Shameful Conduct
POSCO E&C, which has been ephasizing “ethical management,” has been caught recently engaging in unethical business practices. The company has been exposed in four different cases of bid rigging so far this year, and has had to pay fines of 28 billion won (US$27.4 million). This is unprecedented in the Korean construction industry.
As their bid rigging activities have happened roughly once a month so far this year, their image of an ethical enterprise built over the last ten years has been seriously damaged, and they have even been labeled a “market harasser.”
Disturbing the Market with Puppet Companies
POSCO was caught bid rigging most recently in March. The Fair Trade Commission (FTC) accused POSCO E&C and a second company that could be called “Company H” of rigging a bid on the construction of a sewage treatment plant in Daegu City. The executives involved are to be prosecuted, and the government is imposing 6.242 billion won (US$6.128 million) in fines.
Specifically, POSCO E&C put in their own bid for the project, but also created a second, low-quality blueprint (Blueprint B), and forced Company H to submit the inferior blueprint for bidding, creating a false image of competition.
POSCO also dictated the bidding price that Company H would ask, ensuring that POSCO could offer a lower price to win the bid. When this was discovered, the FTC commented, “A sewage treatment plant, as an environmental facility, is crucial for people’s health. We imposed relevant sanctions on POSCO, which violated anti-monopoly and fair trade laws.”
Impeding President Park Geun-hye’s Strong Push on Regulation Reform
The FTC announced last January that it would strictly punish construction companies that engage in collusion activities that involve public businesses. President Park Geun-hye is also very determined “to reform regulations by blocking illegal collision activities that could seriously harm fair market orders.” Regulatory reform is one of the most important objectives of the current government.
However, POSCO E&C has been caught in collusions almost every month in the first half of this year. Not only did they collude in the bidding for the sewage treatment plant in Daegu, but also for a subway construction project in Incheon, a sewage treatment plant in the Cheongna District in Incheon, a water quality restoration center project in Gwangju, and an urban railway construction project in Daegu. All of these projects are directly related to the life and safety of Korean citizens. The FTC said, “POSCO E&C easily won the bids, while being closely associated with another bidder.”
And, what's worse, the additional profits gained through illegal collusion are much higher than the fines imposed. A businessperson commented, “The FTC punishment for collusion is only a slap on the wrist. A market harasser like POSCO E&C deserves a stronger penalty.”
Ethical Management Lost
Yet, POSCO E&C does not admit any wrongdoing. A company represntative even said, “The FTC punishment is quite unfair. We will countersue against the false accusations.”
Sparks from this conflagration are flying all over the entire POSCO Group. POSCO is considered to be a “national company” in Korea. It is also the very first corporation to enact a code of ethics, and has been emphasizing the importance of business ethics. But these promises are proven to be nothing but empty air after this series of collusion activities has come to light.
The coexistence and cooperation between big corporations and small and medium-sized companies were the biggest issue in the last presidential election. Small and medium-sized companies have been suffering from the tyrannies of big corporations for such a long time that it has become a well-known problem in Korean society.
Kwon Oh-joon, the new chairman of POSCO inaugurated last March, also emphasized, “We will break the violence of 'powers.' We will make POSCO respected by the people.”
Overseas Orders to Decrease Drastically
Furthermore, POSCO E&C is stepping backwards in overseas construction orders over time, since they recorded number five in construction capability ranking in 2011 by receiving US$7 billion worth of overseas construction orders. Even though the total overseas order amount is likely to reach US$70 billion for the first time in the last three years, this is not a story of which POSCO E&C is a part.
According to the Ministry of Land, Infrastructure and Transport and the International Contractors Association of Korea on July 8, the amount of overseas orders to POSCO E&C is clearly showing a downward trend, from US$6.898 billion in 2011, to US$1.762 billion last year.
This trend continues this year as well. The overseas orders of POSCO E&C so far this year are only US$589 million. On the contrary, the overseas orders of all Korean construction companies increased 22 percent to US$38.2 billion, from US$31.2 billion of the previous year.
POSCO E&C is also much behind GS E&C (US$5.290 billion), SK E&C (US$4.234 billion), and Daewoo E&C (US$3.212 billion), with which POSCO E&C has been competing in overseas construction for the last few years.
Moreover, the overseas construction order amount of POSCO E&C this year is even lower than Samsung Engineering (US$4.163 billion), Doosan Heavy Industries (US$1.498 billion), and Hanhwa E&C (US$952 million), which have lower construction rankings in the industry.
This drastic decrease in overseas construction orders is definitely the opposite of what POSCO E&C promoted early this year.
POSCO E&C set an overseas order target for this year of US$7.264 billion (7.4 trillion won), even higher than the US$6.898 billion of 2011 and the highest during the last four years, through creative diversification on overseas orders. But to achieve the target seems impossible based on current performances of POSCO E&C.
Credit Rating to Drop after a 20 Year Hiatus Due to Bad Performance
Some say that the reasons for the obvious decrease in overseas orders of POSCO E&C are their internal policies. POSCO E&C aims to enhance internal stability for overall overseas businesses this year. However, this is what all the other construction companies are doing as well.
An official in the construction industry said, “Not only POSCO E&C, but also all other construction companies plan to achieve higher internal stability, and their overseas construction order amount exceeds that of POSCO E&C.”
Due to this drastic decrease in overseas orders and bad performances following, the corporate credit rating of POSCO E&C dropped for the first time in the last 20 years. Korea Ratings lowered the corporate credit rating of POSCO one level, from “AAA” to “AA+.” The other two credit rating companies downgraded their opinions to “negative,” as well.
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