Majority of group inter-company deals done privately

The 10 largest Korean conglomerates had inter-company transactions worth a combined 152 trillion won (133 billion U.S. dollars) last year, with 87.1 percent of the transactions based on private contracts.

A private contract refers to the selection of a service provider without a bidding process. Many inter-company deals based on private contracts mean that companies subcontracted projects to their affiliates without bidding, which is likely to lead to unfair subcontracting among affiliates.

The Financial Supervisory Service and chaebol.com said Monday that 85.3 percent of 4,987 inter-company transactions of the 10 largest conglomerates by assets excluding state-run companies were based on private contracts last year. Revenues from the transactions reached 132.98 trillion won (116.2 billion dollars), or 87.1 percent of the 152.75 trillion won (133 billion dollars) from all inter-company transactions.

Samsung Group topped the list in the value of private contracts. The group had 93.3 percent of inter-company deals, worth 35.4 trillion won (30.9 billion dollars) based on private contracts.

Samsung SDS signed a contract for a project on system integration and management worth 1.56 trillion won (1.31 billion dollars) with Samsung Electronics. Advertising affiliate Cheil Worldwide made 350.3 billion won (306.4 million dollars) from Samsung Electronics alone.

No.2 Hyundai Motor Group also signed private contracts in 91.4 percent of its inter-company deals worth 32.23 trillion won (28.1 billion dollars), followed by SK Group’s 90 percent, Lotte’s 87.4 percent, and POSCO’s 86 percent.

Critics say, however, that private contracts between affiliates could lead to unfair distribution of deals and increased power to the owner’s families. In this context, the Fair Trade Commission encourages conglomerates to declare a bidding process voluntarily and release more information to root out the practice and give opportunities to non-affiliate small and medium-size companies.

Many claim, however, that the commission`s suggestion cannot significantly reduce the practice since it is not binding.

“Under law, illegal internal transactions intended to increase management control or help the succession or reinforcement of a group’s ownership cannot be efficiently regulated," said Park Sang-in, a public administration professor at Seoul National University. "What is needed is the creation of a legal foundation that can determine the illegality of the unfair distribution of deals to affiliates and devise stricter punishment other than imposing fines.”

nuk@donga.com