Deconstructing the construction sector
- Civil contractors openly admit that they can survive only if they break the rules
Oct 16, 2014-
Last September, the Nepali media published some good news about the construction business in Nepal. Nepali construction companies Anak, Lumbini, JV and Tundi finished building a 1,015-km long and 9.10-metre wide bridge over the Karnali River at Kothiyaghat, Bardia district in mid-western Nepal. This is said to be the longest bridge ever constructed by Nepali contractors at a cost of Rs 1 billion without incurring time overruns. In fact, the bridge was completed 10 months ahead of the five-year time limit. The construction of the bridge is an indication of the arrival of a new generation of contractors in Nepal.
In Nepal, the word “contractor” is synonymous with corruption, and the contractor or “thekedaar” has a derogatory undertone similar to that of “dalal” (broker), “jagire” (civil servant) or “byapari” (trader). If the business of contracting carries a bad name and Nepal’s development is all about contracting, read infrastructure, then why Nepal has remained underdeveloped needs no further explanation. As per the latest report of the Auditor General, a total of Rs 4.52 billion is classified as irregularities under the head of “mobilization” which basically is related to the public contracting business.
Construction means development
Given the state of Nepal’s underdevelopment, the scale and size of the construction sector is immense. The sector contributes from 10-11 percent of the GDP and uses around 35 percent of the government budget. Of the country’s development budget, 60 percent is spent through the use of contractors. Therefore, by implication, a large part (75 percent) of the construction sector is related to the public sector. This is the only business in Nepal where the public and private sectors come face to face, again through the channel of public procurement. After agriculture, the construction sector is the largest employment generating sector in Nepal. It is estimated that the sector provides 1 million jobs. Moreover, it generates employment opportunities for unemployed, underemployed and seasonal workers.
Stakeholders and regulators
As per the data supplied by the Federation of Contractors Associations in Nepal (FCAN), there are currently 194 Grade A, 322 Grade B, 1301 Grade C and 15,000 Grade D contractors associated with it. Contractors are classified into four grades and they are eligible to participate in bidding for contracts of varying amounts. The grading is done on the basis of the equipment possessed by the contractors. Therefore, the grading system favours civil contractors.
As per Construction Business Act, 1999 that came into force on April 14, 1999, the Construction Business Development Council chaired by the Minister for Physical Planning and Works, and the Construction Business Development and Implementation Committee chaired by the joint secretary (technical) designated by the Physical Planning Ministry constitute the two apex institutions designed to set out policy and regulatory matters related to the construction sector.
The FCAN website lists as many as a dozen problems and challenges confronting Nepal’s construction business. The problems range from competitive challenges imposed by Nepal’s entry into the WTO to Nepal’s antique rules and regulations governing public procurement and contracting (pre-qualification, approval of lowest bid, variation order and so forth).
In 2010, Nepal’s construction sector removed discrimination. With the entry of foreign and big domestic companies, small contractors will be eliminated from the market. Given the ubiquitous nature of small contractors in Nepal, as reflected by the data mentioned above, a difficult choice has to be made between developing a competitive market and protecting the interest of small domestic contractors. Small (Grade D) contractors face another challenge from Users’ Groups. With the maximum limit of projects Users’ Group are allowed to implement raised from Rs 3.5 to Rs 6 million, small contractors are going to be pushed out of the market. Users’ Groups are notorious for elite capture and corruption in local governance in present day Nepal.
The code of conduct introduced by the new Public Procurement Act in 2007 seems to have had no effect on the business of contracting. A couple of years ago, this scribe came across an interesting article about how contractors in Morang district pledged to deal with the use, or rather misuse, of “musclemen” in bidding for contracts. They entered into an agreement not to use musclemen during the bidding process. The news story also speaks about registering the pact with the district police office as a show of commitment.
The government has introduced e-procurement, but it has not been flawless. Since Nepal depends on donor money for major construction projects and donors do not have harmonized procurement rules, government policy decisions are bound to fail. Remember that the politics behind the construction of an international airport in Pokhara is rooted in public procurement rules. Also, one needs to remember that the RCCC (Royal Commission for Corruption Control) formed during the royal regime in 2005 managed to slap a jail sentence on former prime minister Sher Bahadur Deuba on corruption charges. He was convicted of corruption while awarding a contract for the construction of an access road at the multi-million-dollar Melamchi Drinking Water Project. Deuba was saved only after the Supreme Court declared the RCCC as being unconstitutional.
During one of the sessions with FCAN members related to ethical business practices in the construction sector, they openly admitted they can survive only if they break the rules. A renowned contractor lamented, “What will you do when a government accountant who is supposed to issue cheques deliberately stays on leave?” The answer is clear: He or she is asking for a percentage. This is not to imply that there is no problem with private sector contractors. The lawmakers in Nepal are currently struggling to amend the public procurement law. The move primarily aims to kill collusion and cartelling between contractors to inflate the costs.
Published: 17-10-2014 09:38