Analyzing procurement laws in relation to local government procurement

This article was originally published in on September 15, 2023 by Ashesh Shrestha. Mr. Shrestha ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. Author can be reached at [email protected]

Public Procurement accounts for 13 to 20 percent of the global Gross Domestic Product (GDP) amounting to 9.5 trillion US dollars. In 2018, the share of public procurement out of global GDP of $90 trillion was $11 trillion. Low income countries spend about 13 percent of GDP in procurement of goods, services and works.  Such humongous amount of spending on public procurement necessitates its detailed study to analyze the inefficiencies in the existing structure of public procurement processes and governance, leakages, and corruption, along with mechanism by which the entire procurement system can be made efficient and transparent.

In this article, I aim to scrutinize the current state of public procurement in Nepal, particularly its impact on public finance and procurement, with a special focus on local government operations.

Procurement laws in Nepal

Rules Regarding Public Spending  was the first law implemented in 1958/59 which steered public procurement in Nepal. Then, laws related to financial administration were changed and amended multiple times in order to deal with issues related to transparency, competitiveness and accountability in public procurement in Nepal. It was not until 2007 when a separate law focused specifically on Public Procurement was formulated. With the enactment of Public Procurement Act (PPA) 2063 (BS), we saw the first major reform on public procurement administration in Nepal. Public Procurement Act (2063) and Public Procurement Regulation (2064) are the primary laws which guide the public procurement process in Nepal. The Act has been amended to align with the new constitution which declared Nepal a federal democratic republic with three tiers of government. The regulation has seen up to 12 amendments.

Challenges with low-cost bidding

The PPA requires a public entity to pre-specify evaluation criteria and method in the bidding document and select the lowest evaluated bid based on the said criteria, thereby tacitly providing the procurement unit with autonomy with regards to determination of the evaluation method. However, the same act also mentions that bid prices of all the bids must be compared and the bid with the lowest bid price is to be determined. Moreover, when an invitation to bid has been made through pre-qualification and when the qualification of the lowest bid is found to be consistent with the criteria set forth in the bid document, such bid would be deemed the lowest evaluated bid.

The primary emphasis on cost/bid price is further substantiated by few other provisions. For instance, Section 5 stipulates that the public entity responsible for procurement shall prepare a cost estimate for any procurement. Moreover, Section 26 sub-section 1(b) of the Act postulates that if the bid price of the lowest substantially responsive bid exceeds the cost estimate, the procurement proceeding will be cancelled.

With these provisions we have seen the winning bid being significantly below the government’s estimated cost of the project. The representatives of the local governments have claimed that when winning bid are considerably below the cost estimates the quality of the project is compromised. Additionally, it directly hinders project completion resulting into defaults and delays. One way to overcome this issue which have been discussed in various forums is making provision of Average Price bidding, wherein the bidder whose bid is closest to the average bids among all the participating bidder wins.

Limited autonomy for local governments

Section 2(b) of PPA while defining public entity includes provincial and local governments, and any entities affiliated to them. This basically means that the Act enacted by the federal government binds even the lower levels of government. Even though constitution has delegated responsibilities of providing various goods, services, and sub-national infrastructure to the lower levels of governments, the federal PPA has put substantial limits on their autonomy in determining methods and procedures on how to deliver those to the citizens. It has shackled their prospective innovations in procurement which could have increased efficiency, transparency, and competition in the procurement process. Moreover, any problems/inefficiencies facing the federal government could well be manifested in case of local governments.

Local governments have always been doubted on with regards to their ability on formulating their own laws. While recognizing the fact that all the local governments may not be capable enough to formulate and implement their own procurement laws, we cannot deny the possibility that a few of them could be capable enough to come up with innovative practices. Their innovations could well be emulated not only by other local governments but the federal government as well.

The preference provision has put dual constraint on international bidders. First, any procurement up to a sum of two thousand million rupees has to be made through competition among domestic bidders only. Second, in case of international bidding, preference should be given to domestic bidder whereby a domestic bidder whose bid exceeds by up to five percent of the lowest international bid can be accepted.

As mentioned above, as local governments must abide by the federal procurement laws, they will have to give preferential treatment to the domestic companies. However, local governments are the most resource constraint level of government, most of whose revenue depend upon fiscal transfers from federal and state government. They might rather prefer low cost-high quality goods, services and infrastructure than be concerned whether they are provided by domestic or foreign companies.