Thursday, December 13, 2018

Will the proposed new law to bypass existing procurement law accelerate project execution?

The government has drafted a new law that will allow it to bypass existing public procurement process and award projects worth Rs50 billion and above to developers through direct negotiation. 

The proposed new law allows the government to award projects to probable developer without competitive bidding under three conditions: (i) when no proposals are received during the public procurement process initiated by the authorities; (ii) when the project is based on new concept and technology; and (iii) when the estimated cost of the project is Rs50 million or more. The government will invite for competitive bidding for projects with estimated cost between Rs25 and Rs50 billion, but if only one company applies for it, then the proposed law allows the government to award projects to that company. If no company bid for projects, then government can award it directly to a potential developer. A committee chaired by the prime minister will have a final say on these projects. The committee will be represented by ministers from line ministries responsible for implementing the project, finance minister, vice chairman of National Planning Commission, chief secretary and secretary at PMO overseeing the project. 

The proposed law allows the PM-led committee to decided on the following projects: 50 km two lane road, 25 km four lane road, 2 km tunnel, international airport, 200 MW and above hydroelectricity projects, 220 KV and above transmission line, 100 km railway, 20,000 hectar and above irrigation project, 100 million and above per day drinking water project, and projects above Rs25 billion. 

Politicians and bureaucrats have been arguing for a fast-track approach to finalizing procurement for a long time. One of the core reasons why capital spending is low and spending in the last quarter or month is high is due to delay in procurement. Budget used to be unveiled in mid-July, then project authorization took another two months followed by a month or so of preliminary procurement work. Then government and project offices closed down during festival season. By the time festival season was over, five to six months already lapsed. Government awarded projects at the end of second quarter and those who won bidding of the project took some time to start work (some contractors underbid, took advance amount and forgot about finishing work on time). They felt pressure to spend fast and more towards the end of the year. They tried their best but still could not finish work. Their application for payment against physical progress is cleared in the final quarter or month. This was (and unfortunately is) the process of budget execution. 

To get out of this vicious circle of timing, (under)capacity and low spending, politicians and bureaucrats were looking for a solution.  Public Procurement Act was amended in 2016, but it didn’t work. Budget was unveiled one-and-a-half month before the start of fiscal year (it is written in the constitution now), but still it is not working as expected. Some procurement processes were cleared by the Cabinet, but still it did not work. So, the last weapon now is to bring out a law to fast-track awarding of contracts by bypassing procurement process for national priority projects. Here is a pretty detailed review of various aspects related to public procurement in Nepal. Here is an article on the reasons behind chronically low capital spending

Without sufficient checks and balances, it opens up avenues for foul play by politicians: awarding contract to select developers from particular country without vetting their credibility and ability to take on the task, escalate cost to ensure that it is above $500 million so that the project is governed by the new law, etc. 

The issue is not about awarding of the contract through a fast-track process. The main issue is with the preliminary work that needs to be done prior to the awarding of contract: land acquisition, financial adequacy, contract management (by both government and principal contractor), safeguards assessment and clearance (social and environmental), availability of adequate inputs for construction (raw materials, human resources, machinery, etc), and monitoring and evaluation capacity. ]

If the new law doesn't address these issues plaguing capital spending and focus on fast-track awarding of big projects to select developers, then the situation isn't going to be any different from what we are witnessing now. In fact, it might escalate true cost of project and there will be an incentive to award such project to select developers. A case in point is the 1200 MW Budhi Gandaki hydroelectricity project, which was re-awarded to a Chinese company without competitive bidding.