Korea Local Information Research & Development Institute Pushes Through Sole-Source Contract for Off-the-Shelf Products… Contractor Pockets Unjust Profits

2024.08.12. The Fair Economy — It has been revealed that the Korea Local Information Research & Development Institute, an affiliate of the Ministry of the Interior and Safety, pushed through a sole-source contract for the procurement of goods that should have been subject to open competitive bidding. This effectively blocked bidding opportunities for multiple companies from the outset and funneled benefits to a specific company. The official in charge of the project had already retired before disciplinary action could be sought following the audit, so no responsibility could be imposed.

The Ministry of the Interior and Safety recently released the '2023 Audit Results Report on the Korea Local Information Research & Development Institute,' which detailed these findings.

The institute was established in January 2003 under the 'Electronic Government Act' and carries out informatization projects to implement e-local government and promote regional informatization through entrustment agreements with administrative agencies such as the Ministry of the Interior and Safety and local governments.

In 2020, KORID launched a project to build a security system that provides encryption keys and other elements for cryptographic modules used when government agencies, including local governments, access systems. During this process, KORID requested a direct contract with one company from the Public Procurement Service, citing national security concerns. However, the Public Procurement Service replied that a direct contract was not possible after confirming that many of the items were general commercial equipment.

According to the Act on Contracts to Which the State Is a Party (State Contracts Act) and the institute's financial accounting regulations, general competition is the principle when concluding contracts. In addition, under the Enforcement Decree of the State Contracts Act, private contracts are permitted when there is a security need such as national security, when the technology of a specific person is required, or when only one producer exists for the goods, and when the manufacturer or supplier of such goods directly installs or assembles them because competition cannot be established.

Despite this, the official in charge of the project drafted a document proposing to proceed with its own sole-source contract with a specific company, without reviewing a change in contracting method such as separate ordering. Executive A then approved the document without reviewing whether the sole-source contract was appropriate, and the sole-source contract was signed.

When the Ministry of the Interior and Safety reviewed the contract details, it found that the company that had signed the sole-source contract had only manufactured and installed the items designated as subject to the sole-source contract. For the rest — general commercial equipment such as backup storage servers and L4 switches — the company outsourced delivery and installation to other firms, pocketing the difference between the contract price and the installation cost as unjust profit.

According to the Government Bidding and Contract Execution Standards, a regulation of the Ministry of Strategy and Finance, when ordering a contract that combines two or more of goods, services, or construction, the independence and divisibility of each type of object — goods, services, or construction — must be considered from the project planning stage to determine whether to order them together or separately. The institute, however, disregarded this regulation.

The Ministry of the Interior and Safety instructed the head of the Korea Local Information Research & Development Institute to thoroughly manage contract-related work going forward — including reviewing whether to order separately and proceeding with competitive bidding when general equipment does not qualify as grounds for a sole-source contract — and requested a warning disciplinary action against Executive A, who was involved in the project. B, who worked under A and was in charge of the project, had already resigned at their own request before the audit, so no separate disciplinary action could be requested.