Episode 69: A Private Meeting with the Chief Economic Advisor
“In my opinion, our primary target should be the Middle East.”
“The Middle East?”
“Yes, despite the world economy staggering from the recent oil crisis, the oil-producing nations in the Middle East have amassed enormous wealth as a result. Where do you think these Middle Eastern countries, now flush with foreign currency, will invest their overflowing funds? They will undoubtedly seek to invest in domestic infrastructure. However, the Middle East lacks manpower and sufficient technological expertise. Ultimately, they will have no choice but to hire construction companies from abroad.”
“Hmm. So, you are predicting a construction boom in the Middle East?”
Lee Chang-jin nodded vigorously in response to Won Jong-pyo’s question.
“Yes, that’s correct. It will be on an unprecedented scale that no country has ever attempted before. If we align ourselves with the timing and ride this wave, the Middle Eastern boom could be the driving force behind economic recovery.”
“There’s some sense in that. However, many advanced nations, including the United States, the United Kingdom, and Japan, will also strive to win construction contracts. Do we really have the competitive edge?”
Lee Chang-jin responded to the probing question from the chief advisor.
“No, we do. Chief, we have three distinct advantages over advanced nations.”
“What are they?”
Intrigued, Won Jong-pyo encouraged Lee Chang-jin to explain.
“Firstly, the Middle East is a hot desert region with poor working conditions. The differences in religion and customs, coupled with a lack of entertainment, make it a 3D (Dirty, Dangerous, Difficult) environment that advanced country technicians tend to avoid, no matter how much they are paid. However, we have hundreds of thousands of discharged soldiers equipped with a strong military spirit and a hungry mindset. Secondly, the labor costs for our male technicians are much lower than those in advanced countries, while their skill levels are far superior to those in developing countries. This gives us a competitive edge in terms of pricing.”
“Hmm. And the third?”
“Lastly, the issue of shortening the construction period. Our construction companies have already gained experience by participating in COE projects during the Vietnam War. We accumulated technical expertise through dealing with the rigorous construction supervision and English specifications of the U.S. military in Vietnam. Additionally, we gained know-how on fast-tracking construction through our experience with the Gyeongbu Expressway. This is a competitive advantage that no other country can match.”
“Haha, you are sharp. You have quite an eye for economic matters.”
Won Jong-pyo was impressed. His initial question had been a sort of test to see if this young entrepreneur had a broad vision.
In reality, it was almost as if Lee Chang-jin had recited a memoir, so to Won Jong-pyo, it felt as though his mind had been read. But what did it matter? Lee Chang-jin decided to be shameless.
“However, for Korean companies to advance into the Middle East, several institutional improvements are needed. First and foremost, we need to reform the current bidding system.”
“Why does the bidding system need to be reformed?”
“The current domestic bidding process adopts the lowest bid method, which allows even unqualified companies to win contracts if their prices are low. This often results in safety accidents during construction rushes or substandard construction due to the use of low-cost materials. To fundamentally solve these issues, we need to institutionally block dumping bids. Therefore, it is necessary to implement PQ (Pre-Qualification) as a limited competitive bidding system.”
“So, what specifically are you suggesting?”
“Preliminary reviews should be conducted on aspects such as technical capability, company performance, number of technicians, number of heavy equipment, major accidents, and project performance verification from the client. In the final bid, the bidder with the highest score among at least three companies and closest to the average price should be selected.”
“It’s quite complicated. Do we really need to go that far?”
“We can gradually change it. For example, in projects that don’t require high technical skills but have concerns about construction quality due to low-cost bids, we can implement a limited lowest bid system or improve the current low-cost review system to apply only objective low-cost reviews. Secondly, for PQ-targeted projects or those requiring high technical skills, such as bridges, plants, and ports, contractors who won bids below the minimum project cost set by the client should be required to deposit the difference between the estimated cost and the bid amount as a performance bond, which would be forfeited in case of non-performance. Lastly, for large-scale projects needing cost reduction, we can conduct a two-stage low-cost review as currently done but limit the number of qualified bidders through methods like construction method restrictions.”
“It sounds complex. Is it really necessary to go that far?”
“Advanced countries like Europe, the U.S., and Singapore have construction bid agencies that pre-evaluate construction companies and subjectively assess various bid documents and technical capabilities to select contractors. While standardized contract systems may be advantageous for internal control, they infringe on the autonomy of demand organizations and ultimately lead to inefficiencies in budget execution.”
“It seems difficult to apply such a method in our country. It could lead to accusations of favoritism or bribery. Moreover, if technical scores are emphasized in bids, large construction firms with more research staff and experience are more likely to win government contracts, which could face strong opposition from small and medium-sized construction firms.”
Lee Chang-jin smiled.
“In that case, we can restrict large construction firms from participating in small local projects, allowing them to participate only in projects above a certain scale, thereby creating a fair competitive environment. However, we should still provide opportunities for small and medium-sized construction firms to build their track records.”
“How would you do that?”
“We can allow small and medium-sized construction firms to participate in public projects to build their track records. We could also consider supporting companies with outstanding performance to expand abroad. For example, developing forest roads could be a good project.”
“Forest road development? Explain in detail why that would be considered an SOC (Social Overhead Capital) project.”
At Won Jong-pyo’s curious question, Lee Chang-jin spoke with conviction.
“Yes. Currently, we are focused on forestation, but we need to move towards utilizing forest resources in the future. Installing forest roads is essential for that. If forest roads are developed, the accessible area for logging will naturally increase, thus expanding the area available for timber harvesting. As the accessible area expands, the cost of timber production will be significantly reduced, and the work time will also be shortened. This will lead to significant savings in fuel costs, vehicle maintenance costs, and other auxiliary expenses.”
“Hmm… continue.”
Encouraged, Lee Chang-jin quenched his thirst with water and continued.
“Moreover, installing forest roads will not only serve as firebreaks but also enable quick responses through fire truck access. The segmented areas will also make it easier to prevent pest infestations. Additionally, if we develop scenic villages into tourist attractions, we can generate additional revenue.”
Lee Chang-jin passionately explained, drawing on an industrial analysis model.
In fact, this topic had been the subject of a minor thesis he prepared for his undergraduate degree.
Chief Advisor Won occasionally asked sharp questions as he listened.
“In that case, why not place forest cooperatives under the jurisdiction of the Forest Service instead of establishing a separate Forest Development Corporation? Also, considering that 67% of Korea’s forests are privately owned, isn’t it inappropriate to use national funds for those areas?”
However, Lee Chang-jin had a counterargument.
“A Forest Development Corporation is necessary to lend weight to the project. Furthermore, Korea’s forest road projects are still in their infancy and lack suitable experts. To realize the project, the current workforce is insufficient. Ultimately, a task force team to oversee national public projects is needed. In that sense, a strong organization like the Forest Development Corporation should play the leadership role. We need to empower the organization to secure long-term budgets. Secondly, it is impossible for individuals without large-scale forest lands to achieve economies of scale. However, continuing forest road projects can stimulate the construction industry even during economic downturns.”
“So, how many jobs could this create?”
“For instance, if we form 100 teams nationwide to support forest road construction, we could also foster domestic earth-moving equipment companies. Each team constructing 10 km of forest roads annually would need four pieces of construction equipment and five specialized technicians for direct operations. Including day laborers, each team would create at least 50 jobs. That’s 5,000 jobs if you consider 50 people per team. This could support over 20,000 people if we consider a family of four.”
After listening to Lee Chang-jin’s explanation, Chief Advisor Won asked,
“So, you are saying now is the right time to invest in forest projects.”
“Yes, while the immediate effects may not be large, I believe it’s an essential project for the nation’s long-term future. Policies should be made with a vision for the next 100 years. The seeds we plant now will undoubtedly become the future’s source of income in 10 to 20 years.”
After listening for a while, Chief Advisor Won nodded.
“Hmm, it’s a fresh approach. Where did you learn all this?”
“I had the opportunity to study Germany’s forestry industry while working in Mannheim. Additionally, I developed a personal interest in the sale of timber and plywood as I started my business, so I looked up overseas papers.”
“Impressive. It’s not easy to go that far…”
As a born technician, Chief Advisor Won admired Lee Chang-jin’s enthusiasm.
In Korea, where resources and capital are scarce, the only abundant resource was human capital.
Someone as capable as Lee Chang-jin was crucial for Korea’s future.
“Since I’ve received such good advice, I’d like to do something for you. Is there anything I can help with?”
“In fact, there’s one thing I regret. We are currently engaged in the import business of natural dyes at the request of the domestic clothing industry. However, opening a letter of credit is essential for dealing with overseas companies. Recently, restrictions on issuing letters of credit have been problematic…”
Lee Chang-jin calmly explained the issues he faced with dye imports and exports.
Chief Advisor Won nodded casually after hearing the situation.
“Really? The domestic dye prices are that high? The textile companies must be struggling. It is problematic to unilaterally control the issuance of letters of credit. I’ll take immediate action.”
“Thank you, Chief Advisor!”
Lee Chang-jin bowed 90 degrees.
Chief Advisor Won smiled warmly at Lee Chang-jin’s polite gratitude.
“Haha, it’s the price for delivering the unfiltered voice from the field. I’ll call upon you occasionally to hear your views, so please share your insights when needed.”
“It was an honor to have this conversation. Chief Advisor.”
“Haha, yes. I look forward to your future successes.”
After their greetings, Lee Chang-jin politely withdrew.
After Lee Chang-jin left, Chief Advisor Won sat on his desk, tapping the table as if contemplating.
A little later, he manually dialed a number and made a phone call somewhere.
- To be continued in Episode 70 -
