Making a killing on contracts
Why do the Nepali people almost always get the short end of the deal in foreign-funded projects?
NAVIN SINGH KHADKA
FROM ISSUE #188 (19 MARCH 2004 - 25 MARCH 2004) | TABLE OF CONTENTS
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What do the Kali Gandaki, Middle Marsyangdi and Melamchi projects have in common? Answer: they will all end up costing much more than originally planned because of faulty contracts, and the Nepali people will end up bearing the extra cost.
The types of bidding systems and contracts the government, donors and foreign companies adhere to leaves the country vulnerable to almost unlimited cost overruns, which are then passed on to Nepali consumers by the government. Experts say the only reason this works is because government officials and the private contractors are in cahoots to manipulate costs.
They cite Nepal's largest hydroelectric project, the Kali Gandaki A, as an example. The Asian Development Bank (ADB) financed project managed by Nepal Electricity Authority (NEA) selected the Italian contractor Impregilo spA because it had the lowest bid at $130 million for civil construction of the 144MW project.
But by the time the project was completed with a two-year delay, the contractor had billed $55 million more than the origional bid. The contractor blamed labour disputes, political instability and geological complications.
Now, it looks like the Middle Marsyangdi project will go through similar overruns. A conglomerate of German, Spanish and Chinese contractors, Dywidag Dragados CWE, has already added E65 million to the civil construction cost that was agreed at E77 million in the bidding process even though only 30 percent of the work has been completed.
The 70MW project in Lamjung has already been delayed by at least two years after a protracted legal battle between the NEA and the contractor. The contractor won the first round after the NEA agreed to pay the E77 million overrun. The next round, NEA officials say, could begin anytime. With this week's Maoist blockade, the construction has again come to a grinding halt.
Experts interviewed for this investigation told us the whole process is a scam because contractors take advantage of the corruption and domestic turmoil within Nepal to practice 'dive bidding': quoting unrealistically low prices with the intention of padding it with huge overruns as the project progresses.
Next, it looks like the turn of the mammoth Melamchi Water Supply Project (MWSP), which aims to bring snowmelt through a 27km tunnel to Kathmandu Valley. Having received 30 percent of the Rs 450 million deal, the Korean contractor, Haniel Koneko, has abandoned the road construction component of the project without even finishing 20 percent of the work. Just like the Kali Gandaki and Middle Marsyangdi, the Korean contractor in Melamchi has also demanded compensation.
"They want compensation for everything under the sun," complains MWSP Executive Director Dhruba Bahadur Shrestha. "They want to be compensated for bandas that happen elsewhere, they want compensation because it is too windy, or too sunny."
There is a thread running through all these projects: faulty Federation Internationale des Ingenieurs Civile ( FIDIC) contracts. They come in two types, open-ended ones with options to add cost for unforeseen overruns, and closed contracts with a cap on project cost. In Nepal most of the government-owned and donor-aided projects have had open-ended FIDIC contracts.
By themselves, cost overruns are normal. But in countries with weak regulations or political uncertainty, overruns can sometimes be huge.
MWSP's Shrestha doesn't mince words: "The open-ended FIDIC contract has been the root cause of the problem in our project. It lets the contractors do whatever they want." Often, foreign consultants side with the contractors. When contacted, none of the consultants involved in Kali Gandaki, Marsyangdi or Melamchi projects were willing to talk.
The real question is: why isn't the government doing anything about it? The suspicion is that key officials may be hand-in-glove with foreign contractors. Every time the contractors' bill cost overruns, the project comes to a halt, but the government always gives in-as happened in January with Middle Marsyangdi and last year with Kali Gandaki. Worse, despite the terrible track record of open-ended FIDIC contracts, the government keeps signing similar contracts for new projects.
Donor officials say there is nothing wrong with FIDIC contracts, and it is standard operating procedure all over the world. "The contract has an internationally accepted standard and therefore we approve it in the big projects we are involved in," says Peter Logan, who looks after Melamchi in ADB Kathmandu.
Does that mean FIDIC contracts will remain a development hazard? Nepali financial experts say the government should now press for FIDIC close-ended contracts and fix the price beforehand. "That way there will be no chance of cost overruns and time overruns," says Ratna Sansar Shrestha, a senior chartered accountant.
The Khimti and Bhote Kosi hydropower foreign joint ventures are cited as examples of how the private sector deals with the issue. Both projects had FIDIC contracts, but these were close-ended. The civil contractor built Khimti at the initially agreed cost of $140 million, and even finished 12 days before the deadline. Bhote Kosi was also built at the agreed price of $48 million.
Water management analyst, Ajaya Dixit, says: "If the private sector can do it, it is a mystery why the government can't." Although the closed FIDIC contract may initially cost more, they allow less room for hanky panky than the open-ended ones. It is clear that the government needs to close this corruption loophole, so that future generations of Nepalis don't have to pay for the sins of those currently in power.