This article was originally published in Nepallivetoday on February 13, 2023 by Nabin Kafle. Mr. Kafle 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]
Federal Nepal has seen a surge in the number of construction projects under all tiers of the government, thereby presenting a pool of opportunities for construction companies. While the construction industry in Nepal has been growing rapidly, there are genuine issues pertaining to the quality of work, delivery of projects and governance matters that clearly need to be addressed. Acknowledging the same, the government issued the Public Procurement (12th amendment) Regulation 2079 BS.
In light of below-par construction quality and large influential firms occupying a significant number of construction projects, the recent amendment to the regulation stipulates that a construction firm can run up to five projects at a time and cannot bid for another project until one of the projects under its portfolio is completed.
Additionally, it mandates that prior to bidding for procurements between Rs 20 million and Rs 50 million, the construction firm must have completed at least one project equivalent to 40 percent of the total cost estimate of the project open for bid. Similarly, in case of procurement above Rs 50 million, 60 percent of the cost estimate is the criteria.
These amendments are likely to increase the quality of work, performance of construction firms and will ensure timely completion of projects to some extent. The practice of larger firms bidding for every project possible and then subcontracting the lower end ones at lower rate to smaller firms has continued till this amendment. The limited human resource and machinery had to be scheduled for a larger number of projects which ultimately led to delays and extensions. With only five projects to carry out at a time, the few established companies will emphasize only on high-end procurements. In such a scenario, there will be a larger number of projects to bid for and few established firms can choose the project of their preference.
There will be less competition among these companies and they will be able to bid for higher rates than before. Adding to the higher rates, the limited resources that used to be mobilized in large numbers of projects will now efficiently be concentrated to only five. It will boost the incentives of construction firms to provide better quality of work and timely completion of the projects compared to the past leaving a room for skepticism.
Furthermore, the reduced criteria for procurement above Rs 50 million to 60 percent of the cost estimate will open up opportunities for mid-range construction companies to bid for few larger projects which could never be thought of prior to the amendment. Growth of small and medium firms seems possible with such opportunities in the long run.
The reduced criteria for procurement above Rs 50 million to 60 percent of the cost estimate will open up opportunities for mid-range construction companies to bid for few larger projects which could never be thought of prior to the amendment.
The amendment has also raised the ceiling for National Competitive Bidding (NCB) contracts to NRs five billion from the previous ceiling of NRs three billion. The increased ceiling for NCB shows the confidence of the government towards the capabilities of Nepali construction companies to carry out larger projects deemed impossible in the past. However, these policies are also likely to have a different consequence—an unintended one.
Firstly, the amended clauses might create barriers for swift infrastructure development at the local level in the near future. It looks as if the legislation is in favor of established firms over new/emerging companies and neglecting local level projects. Procurements below Rs 50 million mostly comprise local level projects and are subject to bidding from new contractors or contractors with comparatively lower turnovers after this amendment. With only five contracts of lower amount, smaller and new firms in the business will have a hard time to grow at a faster rate to compete in the near future.
Seeing their growth chances thrown out for worse, these will opt to register as many firms in the name of their confidants. Because of the increased number of firms to bid for the projects, there will be fierce competition at the local level. It will ultimately lead to bids very lower to the full rate of work than before. In such a scenario, local governments need a robust monitoring body to prevent lower quality of works, delays and extension of projects.
Adding to this, the recent national election has established half a dozen contractors in the House of Representatives and another dozen in various provincial assemblies in the country. With these contractors turned lawmakers, there is always a conflict of interest. The formation of an even stronger cartel, enlarged corruption and status quo in lower end procurements seems more likely.
In case of high-end procurement, there will be less competition between the firms, since there are few established firms that meet the criteria. It can be seen as a means of cartel from a few established contractors in the country to take control of larger projects for a longer period of time. We can expect many more amendments in the near future which will benefit their cause rather than the state’s.
Enlarged corruption due to bidding at full rates or near to full rates still looms large considering the 15 percent overhead and profit for contractors already included in the rate analysis. Higher the bid rates than ongoing average successful bid rates, there is more losses to the government and ultimately to the taxpayers. Also, the limit of five projects in the amendment lacks in the aspect of bid capacity of construction firms in Nepal.
At present, a firm can bid for the procurement equivalent of five times the average turnover of the best three of the past ten years less the outstanding value of work in hand. At their present turnover, most of the established firms will only be able to bid for 2 to 3 mega projects. This might create a vicious cycle of scheduling in mega projects pertaining to lack of competition.
There is no public policy in the world without shortcomings. We can address the presumed negative implications of bid capacity by amendment to the requirements so that there is an increased number of eligible bidders and the government does not have to incur costs for re-bidding. New entrants and construction firms with smaller turnovers can only benefit if we increase the limit of projects at a time to more than five under the procurements worth up to Rs 50 million. There will be a pool of opportunities for them to grow in no time and compete with larger firms. Also, low-end procurements will also get fair treatment from these changes.