Procurement and Contracting System Suitable to Infrastructure Procurement

1. Procurement and Contracting System Suitable to Infrastructure Procurement Presentation to the World Bank Washinton DC Dinker Sharma November 6, 2008

2. Transparency in Procurement • Public Procurement very large portion of the national budget is spent for acquisition of goods and services • Public Procurement is one important activity of governance with high potential for corruption • Includes large chunk of money • Includes large contracts • 15 to 70% of the budget ( 66% in case of Nepal) • Necessity of Transparency and Competition • Is tax payers money • The image of any government , particularly in developing world, is largely influenced by the quality and integrity of public procurement.

3. Legal Framework (Background) Procurement in Nepal was framed under • Financial Procedure Act • Financial Administration Regulation (FAR) Other Relevant Act • Revenue and Government Contract Act, 1963 amended in 1968 • Construction Enterprise Act 1999

4. Other Applicable Laws • Taxes • Customs • Insurance • Labor • Banking • Export and import • Foreign exchange • Environment Absence of an applicable law under one umbrella made procurement process nontransparent. Public Works Directive (PWD) was framed under these different applicable Laws. PWD relates to different contractual and procurement matters.

5. Proposed Framework in Nepal • Public Procurement Act ( PPA) • Public Procurement Regulations ( PPR) • Delegation of financial powers • Set of Standard Bidding Documents • Technical Notes and Guidelines • Regular Training and education program

6. Principles of Public Procurement • Value for money • Transparency of process and decisions • Non discrimination of treatment of vendors • Accountability of public officials • Quality of works, goods and services • Integrity in use of public money • Support to public policies • Responsiveness and efficiency

7. Public Procurement in PPA • It is acquisition of Goods, Works and Services, through expending from public purse by all • Govt. Offices • Constitutional Bodies • Statutory bodies • Public Enterprises – Majority owned by the Govt. • Local Government

8. Procurement Entity • All Govt. Ministries, Departments, Projects and Offices • Constitutional Bodies • Statutory bodies • Public Enterprises – Majority owned by the Govt. • Local Government • HMG Grant or Loan funded Institutions • Any other institutions specified by Govt. of Nepal

9. Standard Framework for Public Procurement System • Procurement Law and Regulations • Policy, Oversight or Regulatory Agency • Independent Review Body (Appeal Body) • Set of Standard bidding Documents • Manual and Directives • Education and Training (These requirements are incorporated in the Procurement Act and Regulation)

10. BASIC STRUCTURE OF PROPOSED ACT • PREAMBLE • PRELIMINARY • INSTITUTIONAL ARRANGEMENTS • METHOD OF PROCUREMENT • BIDDING PROCEDURES • PROCEDURES FOR CONSULTING SERVICES • OTHER METHODS OF PROCUREMENT • MANAGEMENT OF CONDUCT • REVIEWS • CONTRACT ADMINISTRATION • OTHERS

11. Institutional Arrangements • Procuring Entity • Procurement Unit • Bid Evaluation Committee • Public Procurement Monitoring Office (PPMO) • Independent Review Board/ Independent Appeal Board • Appellate court

12. Project Cycle National or Local level needs Benefit Monitoring and Evaluation Project Identification Operation and Maintenance Project Preparation Project Implementation Project Appraisal Procurement of Goods, Services and Works Project Funding G O N Loan or Grant Negotiations Donor Appraisal

13. Actors in Procurement Client (GoN) Donors Financing Agencies Training facility, HRD needs Equipment Management Users (Stakeholders) SCAEF CAN Constructors Consultant Insurance, Statutes and Regulations Foreign Consultant Equipment Suppliers, Manufacturers, Subcontractors, Financers, Labors

14. Highlights of Procurement Act And Regulation

15. Highlights • Procurement Types Works Goods Services Other Services

16. Highlights Procurement under Works and Goods • Open bid - Single/Two Stage Bidding • Limited Bidding/ Shopping or Direct Procurement • Sealed Quotations • Community Participation (User’s Committee, Labor Based Approaches) • Force Account • Petty Procurement

17. Highlights Procurement under Consulting Services • Quality and Cost based Selection • Quality based Selection • Quality and Fixed Budget Selection • Quality and Least Cost Selection

18. Procurements G/W/S Frequently Used Methods Other Specific Methods Sealed Quotation ICB Shopping Direct Purchase Community Participation in Procurement NCB Force Account Single/Double stage, single/two envelop Procurement Under BOO/BOT/BOOT Performance-based Procurement Note: ICB: International Contract Bidding NCB: National Contract Bidding

19. Highlights Bidding Process • Bids to be purchased at two or more places and dropped and opened at one place • Modification and withdrawal provisions • Contract is evaluated by a team consisting of an Evaluation Committee. • Bidder can be requested to deposit additional Security if the price are unbalanced and unreasonable. • Award of the Contract to a Substantially responsive lowest evaluated bidder rather than to the lowest bidder, even if one bid is submitted. • Provision of Appeal before the award of Bid

20. Highlights Bidding Process • Bidder’s right to obtain bidding documents by mail or in person • Evaluation practices of bids according to the pre-disclosed criteria • No post bidding negotiation on price with the lowest or any other bidder • Extension of Validity of Bids with due concurrence of the Bidder • Special privileges to PEs for securities

21. Highlights Bidding Process • All Bids to undergo Pre or Post Qualification Bidding Procedure • However, eligibility and registration status is necessary for Bids amounting to less than NRs 6 million • Removal of restricted Bidding system • Issue of survival of Construction Industry • Small Contractors to be protected - still under discussion. Preparation of Standard Bidding Documents are underway.

22. Highlights Types of Standard Bidding Documents – necessary (still under consideration) • Sealed Quotation for value NRs 0.15~1 m • Small Contract I for value NRs 1~6 m • Small Contract II for value NRs 6~30 m • Medium Contract for value NRs 30~100 m • Large Contract for value > NRs 100 m

23. Highlights Risk Sharing Provisions • Securities : Bid or Performance securities in the form of Bank Guarantee or cash. • Additional Guarantee for advance mobilization. • Provision of additional performance security for unbalanced and unreasonable bidding. • Insurance : Insurance is mandatory for amount exceeding NRs 1 million • Delay Damage or Liquidated Damage for Delay

24. Highlights Risk Sharing Provisions • Price Adjustments • Variations : variationissue is under debate • Extension of Time • Termination of Contract • Settlement of Dispute • Provision of Debarment • Conduct of public entity • Conduct of Contractors/ Consultants • Debarment by Authorized Body, Period of Debarment, Opportunity of Bidder for appeal and clearance

25. Highlights Dispute Settlement • Arbitration Act allows contract to make provisions for Dispute Settlement • Dispute Settlement at different Levels • Adjudication for value less than NRS 100 m or Dispute Review Board for value more than NRs 100 m • Arbitration • Litigation beyond arbitration

26. Highlights Provision for e-procurement - some success - e-bidding achieved

27. Contract Experiences

28. Comments from the Engineer • Contractor does not understand the measurement rules despite explaining in the pre-bid meeting. • Contractor does not read Bid document • Lack of record keeping and substantiation in genuine dispute cases • Contractors depend on sub contractors or petty contractors without notifying the Engineer • Contractor lacks confidence in BoQ rate preparation. • Contractors submit claims with no contractual basis and with insufficient back up information.

29. Comments from the Employer • Small contractors never make claims, only large contractors do • Some contractors deliberately go to arbitration than amicable settlement as they make more money out of it. • Some contractors engage specialist (dispute experts) from the onset with intention to seek extra payment. • Dispute experts are more keen on Contractors claim success than on the Employers. • Some contractors will not undertake works until payment is agreed or made.

30. Comments from the Contractor “My biggest mistake was running this job like a Construction Project instead of a lawsuit” A contractor lamented about his project which was doomed from the beginning – incomplete and uncoordinated plans, late access to site, disruption to works, delayed payment, and exceptional escalation.

31. You recognize that your strength are in doing the job you were hired to do. • But suddenly you find yourself in the burden of world of notices and a high stake financial losses. • The only way is to find out some other ways to come out of the situation.

32. Comments from Contractor • Late payment by Engineer/ Employer. • Denial by Employer to pay interest on late payment even if provided in Contract. • Non payment of work executed as per the instruction. • Instructions given to Contractors are either unclear or not understood. • Delay in providing design drawing and subsequent. This has resulted in Project delay and increase in overhead costs plus equipment idle charges.

33. Comments from Contractor • Late handover of site by the Employer. • Verbal instruction not substantiated in writing. • Employer lack adequate knowledge of Contract. • Employer does not take dispute seriously.

34. TO FEEL THAT YOU ARE IN CONTROL, BE SURE THAT YOU HAVE UNDERSTOOD YOUR CONTRACT

35. Thank You