PPA amendment: Vital for govt spending

KATHMANDU, Aug 21:

When the government´s guide to procuring goods and services was enacted in 2007, the law´s authors had envisioned getting rid of corruption and ´hooliganism´ and making the bidding process more effective. But the Public Procurement Act (PPA), 2007, created its own set of logjams and has not only not managed to get rid of ´hooliganism´ but also cut down the quality of goods bought and chased away potential bidders.

The act is one of the factors causing low capital expenditure in the country, which was 3.2 percent of gross domestic product (GDP) in Fiscal Year 2013/14. There are a host of issues surrounding the procurement of government goods and services for activities such as construction, building, and vehicle purchases, among others.

The problem of low expenditure performance has worsened to such an extent that actual capital expenditure was just 75 percent of what was planned for last year, according to the Ministry of Finance.

Troubled by the low amount as well as quality of capital expenditure, parliamentarians have accelerated the addressing of the core issues by revising the Public Procurement Act (PPA) and the associated rules.

This is of vital importance to the country, given its massive infrastructure needs, financing for which stands between 9-12 percent of GDP.

The government recently announced that it would amend the Public Procurement Act and Public Procurement Rules, 2007, for expediting development projects by easing a lengthy procurement process.

The act, which was launched in 2007 with the objective of financial transparency and the effectiveness in bidding process, has itself became a barrier for timely completion of projects due to procurement issues.

The government has learned of so many problems after the implementation which it had not envisioned during formulation of the Public Procurement Act.

Now, on the initiation of the Ministry of Finance and the Finance Committee of the Legislature Parliament, the act is under the process being amendment. But why does the government feel the requirement of amending in Public Procurement Act?

AWARD THE LOWEST BIDDER

The existing Procurement Act has provisioned awarding of a bid to the lowest bidder no matter what. This has become a major problem for completion of development projects.

Because of this provision, shadow companies are emerging due to rampant licensing to sub-contractors, according to Jay Ram Lamichhane, the president of the Federation of Contractors Association of Nepal (FCAN).

´To the lowest bidder´ is the major reason for the inferior quality of work and the supply of inferior quality goods.

The provision also means that the executing agencies have no use for checking bidders´ profiles, track records and the practicality of the bid amount as they are compelled to award the contract to the lowest bidder as according to the rules ´lowest is best´.

The concept of ´lowest is best´ was not practical enough. Shadow companies of reputed contractors use the process to bid low rates and the shadow companies then pull out when the bids open. Then the executing agencies have an obligation to award to the second lowest bidder or publish bid a notice once again, which is ultimately hurting government´s capital expenditure.

LENGTHY PROCESS

The bidding process is too lengthy in Nepal. The act has provisioned a minimum of one month for bid submission. But it takes more than three months for the whole bidding process to finish. On one hand, the government is talking about e-bidding, which can be submitted from very few days from all over the country. This process, however, does not allow for actual submission through the internet. So it has become just a system of downloading forms. The government had also hoped e-bidding would cut down on ´gangsters´ harassing bidders when they came to submit their bids. But since bidders have to come to the concerned offices anyway to submit the downloaded and filled forms, e-bidding has become ineffective in minimizing hooliganism.

LACK OF LIABILITY

Contractors are also ´encouraged´ into doing inferior work because the act does not include a provision for them being liable for defects once the project is handed over to the government. It also does not provide for the concerned agency to inspect the quality of work when they take it over. The inspectors only measure if the work meets the number -- be it distance or number of goods. Once the contractor hands over projects like roads, irrigation canals, bridges or other development works, they will be immune from all liabilities. “If the construction work is found to be defective next day, we can´t make the contractor liable to rebuild that,” CP Mainali, a lawmaker and the convener of a panel formed by Finance Committee told Republica, adding “There should be a provision of a defect liability period to make contractor responsible for the quality of work.”

COST variation

There also a provision widely called cost variation which serves the interest of the contractors. The low cost bidding will be compensated by the variation, that is, contractors can add later increased cost owing to strikes, exchange rate change, and price adjustment of construction materials and so on.

We can take the example of the Chameliya Hydropower Project. The cost of the project went much beyond the original estimate.

Normally, it costs Rs 150 million for generating a megawatt of hydropower, but the final cost of Chameliya reached Rs 500 million per megawatt because of cost variation.

Finance Minister Mahat, who initiated the legal reform, has emphasized the need for the act to restrict strikes in industrial as well as development project areas for efficiency of the development project because the increase in cost of development and delay in completion ultimately hits consumers.

Contractors have also been known to entice political groups or ´gangsters´ to cause strikes and vandal the contractors´ own offices at the project site so that they can increase costs allowed through variation.

MANAGING MOBILIZATION FUNDS

The government provides 20 percent of the total estimated amount as mobilization funds to the contractor after awarding contract. Most of the bidders flee after receiving the mobilization fee. Bidders who get the tender for crucial works have also flown after receiving mobilization funds. The Ministry of Industry awarded contracts to build road accesses and install power supply lines to Cement Industries, the government failed to complete the task in time because of the dishonesty of contractors, according to Dhruba Thapa, the president of Cement Industry Association.

Chief Secretary Lila Mani Poudel once said that mobilization funds should be released on installment rather than being provided in bulk, which might prevent contractors from escaping after receiving the mobilization fees.

PPA: HANGING ROPE FOR PUBLIC ENTERPRISES?

We can take the example of Nepal Telecom and the private sector run telecommunication service provider company Ncell which is aggressively expanding its market.

Ncell does not have go through much procedural hassle regarding procurement. But the Public Procurement Act of the government fastens Nepal Telecom, which is a government-owned company.

“The equipment that Ncell can easily procure in the desired time frame, Nepal Telecom cannot,” Bimal Wagley, the chairman of the Public Enterprise Directive Board, said.

“And then how can the public enterprises compete with private companies.” He suggests putting result-oriented provisions in the act rather than the present process oriented ones.

OVERSIGHT AGENCIES AND PPMO

The government formed a separate agency -- the Public Procurement Monitoring Office (PPMO). But the oversight agencies became more proactive than PPMO on procurement issues.

PPMO has not found its absolute role in the monitoring of public procurements.

Because of this, the executing agencies have shown unwillingness in prompt decision-making for the sake of completing development projects in time.

In this regard, the government should strengthen PPMO using the amendment. It has to clearly define the role of PPMO through the act.

Source: Republica