How Nepal’s public procurement process is hindering quality outcomes

Persistent delays, cost overruns, inferior quality, and frequent abrasion have, for a long time, been the main features of public construction projects of Nepal. Despite frequent claims of such adversities, surprisingly the bids for new construction projects are redirected to the same contractors. It has recently been revealed that out of 562 high-priced construction projects, more than 45 percent are secured by mere 16 contractors in the country. A dozen contractors are reported to control 80 percent of all construction projects.

While the morality and ethics of both contractors and public officials are questionable, equally questionable is the legislation surrounding public procurement in Nepal that plays a significant role in magnifying anti-competitive practices in the sector. The Public Procurement Act has experienced frequent amendments within a short span of time, despite which, it has effectively failed to ensure quality, as well as transparency. This failure indeed fuels suspicion regarding whether the reforms were made to improve the entire procurement process or to amend clauses in favor of a few influential contractors. It also portrays weak governance surrounding the sector and the outright misuse of taxpayers’ money that the government is accountable to.

A mature consideration of the events justifies the need to reform the detrimental practices in public procurement that has plagued infrastructure development in Nepal. This article focuses particularly on two of such practices. 

Selection of lowest bidder 

Nepal practices a system whereby the bidder who proposes the lowest cost is awarded. The method has been questioned worldwide. Research in both developed and developing countries reveal that, while the lowest bid ensures completion of projects at least cost, it also creates a disincentive for contractors to focus on quality-enhancing measures. Instead, contractors dedicate immense attention and effort on cutting prices by employing low-cost products, despite a more expensive one being in the best interest of the infrastructure. Additionally, contractors refrain from hiring equipment and resources to cut costs, naturally leading to delays in construction. Thus, contracts granted on the basis of the lowest bid hardly result in the best value for money as the project will never be awarded to the best-performing contractors. 

In the case of Nepal, this process has also been fueling illicit practices. The secrecy that is maintained in the government’s cost estimate based on which bids will be evaluated provides room for bidders to bribe public officials demanding disclosure of the cost. There is room for suspicion also because a number of big contractors also happen to be political leaders. Acquiring information regarding bid and cost estimation is easier for the people and organizations that can exercise power and have adequate financial resources, creating information asymmetry in the bidding process which provides an unfair advantage to a few contractors and promotes anti-competitive practices.

In a move to discourage the trend, a recent amendment to the Public Procurement Act mandates bidders who propose prices that are below 30 percent of the estimated cost to provide a justification. However, the continuation of dubious practices in granting projects suggests its ineffectiveness to generate desired results. Nepal needs to strategize other interventions. Subtle changes to the legislation like excluding projects that propose prices that are lower than government cost estimation or publicly floating cost estimates derived by a public entity, would not only facilitate the government in ensuring quality output at a reasonable cost but also would to some extent create a level playing field for all contractors. There are several other alternatives to low-cost bidding. While the initial cost of the project will be higher than the lowest bid method, in the long term, they have lesser costs as infrastructures are of better quality and have a higher life cycle. 

Preference to domestic contractors over foreign contractors

Currently, a large number of contracts are in the hands of a few contractors, which not only indicates poor governance, but also elucidates on compromised quality of work, and delays. It is immensely important for Nepal to do away with an anti-competitive practice that has afflicted the entire sector.

With the aim to reduce the dominance of large contractors by supporting the growth of small contractors, the amendment to Public Procurement Act has incorporated provisions of merger allowing two or more contractors to merge and bid. Despite being well-intended, the provision has been frequently exploited as the entire work is passed on to the small contractors with limited capacities and skills, while the large contractors benefit by paying only a portion of the entire project budget to the small contractors and keeping the remaining amount as profit. The provision has ceased to generate the intended result of transferring technology and skills to small contractors.

Such incidents lay bare the fact that corruption has covered all aspects of procurement activities in Nepal. For the sector to experience fair competition in terms of price and quality of work, competent bidders from all over the world must be allowed to access the construction market in Nepal. Open bidding whereby both domestic and foreign contractors will get equal treatment and opportunities will help Nepal realize the benefits of competition in terms of prices, technology, and transparency.

However, the Public Procurement Act instructs officials to provide preference to domestic contractors over foreign contractors. While the legislation is implemented with the aim to safeguard domestic contractors from foreign competition, it has several repercussions as contracting companies have no incentive to improve the quality of their work considering the preferential treatment.

Nepal can adopt different measures to allow foreign companies to complete the construction projects whilst ensuring the growth of domestic companies as well. Countries around the globe adopt measures whereby in case the procurement is awarded to international bidders, the bidders must ensure that the labor, raw materials and components from within the country should account for more than 30 percent. Moreover, in order to promote the small contractors with lesser capabilities, the government can split or divide the contracts in lots whereby domestic bidders can have preferential treatment on low requirement contracts. Nepal can also reduce the bidding time frame for international bidders to 21 days—the same time frame provided to domestic contractors—to ensure equal treatment to all.

Infrastructure development is associated with numerous economic and social aspects of a nation. It has dominance in almost all sectors of the country, and thus plays a significant role in assisting economic growth and prosperity. Prolonged challenges in the sector will result in sluggish growth. Focusing on the rapid development of the sector by introducing conducive policy measures should thus be a priority for Nepal.

This article was originally published in Nepal Live Today on 14 March 2022 by Ayushma Maharjan.