The new AP government taken a bold initiative to stop corruption in contracting system. With the motto to become a pro-poor government, it has taken some corrective steps. What is the basis for the proposed corrective steps. The new government is considering that:
1. Many contract works in the earlier regime have been sanctioned without following the engineering works procedures in vogue;
2. The past government has not followed business rules with respect to works contracts and either changed or sacrificed the rules while sanctioning the works to various contractors;
3. The works were issued without complying the FRBM Rules and the same will become a huge burden on the state exchequer.
4. In the situation of thin financial resources, the new government is thinking that it is not wise to continue such works.
Hence, the AP Government has taken some harsh steps which are creating ripples in the contracting firms. The government is taking actions in the following manner:
1. Cancellation of works not yet commenced:
The UO Note No. Fin.01 - FMUOASD (WR1)/80/2019 (Comp No 898809) dated 29.05.2019 is giving directions to all the departments to cancel all work contracts which were sanctioned prior to 1st April, 2019, irrespective of whether such works are sanctioned in a right manner or wrong manner, they will be terminated immediately. A blanket termination of all works, whether small or big, whether the works of state departments or the works funded by World Bank, ADB, or JICA and whether the contracts of Lumpsum, EPC, or any other type of contracts including supply contracts will be terminated instantly.
2. Suspension of Works Completed below 25% Value:
Through the UO Note of F-1/2019 the government further instructed all departments to suspend the payment of all works under progress, if the progress of works is below 25% of originally estimated value. As such any works if not completed more than 25% in value (not in physical volume) will be suspended immediately unto review each work and decided by the government whether continue or close for forever. All such works will be suspended whether they are not completed over and above 25%, even for the reasons beyond to the control of the contractors also. The works which are not achieved more than 25% progress due to lack of sites, delay in designs or due to any other obstructions including funding problem also will be stopped immediately.
The government directed all the departments to STOP PAYMENTS to all such works with immediate effect. The blanket ban on payments will be affect such works which have been completed up to 25% on ground; but payments received were less than 25% also. However, any work has been completed over and above 25% and bills also certified and recommended for payment, but payment is not yet realized may be allowed to continue.
However a panic situation engulfed all the contractors in the state. This action will be a long lasting effect in the state infrastructure development, if not remedial actions also not started simultaneously.
What about Big Projects in the midway?
The UO Note issued on 29.5.2019, just a day before the swearing in ceremony of the new government is dealing with the above two types of works only. Works not yet started and works executed below 25% value. There is no specific details in the UO note on Big Works in execution and have crossed the 25% value of 'Original Contract value'. However, the statement of the incumbent Chief Minister on 30.5.2019 on corruption in construction contracts and actions proposed if becomes a policy in future, similar harsh steps will be extended to all contracts.
A Big Challenge before the Government:
The new government is taking a massive legal challenge by cancellation of contracts and by suspension of payments. The mood of the government is clear. It may take all the major projects in the state also to the task. No doubt this will turns into a great legal battle. When the government is determined for "reverse contracting" which term is having no understandable meaning in the indian construction sector, it may be construed as reversal of contracting system of earlier government only. It is not yet clear, whether the government move is for reversal of existing contracts. it the intention of the government is to undone the past government contracts, the same will create severe repercussions and lead to several legal disputes. Further,the projects under process will suffer and the cost of such reversal actions will always be costly to the exchequer. Hence, the government has to move cautiously. The prescription shall not be turn into a new problem.
What is Reverse Contracting?
It is not a new invention. It is already there in the global construction sector. Many countries have implemented; but the experiences are not good. Thailand and Indonesia are still using reverse auction process in their e-procurement for construction contracts.
Reverse Tendering will be conducted in two stages. In the 1st stage Pre-Qualification of Bidders will be conducted. In the 2nd stage, pre-qualified bidders will be asked to submit their competitive bids. FIDIC forms also using such two stage bidding. However, in the reverse auction system bidders were allowed to change their bid rates several times. The bidders will be given chance to further reduce their prices within a specific period. Thus, l, the government may get the lowest price offers for the works from highly qualified contractors, who are technically and financially sound. But all over the world, the experiences in Reverse Contracting found negative. Quality compromise is the major problem encountered by the governments. Abandonment of works in the middle also experienced. Ultimately, the governments have been forced to incur huge costs on account of prolongation of project are for retendering.
In the present contract system also, when cut throat competitions emerge, contractors are quoting abnormally low bids. However, projects for which bidders have quoted with lowest prices have actually not grounded in time or if grounded not completed. Contractors have abandoned works to save huge losses. Retendering of the same with revised designs caused thousands of crores additional cost. Hence, it is not what system you are following is the question, but how your are implementing the same is the key issue.
Need of the Hour:
The new government's initiative to review and redefine the contracting systems is appreciable. However, it should not seem as a political decision to reverse the earlier establishment's actions. The system correction should be the lead line. Contracting is an entrepreneurship arena. It is known fact that several contracting firms have become insolvent in the recent past. Government itself cannot construct the projects. Government needs private entrepreneurs in all fields, including construction sector. Evolving right systems is the need of the hour. Managing the systems in a proper manner is very important. Any good system also succumb to corruption, if fine tuned management system is not there. Now construction contracts have become very complex in nature, wider in scope and cumbersome in implementation.
Constructability Review Boards:
The malady lies in the bid preparation, project planning and the dispute resolution system. There is no coordination in between the planning, bidding and implementation. Many projects are failing because they are being planned without proper design, without acquiring the sites and deficit in funds. Inappropriate dispute resolution system is another major problem. The new government has to review the APDSS. Arbitration shall be made compulsory in all government contracts and all engineering departments shall be provided with in house legal divisions to enable the departments to maintain contracts in line with the terms of the agreement. Before issuing any tender, all works shall be reviewed by CRB (Constructability Review Board) who will verify whether the work is planned properly - its timing, designs, sites acquisition, budgeting, risk evaluation, ability of department etc. shall be examined before launching the tenders. The existing pattern of pushing the projects in haste for political expediency will lead to inappropriate contracting and yield to corrupt practices. Whenever projects were planned without constructability review, it is certain such projects will not be completed as planned. Will the new government take appropriate steps in this direction, setting aside the narrow political interests? Whether the present initiative will be carried out until achievement of positive results?
The new government's initiative is good; but it should move forward with more appropriate agenda and goal.
- Krishna V Rao, Director, Professionels*
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*Professionels taking up Contract Change Management and Arbitration Dispute Resolutions and can be contacted through krishna@ professionels.in. Mobile: 7780784933
1. Many contract works in the earlier regime have been sanctioned without following the engineering works procedures in vogue;
2. The past government has not followed business rules with respect to works contracts and either changed or sacrificed the rules while sanctioning the works to various contractors;
3. The works were issued without complying the FRBM Rules and the same will become a huge burden on the state exchequer.
4. In the situation of thin financial resources, the new government is thinking that it is not wise to continue such works.
Hence, the AP Government has taken some harsh steps which are creating ripples in the contracting firms. The government is taking actions in the following manner:
1. Cancellation of works not yet commenced:
The UO Note No. Fin.01 - FMUOASD (WR1)/80/2019 (Comp No 898809) dated 29.05.2019 is giving directions to all the departments to cancel all work contracts which were sanctioned prior to 1st April, 2019, irrespective of whether such works are sanctioned in a right manner or wrong manner, they will be terminated immediately. A blanket termination of all works, whether small or big, whether the works of state departments or the works funded by World Bank, ADB, or JICA and whether the contracts of Lumpsum, EPC, or any other type of contracts including supply contracts will be terminated instantly.
2. Suspension of Works Completed below 25% Value:
Through the UO Note of F-1/2019 the government further instructed all departments to suspend the payment of all works under progress, if the progress of works is below 25% of originally estimated value. As such any works if not completed more than 25% in value (not in physical volume) will be suspended immediately unto review each work and decided by the government whether continue or close for forever. All such works will be suspended whether they are not completed over and above 25%, even for the reasons beyond to the control of the contractors also. The works which are not achieved more than 25% progress due to lack of sites, delay in designs or due to any other obstructions including funding problem also will be stopped immediately.
The government directed all the departments to STOP PAYMENTS to all such works with immediate effect. The blanket ban on payments will be affect such works which have been completed up to 25% on ground; but payments received were less than 25% also. However, any work has been completed over and above 25% and bills also certified and recommended for payment, but payment is not yet realized may be allowed to continue.
However a panic situation engulfed all the contractors in the state. This action will be a long lasting effect in the state infrastructure development, if not remedial actions also not started simultaneously.
What about Big Projects in the midway?
The UO Note issued on 29.5.2019, just a day before the swearing in ceremony of the new government is dealing with the above two types of works only. Works not yet started and works executed below 25% value. There is no specific details in the UO note on Big Works in execution and have crossed the 25% value of 'Original Contract value'. However, the statement of the incumbent Chief Minister on 30.5.2019 on corruption in construction contracts and actions proposed if becomes a policy in future, similar harsh steps will be extended to all contracts.
A Big Challenge before the Government:
The new government is taking a massive legal challenge by cancellation of contracts and by suspension of payments. The mood of the government is clear. It may take all the major projects in the state also to the task. No doubt this will turns into a great legal battle. When the government is determined for "reverse contracting" which term is having no understandable meaning in the indian construction sector, it may be construed as reversal of contracting system of earlier government only. It is not yet clear, whether the government move is for reversal of existing contracts. it the intention of the government is to undone the past government contracts, the same will create severe repercussions and lead to several legal disputes. Further,the projects under process will suffer and the cost of such reversal actions will always be costly to the exchequer. Hence, the government has to move cautiously. The prescription shall not be turn into a new problem.
What is Reverse Contracting?
It is not a new invention. It is already there in the global construction sector. Many countries have implemented; but the experiences are not good. Thailand and Indonesia are still using reverse auction process in their e-procurement for construction contracts.
Reverse Tendering will be conducted in two stages. In the 1st stage Pre-Qualification of Bidders will be conducted. In the 2nd stage, pre-qualified bidders will be asked to submit their competitive bids. FIDIC forms also using such two stage bidding. However, in the reverse auction system bidders were allowed to change their bid rates several times. The bidders will be given chance to further reduce their prices within a specific period. Thus, l, the government may get the lowest price offers for the works from highly qualified contractors, who are technically and financially sound. But all over the world, the experiences in Reverse Contracting found negative. Quality compromise is the major problem encountered by the governments. Abandonment of works in the middle also experienced. Ultimately, the governments have been forced to incur huge costs on account of prolongation of project are for retendering.
In the present contract system also, when cut throat competitions emerge, contractors are quoting abnormally low bids. However, projects for which bidders have quoted with lowest prices have actually not grounded in time or if grounded not completed. Contractors have abandoned works to save huge losses. Retendering of the same with revised designs caused thousands of crores additional cost. Hence, it is not what system you are following is the question, but how your are implementing the same is the key issue.
Need of the Hour:
The new government's initiative to review and redefine the contracting systems is appreciable. However, it should not seem as a political decision to reverse the earlier establishment's actions. The system correction should be the lead line. Contracting is an entrepreneurship arena. It is known fact that several contracting firms have become insolvent in the recent past. Government itself cannot construct the projects. Government needs private entrepreneurs in all fields, including construction sector. Evolving right systems is the need of the hour. Managing the systems in a proper manner is very important. Any good system also succumb to corruption, if fine tuned management system is not there. Now construction contracts have become very complex in nature, wider in scope and cumbersome in implementation.
Constructability Review Boards:
The malady lies in the bid preparation, project planning and the dispute resolution system. There is no coordination in between the planning, bidding and implementation. Many projects are failing because they are being planned without proper design, without acquiring the sites and deficit in funds. Inappropriate dispute resolution system is another major problem. The new government has to review the APDSS. Arbitration shall be made compulsory in all government contracts and all engineering departments shall be provided with in house legal divisions to enable the departments to maintain contracts in line with the terms of the agreement. Before issuing any tender, all works shall be reviewed by CRB (Constructability Review Board) who will verify whether the work is planned properly - its timing, designs, sites acquisition, budgeting, risk evaluation, ability of department etc. shall be examined before launching the tenders. The existing pattern of pushing the projects in haste for political expediency will lead to inappropriate contracting and yield to corrupt practices. Whenever projects were planned without constructability review, it is certain such projects will not be completed as planned. Will the new government take appropriate steps in this direction, setting aside the narrow political interests? Whether the present initiative will be carried out until achievement of positive results?
The new government's initiative is good; but it should move forward with more appropriate agenda and goal.
- Krishna V Rao, Director, Professionels*
---------------------------------------------------------------------------------------------------
*Professionels taking up Contract Change Management and Arbitration Dispute Resolutions and can be contacted through krishna@ professionels.in. Mobile: 7780784933