation rates and bidding desired quantities at higher unit prices. Fair Trade Commission.

The core significance of this measure lies in the fact that not only the qualified cooperatives that led the collusion, but also the member companies that knowingly used it as an avenue for illicit gain, were subject to strict sanctions. The seven companies belonging to the Corrugated Pipe Cooperative were aware of the cartel agreements via meetings or emails and nevertheless participated in dummy bidding or delegated their participation at the cooperative's request, thereby joining the cartel. These companies continually secured allocated quantities derived from the collusive practices.

The Korea Fair Trade Commission also found evidence that, when staff of the cooperatives were unavailable due to leave or other reasons, they contacted member companies directly and asked them to substitute in the bidding order. This was included as a violation of the law. Furthermore, this case was uncovered thanks to the Commission’s own "Bid-Rigging Sign Detection System," which enabled it to unearth sustained, covert collusion in independently-operated public procurement areas.

The Commission emphasized, "Even if a qualified cooperative acts as a proxy in bidding under the pretext of supporting SMEs, it is subject to strict sanctions with no exceptions when violating the Fair Trade Act. With the recent substantial increase in the minimum fine for unfair joint conduct, we will continue to monitor and sternly crack down on actions that undermine the integrity of transactions in the public procurement market."

This content was produced with the assistance of AI translation services.