Incheon impasse: Will foreign bidders be frozen out by Korean Customs Service intervention in duty free tender?

KCSSOUTH KOREA. Korea Customs Service’s (KCS) surprise intervention in the Incheon International Airport Terminal 2 duty free tender has put the bid in a state of flux.  It could also leave international retailers out in the cold.

As revealed last week by The Moodie Davitt Report, KCS wants to create a licensing committee to evaluate the T2 bids and judge the offers according to a much wider set of criteria than that used by IIAC (60% technical, 40% financial). The committee would work on a similar basis to those that assess rival candidates for downtown duty free shops.

The move has caused a major headache for IIAC, which has been forced to delay the publication of the tender. It had been slated initially for November or December last year. Bidding for the five-year contracts was originally due to close by mid-February 2017 with awards expected to be announced by the end of the same month. With this impasse, it is uncertain when the tender will be issued and how it will be evaluated.

The tight timeline recognises that the first phase of the ambitious T2 development will open in October, with ultimate project completion in 2023.

Historically the IIAC, like most airports around the world, has been the sole evaluator of the respective bids. To The Moodie Davitt Report’s knowledge, there is no precedent for a national customs agency being the ultimate assessor of a duty free tender.

As reported the IIAC was planning to open the tender to international and local companies. However, the KCS evaluation criteria, while not disqualifying foreign bidders, would make their chances of success (already remote in most foreign players’ eyes) practically impossible.

Concourse Lotte 2
Incheon International Airport Corporation finds itself at the centre of a tendering row that has potentially profound repercussions for how duty free contracts are struck

Under the terms of the ‘Enforcement Decree of the Customs Act’, any successful bidder has to meet several yardsticks.

These include evidence of:

* Contribution to Korea’s economic and social development, such as sales of products manufactured by small and medium enterprises (SMEs);

* Contribution to tourism infrastructure and other wider environmental factors;

* Return of profits to society;

* Evidence of ‘win-win’ partnerships with SMEs

Given that no international duty free retailer operates in Korea (other than Dufry in the ThomasJulie partnership at Gimhae Airport, Busan, which is classed as a SME), that would make it implausible for a foreign bidder to win any of the IIAC contracts. That could in turn prompt investigations into unfair trade restrictions. Any international bidder could feasibly complain to the World Trade Organization (WTO) or their respective national governments, as well as to the Korean Ministry of Foreign Affairs Department and/or Ministry of Strategy and Finance.

The Moodie Davitt Report has now obtained a full translation of the KCS statement (pictured below) from last week on the Incheon tender. Here are the key points.

  • So far, the IIAC has had sole authority to choose its duty free retailers. Once chosen, they were then licensed by Korea Customs Office after a brief evaluation of their fitness to trade.
  • The KCS wants to change the airport tender system and select the operators in accordance with “an appropriate procedure”. The IIAC expressed its dissatisfaction with the announcement.
  • The KCS requests the IIAC to increase the number of duty free shops and the number of retailers and expand the area granted to the shops.
  • The KCS says the current bid evaluation system was adopted when Incheon International Airport first opened and it required “substantial income” from duty free shop rents. “It was a model approved by the government in order to maximise the IIAC rental revenue,” KCS said.
  • The KCS believes that the Incheon procedure is not aligned with the objects of current customs law regarding the licence examination of duty free retailers. It says the law focuses on a wider set of criteria, including the public value of each bid – incorporating factors such as the benefits offered to the tourism industry; the giving back of corporate profit to the community; and the mutual growth of large and SME companies.
  • For this reason, the KCS wants to “normalise” the process through a dialogue with the IIAC.
  • The current customs law, KCS insists, means airport duty free shop operators need to go through the same evaluation process as their downtown duty free counterparts.
  • Until now the IIAC has “unduly used” a general commercial facilities tendering system. This, KCS claims, is undermining the government’s “duty free market improvement policy”.
  • For instance, to control duty free market monopolies, the government operates a “points-subtraction” policy for evaluating “market-dominating” downtown bidders. But this policy, KCS says, is impractical when choosing Incheon Airport’s duty free shop operators because the airport company’s system allows it to select a sole trader [though IIAC has always opted for multiple operators -Ed]
  • Accordingly, the KCS is in “negotiations” with the IIAC so that the airport’s duty free bidders can be evaluated by the KCS and a winning operator can be chosen “only through substantive competition among multiple tenderers”.
  • Even though a duty free shop operates its business within the airport, the government has the sole right to decide how many retailers be granted licences. “Hence, it is fair for the KCS to request the IIAC to increase the number of SME duty free stores.”
  • The KCS wishes to change the T2 duty free stores’ plan, which it claims “noticeably favours large companies in order to maximize the rental revenue” [three large companies, two SMEs]. It wants to see three large companies and three or four SMEs.

Further urgent talks between the parties are likely, according to sources in the Korean duty free supply sector.

IIAC could not be reached for comment by The Moodie Davitt Report today.

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Korea Customs Service’s evaluation criteria for downtown duty free licences looks very different from that traditionally adopted by Incheon International Airport Corporation. Source: KDB Daewoo Securities Research; Korea Customs Service
the-korea-customs-service-announcement
Korea Customs Service’s bombshell statement last week made it clear that the government agency wants to decide who runs which contracts at Incheon, and sets the criteria.

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