Cartel of contractors in cahoots with govt officials swindle billions of rupees, govt report reveals

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In Nepal, half a dozen contractors have monopoly over construction contracts. The cartel holds sway over entire construction administration and political sector. They huddle together before bidding for large infrastructure projects.  A report by Public Procurement Monitoring Office under Prime Minister’s Office has exposed their workings.

-Rudra Pangeni, for Center for Investigative Journalism

This story is from a period when Nepal was under Panchayat regime. The district administration office of Jumla issued a notice to buy a horse. The office said it was looking for a horse with a star in its forehead, a yellow mark at its back, with a short tail and checkered hoof. After the notice, horse owners of Jumla were excited and offered their horses to the district administrative office. The officials checked the horses to see if they met the criteria. Eventually, one horse was identified as the one meeting the criteria. It belonged to the chairman of district Panchayat.

 

It turned out that the criteria was deliberately set in such a manner so that only that horse will qualify. This story from decades ago might be apocryphal, but it illustrates how government officials collude with contractors to award them contracts. This trend, however, has continued even in the republican era. Government officials set criteria that suit a few big contractors.

A 65-kilometre Mugu-Humla road serves as an example of this collusion. Any contractor with an experience of road construction within Nepal should have qualified for bidding for the project. But a criterion was added saying the bidder must have an international experience. The criterion was made in order to allow few construction companies including Kalika Construction at shot at it. Bikram Pande, a minister for forest and land reform, is the owner of the company.

At the 19th convention of Federation of Contractors’ Association on September 3, 2017, Bijay Paudel, a coordinator of the Unified Marxist-Leninist party’s Department of Physical Infrastructure, accused the contractors of engaging in ‘match fixing’ by setting criteria that only suit handful of them.  “This way of doing business is harmful for our country. Small contractors are bearing the brunt of the syndicate,” he said. “About 10 percent of contractors have held all major contracts. The rest are sitting idle,” he told the gathering at the five-star Hotel Soaltee Crown Plaza in Kathmandu. His remarks drew applause from contractors working on small and medium-sized projects. No one opposed Paudel’s remark that day.

Big infrastructure projects for road and buildings are awarded not through a rigorous vetting process, but based on favoritism. In this, the country’s bureaucracy and politicians are in cahoots with contractors. Among the most influential contractors are Ramesh Sharma of Sharma and Company, Bikram Pande of Kalika Construction, Jaya Ram Lamichhane of Swachchhanda Nirman Sewa, Jip Tshering Lama of Lama Construction, Mohan Acharya of Rasuwa Construction and Rishi Subedi of Tundi Construction.

Bidding  in name only

At a parliamentary committee meeting of stakeholders in August 2014, lawmakers agreed to set a threshold of 600 million rupees for foreign companies looking to bid for infrastructure projects in Nepal. Meanwhile, contractors organized a five-day trip for seven lawmakers and six parliamentary officials to Singapore and Malaysia. The trip cost Rs 2.5 million. Half of the fund for the trip, however, was handed from a committee under Ministry of Physical Infrastructure and Transport. The fund is collected from each contract awarded to the contractors for their capacity building.

Prakash Jwala, CP Mainali, Gopal Dahit, Janardan Dhakal, Jagdish Narsingh KC, Ratna Sherchan, Sher Bahadur Tamang were among the lawmakers in the trip. Though the lawmakers went on the trip without informing the parliamentary committee, the Finance Committee in its annual report of 2015 mentioned the visit, saying the lawmakers went on a field trip and held discussions with Malaysian finance ministry officials on procurement process.

The fact was it was a junket funded by Federation of Contractors’ Association of Nepal (FCAN). The real motive behind it was to influence lawmakers to raise the threshold for international contractors bidding in Nepal to Rs 1 billion. This happened while the amendment to the Public Procurement Act 2007 was pending at the parliament.

Indeed, they scored victory right after the trip. According to the Public Procurement Act 2007 (first amendment 2016), international companies are barred from bidding for projects less than 1 billion rupees. The new rules ensured big Nepali contractors have monopoly over contracts ranging between Rs 700 million and Rs 1 billion because small and medium contractors lack experience to bid for such big projects.

Even before publication of tender notice, big contractors meet officials of various departments including Department of Building, Department of Irrigation and Department of Roads and strike a deal. They persuade officials to create a package of contracts with total amount more than 700 million rupees. This makes only a handful of contractors eligible for bidding. This also violets a provision of Public Procurement Act, which says, ‘The tender should not disqualify contractors of certain class.’

After striking such a deal, the contractors divide civil works among themselves. The contractor who is receiving the contract proposes a cost one percent less than an estimated cost. In order to show it was a competitive bidding, another contractor of the group proposes a slightly higher cost. As a result, one of the group members wins the contract. “Tender notice is issued only for formality. They know which company is going to win the bidding,” an official of FCAN said on condition of anonymity. “In the last two years, about Rs 55 billion’ worth of contracts have been handed in that way.”

While collusions like these have made a mockery of Public Procurement Act and its regulations, its primary beneficiaries include a handful of contractors. This also discourages competitive bidding. Because big contractors don’t have to bid for projects, they win contracts at maximum price. Lack of bidding for projects allows them to make up to 25 percent in profit. They use this large sum of money to peddle influence among politicians and government officials.

“The syndicate system flourished after two road projects: Dharan-Chatara and Galchhi-Mailung. Most big contracts go to six big contractors. Smaller contractors are forced to cling to them to find work,” said a former official of FCAN. “Smaller contractors subcontract work from the big ones. The big contractors draw up to 10 percent commission even without any work.”

Dozens of infrastructure projects in 18 municipalities in Tarai including Dharan-Chatara road, Galchhi Mailung Syafrubeshi road, Postal Highway, roads connecting district headquarters (commissioned by Department of Local Infrastructure Development and Agricultural Roads), Mid- Hill Highway have already been handed to big contractors without following competitive bidding process.

In total, they have won an estimated 55 billion rupees worth of contracts. The losses to the government due to lack of fair competition from these projects are in a range from Rs 8 billion (15 percent of the estimated cost of project) to Rs 14 billion (25 percent). Had the contractors gone through competitive bidding as outlined in the Procurement Act, the state would have have saved billions of rupees in revenue. But the big contractors have pocketed the money. This has harmed the efforts to promote good governance and maintain fiscal discipline.

Public Procurement Monitoring Office (PPMO) has carried out study on the impact. Its latest annual report 2074 has acknowledged the fact that such collusion had prevented competitive bidding for awarding contracts.  “In the last few years, against the fundamental principle of law, procurement policies have been modified so that only certain companies can bid for tender without any competition or by limiting competition.” (page 31 of the annual report 2074) The report has detailed information on how collusion affected more than Rs 25 billion worth of the road projects including Dharan –Chatara and Galchhi-Syafrubeshi road.

The report was submitted to Prime Minister Sher Bahadur Deuba in August by Binod KC, the secretary of PPMO. “The tendency to propose big project packages aimed at limiting competition during bidding for huge construction projects has increased,” the report said. “This has a number of implications: the misuse of public money, contracts awarded to a handful of contractors, which causes delays in completion of projects.”

Now contractors themselves have begun to openly talk about corruption that has plagued the sector. “There has been a series of collusions. Small tenders are merged to make projects worth 800-900 million rupees,” said Yaksya Dhwaj Karki, former president of FCAN and proprietor of Sky Builders Pvt Ltd.  The recent contracts of Rs 10 billion Postal Highway, according to him, are an example.

“We have become helpless in the face of such collision. The bidding criteria for the recent tender of Mid Hill Highway were set in such a way that only big contractors were eligible. We visited the project office and Public Procurement Monitoring Office and made our point, but nothing was done,” Karki said.

“The 1 billion threshold was meant to protect Nepali contractors and allow 500 active contractors to bid for tenders,” Ramesh Sharma, former secretary of Public Procurement Monitoring Office. “If the proposed cost is on par with estimated cost and if this is limiting competition, the provision must be revoked.”

The big six contractors

At present big contractors are hands in gloves with government officials of Department of Urban Development and Building Construction and Department of Roads to package contracts as per their needs. They pay officials in exchange for contract awards that range between Rs 700 million and Rs 1 billion. This will ensure that only half a dozen big contractors are eligible for bidding. It is called ‘packaging’ in contractors’ parlance.

These handful of contractors are so powerful that they can easily influence Prime Minister, Ministers and politicians. In April 2016, they persuaded Minister for Physical Infrastructure Bijay Kumar Gachchhadar to divide the 318-kilometre Hetauda-Chatara Highway into two contracts. Similar package was created for bridges along the highway: 43 bridges to be constructed in the eastern section and 33 in the western part only in two packages against the normal practice. Then, the all-powerful contractors handed the Galchhi-Mailung Syafrubeshi road project to their associates. The cabinet meeting took the decision to award contracts to foreign firms with Nepali joint ventures. Madhav Karki, the Director General of Department of Roads, added a provision that required 25 percent investment of Nepali companies in such joint ventures.

As a result, only those six contractors were eligible for the bidding process.

The six contractors won contracts for all five projects including three roads and two bridges. Then, they handed the civil works to all six. The government report has exposed this. The latest report by Public Procurement Monitoring Office said: “A total of 11 firms including nine Nepali and 3 foreign competed in the tender process. All 11 firms received contracts in one way or the other. The contract amount is only one percent less than project’s estimated cost. Only one firm has proposed less than project estimated cost in each packages. All four bidders were awarded with contracts.” The report said, “It is not hard to surmise that the packages were of huge amount and the number of contractors eligible for bidding very limited.”

After reviewing five contracts, the report said in its conclusion: “The fact that among all the tenders, only one had contract amount more than project estimated cost, the contract amount and project estimate cost were around the same figures, certain firms were repeated and all bidders ended up getting some contracts shows that this was not a coincidence but a deliberate manipulation.”

After getting wind of the collusion, the Public Procurement Monitoring Office on July 5, 2016 urged Department of Roads and the Ministry to stop the process, but it didn’t receive any response. Despite being well aware of the collusion, the PPMO under Prime Minister’s Office, let it go ahead.

According to Public Procurement Act, such collusion leads to the contractor being blacklisted for 1 to 3 years and cancellation of the contract. When asked about this, Surya Nath Upadhyay, a former chief commissioner of Commission for the Investigation of Abuse of Authority (CIAA), said, “To package contracts to suit certain contractors and collusion in procurement is 100 percent corruption. The CIAA should investigate these cases and file charges of corruption against contractors and officials involved in it.”

Trampling on criteria for bidding

On September 12, 2017, government published a tender notice for 12 packages of the eastern section of Mid Hill Highway. According to the Standard Bidding Document, the bidder would have been qualified if it had experience in earthen works that was 80 percent of estimated cost. But the criterion was modified to say 100 percent, which limited the competition. It required contactors to have such experience in one year, whereas an accumulated experience gained over several years would have qualified them for the contract.

On October 23, 2017, a delegation led by Bishnu Bhai Shrestha, caretaker president of FCAN, met Satyendra Shakya, the head of the project, to express their concern. Shakya told the delegation that he had included the provision after he received a circular from his department. The delegation also met with officials of PPMO, but its grievances weren’t addressed.

The transfer of secretary of PPMO illustrates the kind of power the big six contractors exercise. Karki, the former president of FCAN, said, “After our meeting, secretary Binod KC agreed to amend the provision. But two days after the process began, he was transferred to Ministry of Defense. Then, the caretaker secretary at the PPMO didn’t want to follow up on his predecessor’s decision.”

In another instance, the head of Postal Highway project, Balaram Mishra, who went against the contractors’ suggestion, was transferred to Department of Roads. On August 16, 2017, he issued a tender notice for 12 projects of over Rs 10 billion in province 2. He was transferred in less than a week. Most of those contracts were awarded to the six contractors. Sharad Kumar Gauchan, the president of FCAN, was killed on October 9, 2017. He was reportedly killed after failing to satisfy his allies in distribution of commission for the contracts.

Kedar Kandel, a former central working committee member of FCAN, said, “The Big contractors were not behind the murder, but they were responsible for creating a situation where he became a target of criminals.” Gauchan himself wasn’t a member of the six, but he had supported them.

Three years ago, contracts for a 29 kilometre section of East-West Railway were awarded after ‘matchfixing’ by limiting the competition among a handful of contractors. The CIAA began investigating Ananta Acharya, the Director General of Department of Railway, for collusion in evaluation of bidding. Acharya, who is back at the Department of Railway, was grilled by the CIAA. But soon after, the CIAA put the case on hold, paving the way for the project to move forward.

Two years ago, CIAA had also initiated investigation into collusion at the western section of Mid Hill Highway and Dharan-Chatara and Galchhi-Syafrubeshi road. The CIAA summoned secretaries and questioned them. But until now CIAA hasn’t filed cases against any of the big contractors at the Special Court. This shows that the big six contractors can influence even the anti-graft body. When asked about the corruption related to these projects, Bishnu Prasad Pokharel, a spokesman at the CIAA, said he couldn’t talk about it since it was under investigation. After repeated requests, he excused by saying that he would have to consult the investigating office. He has not available to comment after that.

Syndicates run the show

Once in a while, big contractors let small and medium sized contractors join them in joint ventures for construction projects. But small and medium sized contractors have to pay 3 to 10 percent commission in order to get the work. For example if a contract is worth Rs 800 million, the six big contractors receive anything between Rs 240 million and Rs 800 million.

As a joint venture, the medium sized contractors receive letters of experience and an annual turnover. Fearing that they might lose projects that they have already received, they don’t disclose details. “Cartelling and corruption is so rife in the sector that public construction administration has returned to pre- e-biding stage. Earlier, contractors mobilized goons on the day tender notices were issued. Now instead of that, the big contractors engage in match fixing,” an industry insider said.

Government officials profit from match fixing. Assured about being awarded with contracts, the big contractors pay them more than their usual commission. “The rate of commission for officials has increased four times,” a top government official said. “Because they are rewarded with hefty amount of commission for large infrastructure projects, politicians and their middlemen are happy to allow these syndicates to run the show.”

 

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