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Collusion among contractors limits competition, forcing government to pay more

- PRITHVI MAN SHRESTHA, Kathmandu

May 23, 2019-

Four bidders passed technical qualification to undertake the construction of road, drainage, sewer and land work in a tender called by the Special Economic Zone  Development Committee on April 11, 2017.

But there were no massive differences in the prices quoted by all four bidders against the estimated cost of Rs849.99 million.

The SEZ Development Committee had called the tender for developing Block A of the garment processing zone at Simara.

Swachchhanda/Ashish JV quoted Rs148.94 million while Kalika Construction quoted Rs848  million. Tundi Construction quoted Rs869.41 million and Sharma/Amar/ Kanchharam JV quoted Rs141.36 million.

Before the contractors participated in the bid, Rupesh Construction Company had registered a complaint at the Public Procurement Monitoring Office claiming that there was foul play to enable the Sharma/Amar/Kanchharam JV to get the contract.

In line with the complaint, Sharma/Amar Kanchharam got the contractor for quoting the lowest price and the SEZ Development Committee signed a contract agreement with Sharma/Amar/Kanchharam JV on September 12, 2017.

Furthermore, the bidders--Kalika, Tundi and Sharma/Amar/Kanchharam JV—quoted the same price for 105 items out of the 115 items to be used during the construction. Two of them have quoted the same price for eight of the remaining items.

The quoted price in the bids by all four contractors gives credence to the suspicion that there has been a cover bidding, states the assessment of the Public Procurement Monitoring Office.

Cover bidding, also known as complementary bidding or courtesy bidding, occurs when some of the bidders agree to submit bids with an intention of not winning them.

“A complaint was registered by Rupesh Construction about awarding the contract to a particular contractor and the contract going to the indicated contractor at the range of the estimated cost suggests that procurement was made against the spirit of public procurement,” the PPMO concluded in its assessment.

“This cannot be just a coincidence; it can be easily assumed that it is the result of organised planning,” the Public Procurement Monitoring Office mentioned in its annual report 2017-18.

The report has also pointed out possible collusion in the packaging of the project between the government agency and the contractors to block foreign contractors.  

When the consultant prepared the detailed design for the project, the estimated cost of the package was Rs1.17 billion.

But, when the tender was called, the estimated cost was reduced to less than Rs1 billion.

The PPMO said that the number of contractors with the capacity to participate in a project with its cost around Rs1 billion is very limited.

“If the packaging is made by making it bigger than Rs1 billion, foreign companies can also participate as per the public procurement regulation. In order to stop this, there is a trend of packaging the project within the limit of Rs1 billion,” the report states.

In the new amendment to public procurement regulation, foreign contractors cannot participate in a bid as long as the estimated cost is Rs2 billion, which is expected to limit the competition further.  

PPMO officials said that when only a limited number of contractors can work in large packages, they tend to collude with each other, allowing one contractor to get one project in exchange for another contractor supporting the first in another project.  

So they collude to keep the price at the range of the estimated cost so that the government agency loses due to a lack of competition among the contractors.  

“Public procurement regulation has been amended to prevent such trend,” said Keshav Prasad Prasain, director at the Public Procurement Monitoring Office.

As per the amended regulation, the government agency should not make a large package of contracts to limit competition as long as their work is similar and a single package serves the government’s purpose.”

“Such amendment was made after a thorough discussion among the stakeholders,” said Prasain.

The PPMO has been pointing out the tendency of collusion among the contractors for the last few years. PPMO officials said that such trend flourished after the provision was made in the Public Procurement Regulation through the fourth amendment in December 2016 that a foreign contractor cannot bid for projects having the estimated cost below Rs1 billion.

The government had made such provision amid strong lobbying from some domestic contractors although it was claimed that the threshold was increased due to the growing capacity of domestic contractors, according to officials and contractors.

The contract awarded by the SEZ Development Board is not the only example of possible collusion among the contractors.

Last year, the PPMO report titled ‘A Collection of Reports on Public Procurement Monitoring and Complaints’ also pointed out possible collusion among bidders while participating in and bagging contracts for road and bridge projects in the under-construction Dharan-Chatara-Gaighat-Katari-Sindhuli road and the Galchhi-Trishuli-Mailung, Syabru-besi-Rasuwagadhi road.

In case of the Dharan-Chatara-Gaighat-Katari-Sindhuli road, two packages were designed each for road works and bridges while only a single package was designed for the Galchhi-Trishuli-Mailung-Syabru-besi-Rasuwagadhi project. Thus, there were a total of five packages in the three projects.

Only three contractors submitted bids for each of the five packages, in hard copies, instead of participating through e-tender. Surprisingly, only one bidder quoted a little less than the estimated cost while the other two bidders quoted slightly higher than the estimate.

In all packages, certain bidders were repeated frequently. In five packages, only nine Nepali and two foreign contractors submitted bids. The report says it might not have been a mere coincidence.

The report said these projects could have been packaged in different reasonable sizes but were broken into so large components that only certain firms could participate in the bidding process. In order to limit competition, an unusually high average annual construction turnover was demanded.

The Covec-Tundi-Rasuwa JV and Kalika Swachchhanda-Ranken JV had submitted bids for the Galchhi-Trishuli-Mailung, Syabrubesi-Rasuwagadhi road project.

But only the Covec-Tundi-Rasuwa JV had quoted a little lower than the estimated project cost while the other two quoted a little higher than the estimate. In other four packages too, there was a slight difference in the amounts quoted by bidders and all of it was close to the government’s estimates, according to the PPMO report.

Contractors admit that the practice of collusion is widespread, particularly among large contractors. Rabi Singh, president of the Federation of Contractors’ Associations of Nepal, told the Post that there is a widespread tendency of packaging the project in the range of Rs700 million to Rs1 billion so that only a few large contractors could participate in bidding. “This happens due to collusion between government officials and the large contractors,” he added.

According to him, currently, around 35 large contractors have occupied contracts covering 80 percent of the government’s total capital budget. This was possible due to the packaging of projects in large sizes.

Although the new regulation sought to control such tendency by barring government agencies from making large packages, the FCAN says this provision contradicts the increase in threshold where only domestic contractors can participate to Rs2 billion from the earlier Rs1 billion. “Only about a dozen domestic contractors will be eligible to bid for projects upto Rs2 billion,” said Singh.

He said that the government increased the threshold even though the FCAN had not demanded it. “Even in the past, the threshold was increased to Rs1 billion though our suggestion was just to limit it to Rs600 million,” he said

Published: 24-05-2019 07:00

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