TheWorld Bank J u l y 2 0 0 4 PREMnotes n u m b e r 9 0 Public Sector Korea's move to e-procurement The Republic of Korea's electronic procurement system has generated considerable benefits--and offers lessons for other countries interested in public procurement reform. In 1997 the Korean government began reform- from the Procurement Business Law, and ing its notoriously complicated, nontranspar- decentralized procurement has been increas- ent, corrupt public procurement system, ing--promoting local autonomy and satisfy- introducing e-procurement to exploit the ing various government agencies' desire to country's well-developed information and handle their own procurement. Decentralized communications infrastructure. Through procurement also reflects dissatisfaction with extensive business process reengineering and the Public Procurement Service. information strategy planning, the Public Pro- Before e-procurement was introduced, legal Electronic public curement Service--the agency formerly and regulatory requirements resulted in com- responsible for buying government goods and plicated procurement procedures. Compa- procurement can services--has been transformed into a one- nies seeking government business had to scan stop information center. newspapers, magazines, and government greatly increase E-procurement has generated numerous gazettes to identify opportunities, then reg- benefits, including: ister separately with each government agency. transparency and · Enhanced transparency and public trust-- Moreover, procuring agencies did not share by reducing contacts between officials and information. Instead, each maintained its own efficiency suppliers and by sharing information register of suppliers. This time-consuming, between government agencies and the costly application process discouraged sup- public. pliers, and prearranged bidding was not · Increased managerial efficiency--by achiev- uncommon--contributing to corruption. The ing economies of scale in procurement, process also limited economies of scale. with an estimated $2.5 billion a year in sav- Although a few ministries had computerized ings from the $26 million investment. procurement systems when reform began in This note analyzes how Korea achieved 1997, sophistication was low. And because these these outcomes, the lessons of its experi- standalone systems were incompatible, they ence, and the challenges that remain for its could not handle large volumes of procure- e-procurement system. ment. Meaningful change began only when former President Dae Jung Kim initiated com- The need for change prehensive e-government reform, vowing in his The Public Procurement Service was estab- 1998 inaugural speech to have state-of-the-art lished in 1949 to run Korea's centralized pro- systems in place by the end of his term in 2002. curement system. The Procurement Business A Presidential E-Government Committee Law requires all government agencies and was created to oversee e-government reform, local governments to procure their supplies which involved 11 major projects: the National through the service. Pension System, Internal Tax Service, Inte- In practice, however, the procurement sys- grated Local Administration System, National tem has centralized and decentralized com- Education Information System, Financial ponents. Some local governments are exempt Management Information System, Human from the development economics vice presidency and povert y reduction and economic management network Resource Management System, Electronic · Managing the e-procurement system's bid- Data Interchange, e-Signature System, Gov- ding, contracting, and payment facilities. ernmentwide Information System, Govern- · Prequalifying suppliers and standardiz- ment for Citizens (known as G4C), and ing information on products. e-Procurement. Benefits The approach to reform As noted, two of the new system's greatest ben- E-procurement reform has relied on care- efits are enhanced transparency--and the ful sequencing and pacing. After reform was resulting increase in competition--and approved, the Ministry of Planning and Bud- increased managerial efficiency, leading to get conducted an innovative business process significant savings. E-procurement reengineering to translate its work processes into an online system. The ministry also estab- Enhanced transparency and reform has lished a project management unit that under- competitiveness took an information strategy planning Transparent online information disclosure relied on careful exercise, developing action plans to automate has been a powerful tool for increasing the the recommended processes. The exercise accountability of e-procurement decision- sequencing emphasized the importance of automating makers and system operators. Making the the most common purchases first and of e-procurement system the only channel for and pacing actively involving users in the system's design, public notification has created a real-time to ensure its smooth and swift acceptance. procurement information center, with infor- The e-procurement system gives govern- mation on more than 420,000 standardized ment agencies and suppliers a single point products. All domestic bid notices and results, of contact for registration and information. including price data, are now available online. The system has also expanded the selection The system allows cross-agency comparisons of products and standardized their classifi- of procurement methods and prevents pre- cations. Moreover, it involves simpler doc- arranged bidding based on corrupt rela- uments and faster payments. tionships with potential suppliers. As a result The system is linked to more than 30 pro- there are far fewer rent-seeking opportuni- curement-related external agencies--includ- ties for Public Procurement Service staff. ing supplier certification agencies, financial Sharing information among government clearing institutes, the Ministry of Internal agencies and various associations not only Affairs, the Ministry of Finance, and e-guar- reduces the volume of paperwork submit- antee and e-payment systems. Encryption tech- ted by bidders--for example, business nology and digital certification ensure secure licenses, tax reports, and many other docu- transactions and protect online information. ments are no longer needed--it also sig- The reform has transformed the Public nificantly shortens payment periods. Vendors Procurement Service from an agency that can request payment as soon as inventory conducted the entire procurement process-- inspection has been approved. Using the from public notification and specification e-payment system, payments are usually review through final payment--into an infor- wired to vendors' bank accounts within four mation center, enabling government agen- hours. (By law, payment is required within cies to procure goods and services themselves. 14 days.) The simplified process has helped As a central oversight body, the Public Pro- triple the number of bidders. curement Service serves a wide range of gov- ernment agencies and suppliers. Its new Savings on procurement management functions include: Several indicators show that e-procurement · Providing integrated information on reform has been a positive investment. domestic bidding. (The e-procurement Between 1998 and 2002 the number of Pub- system is the only platform allowed to post lic Procurement Service staff fell from 1,058 bid information on public procurement.) to 935, while the value of procurement they PREMnote 90 July 2004 handled increased by a third, from $12.8 tee to monitor the status of the 11 main billion to $17.1 billion. Moreover, pro- e-government reforms. curement staff have been retrained to per- Second, e-procurement reform is much form their new roles and responsibilities, more likely to be sustainable if it is intro- and two-thirds have been certified in duced as part of nationwide e-government information technology. reforms, rather than as an isolated change. The value of procurement handled and In Korea e-procurement was among the 11 the number of public agencies and private e-government reforms, increasing accep- companies participating have continued to tance among the staff of the Public Pro- increase since the e-procurement system curement Service. Moreover, each year the was fully implemented in December 2002. public administration is evaluated in terms Between September 2002 and September of its e-progress. Public surveys and stud- E-procurement 2003 about $20 billion in goods and ser- ies rank ministries and agencies on their vices were procured through the system, reform efforts, and awards are given to the requires strong with more than 25,000 public agencies and top performers. These evaluations and 87,000 companies participating. This was awards increased e-procurement efforts leadership and more than a third of the $55 billion in total among Public Procurement Service staff. public procurement, and 60 percent more Third, e-procurement requires a certain sufficient than the Public Procurement Service han- level of information and communications dled in 1998. If all government agencies infrastructure. Although it does not require information and start using the system, the Public Procure- a state-of-the-art information network, social ment Service expects to generate $2.7 bil- and economic capacity for information and communications lion in savings. communications technology should be The e-procurement system has also reviewed to determine the feasibility of infrastructure increased public sector participation in pri- reform. Developing countries often try to vate e-commerce, because it allows users improve information and communications to search for products on the Websites of infrastructure by introducing e-procurement, private companies. This approach was facil- but doing so imposes serious burdens on itated by modifying government product financing and implementation efforts. In codes to be compatible with commercial Korea more than 70 percent of households classifications. (about 10 million) subscribe to high-speed Internet services, and in November 2002 Lessons more than 60 percent of the country's 43 mil- Every country interested in e-procurement lion residents used the Internet on a regu- has distinct goals, and environments for pub- lar basis. Almost all private suppliers have lic procurement differ considerably across high-speed Internet access. countries. Still, Korea's experience offers Finally, comprehensive process reengi- four lessons that can help other countries neering must be conducted prior to com- implement such reform and overcome puterization. Careful sequencing and pacing bureaucratic and other obstacles. of reforms are often at least as important First, and perhaps most important, is the as choosing the right technology. The value importance of strong leadership. As with of e-procurement, like other e-government other public sector reforms, such leadership reforms, lies in its ability to transform rigid, is essential--without it, the public sector will inefficient bureaucracies into more efficient, hardly change. Throughout his term, Pres- responsive organizations by redesigning ident Kim consistently demonstrated strong workflows and decisionmaking processes. interest in and commitment to building a Thus any e-procurement effort that simply strong information and communications replicates and computerizes an existing sys- infrastructure and advancing e-government. tem will fall short of expectations. For example, he held regular meetings with In Korea process reengineering avoided the Presidential E-Government Commit- replicating inappropriate, inefficient pro- PREMnote 90 July 2004 cesses in the new system. Information strat- diture plans, helping ensure more predictable egy planning, conducted after business procurement in support of service delivery. process reengineering, contributed to a Developing this link would require integrat- smooth multiyear transition. Both processes ing the e-procurement system with the trea- reviewed legal, administrative, and even cul- sury information management system to allow tural differences in procurement processes timely data exchange between them. between national and local governments and It is still unclear whether e-procurement state-owned enterprises, and made necessary reform is fully supported by Korean society, changes through the Presidential E-Govern- the Public Procurement Service, suppliers, ment Committee. and government agencies. The simultane- ous change in 2003 of two reform champi- Korea's Future challenges ons--President Kim and the administrator Korea's e-procurement system still faces chal- of the Public Procurement Service--will be e-procurement lenges. Although the system's hardware is a good test of whether the reform has truly in place, its operating system must be sta- been internalized and will be sustained. system still faces bilized, users continuously trained, content reliability enhanced, and product choices Further reading challenges broadened. Korea Public Procurement Service. 2002. Computer viruses and worms have become 2002 Annual Report. Daejeon, Republic a serious threat to the system's stability. One of Korea. infection already shut down the entire sys- Talero, Eduardo. 2001. Electronic Government tem--resulting in financial losses to the Pub- Procurement: Concepts and Country Experi- lic Procurement Service and associated ences. A World Bank Discussion Paper. suppliers, and raising concerns about the sys- Washington, D.C. tem's reliability. Information security has United Nations Development Programme become an urgent issue. (UNDP), Accenture, and Markle Foun- Furthermore, some parts of the popula- dation. 2001. Creating a Development tion have been left out of e-government. A Dynamic: Final Report of the Digital Oppor- governmentwide policy is needed to narrow tunity Initiative. New York. the widening societal gap in information and communications technology capacity. This note was written by Junghun Cho (Consul- For the full effect of e-procurement reform tant, Public Sector Group, PREM Network) and to be felt, its changes must be internalized, Hee Seok Byeon (Director, Information Planning and savings in government agencies' pro- Division, Korea Public Procurement Service). The curement should be reflected in their expen- authors acknowledge substantial contributions diture management. Engaging treasury from Eduardo Talero, Knut Leipold, Richard Allen, officers in the overall procurement process-- Bill Dorotinsky, Ed Campos, and Helen Sutch. from demand planning, budget planning, If you are interested in similar topics, consider acquisition management, and logistics man- joining the Public Expenditure Thematic Group. agement, to final disposal--would enable Contact Bill Dorotinsky (x37189) or click on The- agencies to prepare more accurate expen- matic Groups on PREMnet. This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely dis- tributed to Bank staff and are also available on the PREM Website (http://prem). If you are interested in writing a PREMnote, email your idea to Madjiguene Seck. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. 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