Raised barriers to entry for foreign contractors can limit competition

The government’s entry barriers for foreign contractors to get involved in construction work worth under Rs 5 billion could result in restricted competition, although they intended to help local companies grow, stakeholders say.

Foreign companies cannot bid for construction works worth less than Rs.5 crore 12th amendment on the Regulation on Government Procurement published in the Nepal Gazette on Monday.

It is the second time in just over three months that the government has raised the threshold barring foreign companies from bidding on works valued below the threshold.

In March this year, the government raised such a threshold from Rs 1 billion to Rs 3 billion.

“The main goal of raising entry barriers for foreign construction companies is to prioritize domestic companies over the increasing capacity of domestic companies,” said Umesh Dhungana, spokesman for the Public Procurement Monitoring Office.

Through the 11th Amendment to the Ordinance, the government has stipulated that foreign construction companies can only bid for works worth Rs 5-10 billion through joint ventures with Nepalese companies.

“Another goal of raising the entry barrier for foreign firms is to prevent foreign currency outflow from Nepal,” Dhungana said.

Amid rising imports, Nepal has been facing persistent foreign exchange reserve depletion since the start of the current fiscal year 2021-22.

Corresponding Nepal Rastra BankThe country’s gross foreign exchange reserves fell 21.1 percent to $9.28 billion in mid-May 2022 from $11.75 billion in mid-July 2021.

However, Dhungana said the barrier to entry for foreign companies has not been raised because of the current foreign exchange reserves. “It’s just a coincidence that when the country faces a drop in foreign exchange reserves, the barrier to entry has been raised,” he said.

However, some contractors have questioned how the capacity of Nepalese contractors has increased overnight, leaving entry barriers for foreign contractors to raise significantly.

By the end of March the threshold was Rs 1 crore which was raised to Rs 3 crore at the end of March and increased to Rs 5 crore in less than four months.

“The policy has been changed in the interests of some major construction companies,” said Bishnu Bhai Shrestha, chairman of CM Construction. “There are fewer than a dozen companies that can handle the construction work alone, worth around Rs 5 billion.”

He said the Federation of Contractors’ Associations of Nepal (FCAN) had not called for the entry threshold for foreign contractors to be raised to Rs 5 billion.

Rabi Singh, President of FCAN, said the federation had proposed leaving the threshold at a maximum of Rs 3.5 billion.

“Due to the raised bar for foreign company entry, there is a possibility of a cartel among large domestic contractors as there are not many large contractors who can work on projects worth around Rs 5 billion alone,” he said.

A senior government official from the Public Procurement Monitoring Office admitted the government heard contractors’ calls for the threshold to be raised as they campaigned heavily that they were already able to work up to Rs.5 crore . “While they work in the fields, the government has listened to them,” the official said.

In fact, the PPMO had proposed raising the threshold to Rs.2 crore when it was raised to Rs.3 crore in March, according to the draft amendment seen by the Post.

The threshold has been raised from Rs600 million to Rs1 billion fourth change of the Government Procurement Regulation in 2016. Since the increase, the collusion trend has improved, according to PPMO officials.

On May 13, 2019, the government raised the threshold to Rs. 2 crore sixth amendment to the procurement ordinance. The threshold was later lowered back to Rs1 billion by the eighth amendment of the ordinance as of August 1, 2019.

In its past annual reports, the PPMO has pointed out incidents of possible collusion between the major contractors.

In its 2017-18 annual report, the Procurement Monitoring Bureau mentioned a possible collusion in the tender for the development of Block A of the Garment Processing Zone in Simara between the government agency and the contractors to block foreign builders.

When the consultant prepared the detailed project design, the estimated cost of the package was Rs 1.17 billion. But when tenders were called, the estimated cost was reduced to less than Rs 1 billion.

Four bidders passed the technical qualification to carry out the construction of roads, drainage, sewerage and land works but there were no massive differences in the prices quoted by all four bidders against the estimated cost of Rs 849.99 million.

A PPMO report titled “A Collection of Reports on Public Procurement Monitoring and Complaints” released in 2018 also pointed to possible collusion between bidders in participating in and bagging contracts for road and bridge projects under construction in Dharan -Chatara-Gaighat-Katari -Sindhuli Road and the Galchhi-Trishuli-Mailung-Syabrubesi-Rasuwagadhi Road.

However, Singh said the new rule that a contractor who has already signed a maximum of five contracts cannot bid on new bids could pave the way for more other contractors to bid on the bids.

The big companies supported the government’s move on entry barriers for foreign companies as there are already many contractors capable of undertaking large construction projects.

“There are already 50-60 companies that can only handle Rs 5 crore construction projects,” said Sahadev Khadka, managing director of Bhimeshwor Drilling Tatha Nirman Sewa.

Contractors have differed on how many companies have the capacity to handle projects worth around Rs 5 crore. Regarding concerns about restraint of competition, he claimed that there would be enough competition between domestic companies.

“There is a provision in the amended Regulations that a contractor may bid for works valued at Rs 1 billion by demonstrating experience of working on works valued at Rs 600 million, which will allow for the participation of more bidders.” said Khadka.

In the past, a contractor would have had to provide proof of having worked on Rs 800 million worth of work in order to bid for Rs 1 billion worth of works.

“Nepalese contractors have done a better job than foreign contractors, as evidenced by many projects where foreign firms have been unable to continue work,” Khadka said. “The priority given to domestic contractors will also help keep foreign currencies in the country.”

Government agencies have had many bitter experiences with the participation of foreign companies in large infrastructure projects.

Major projects such as Melamchi drinking water project, Butwal-Narayagadh road, Tribhuvan International Airport expansion, Chilime hydropower project and Upper Trishuli-A hydropower project have been delayed as foreign firms received orders.

For Shivahari Sapokta, former director-general of the Department of Roads, domestic contractors should be preferred despite the possibility of limited competition. “Foreign contractors won’t work even if there is a small problem,” he said. “Local contractors are chasing the policymakers to clear the hurdles.”

However, limited competition could increase costs for the government. “As long as the prices offered by domestic contractors are lower than the estimated costs, it should not be considered costly for the government,” Sapkota said.

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