Sunday Times 2
Review the mega project to build 65,000 houses and save billions
After reading Namini Wijedasa’s two articles in the Sunday Times of February 1 and March 20 about the battle between Mittal and Local Builders, to construct 65,000 houses for displaced people in the North and the East, I thought of sharing my views and expertise on the matter in a bid to stop a scandalous attempt to rob the country at the expense of the poor displaced people.
I have worked in the construction industry overseas — the Housing & Development Board in Singapore being one such place of work — and taught construction related subjects in a university in the West, for well over 60 years, I thought of expressing my opinion on this looming battle between Mittal and local builders for the construction of 65,000 houses in the North and the East.
A sample house: Mittal says it can build a house for Rs. 2.1 million
I worked as a (volunteer Consultant) Senior Project Manager for the Tsunami Housing Reconstruction Unit and the State Engineering Corporation’s Ippolgama Ranawiru Housing Project. I am well conversant with the National Procurement Agency (NPA) guidelines and the ambiguities created by those guidelines. I recommended to the then President Mahinda Rajapaksa to re-write the NPA guidelines but without re-writing the NPA Guidelines to remove the ambiguities he ordered the closure of the NPA. It is my belief that the tender documents and pre-qualification conditions used for the 65,000 houses project is based on the defective procurement guidelines of 2006.
During my career as a construction manager/project manager handling multimillion-dollar contracts, I have not come across tender pre-qualification condition such as what this contract has imposed on contractors to bid for this 540 Sq. Ft two-bed houses in two different locations (provinces) about 100 km away. According to Arcelor Mittal’s cost estimate, a house will cost Rs. 2.1 million and it includes a steel frame house completed with Calicut tiles and side panels with simple amenities such as furniture and a gas cooker. The houses without even a small verandah are designed without considering the climatic conditions in the North and the East.
Pre-qualification conditions
I believe that the pre-qualification conditions are based on NPA Guidelines Section 5.3.11 – Bid Security. Bid security is not an essential part of a contract, if the contract can be formulated to overcome the contractual risks such as a contractor abandoning the contract without completing it. But why are these officials who prepared the documentation following a document full of ambiguities and inconsistencies?
This is because the 2006 NPA guidelines are not workable. Procurement experts from the World Bank rejected the NPA guidelines and recommended that they be re-written, but this was not done.
According to pre-qualification conditions for this bid, contractors tendering or submitting bids for this project should meet these extraordinary conditions.
1. Completed a single job costing Rs. 25 billion in the past five years.
2. A bid bond of Rs. 650 million
3. Contractor-funding letter for more than US$ 1 billion.
Condition No. 1 – this pre-qualification condition should have negated by the Technical Evaluation Committee (TEC) and the Cabinet Appointed Negotiation Committee (CANC) as no Sri Lankan contractor can meet this condition. It is inappropriate to impose such a requirement and sideline local contractors.
The question we should raise here is why it is necessary to complete a single job of over Rs. 25 billion to become eligible for this project, when a single house as estimated by Mittal is costing only Rs. 2.1 million. Local construction companies such as MAGA and CCE may have completed a single project exceeding Rs. 7 billion, but they are registered with the Institute for Construction Training and Development (ICTAD) and classified as major contractors. When the State Engineering Corporation (SEC) under my supervision called for tenders for the now completed Customs Building which cost around Rs. 5 billion, it imposed a pre-condition that any contractor, who has completed a building above 3 storeys, with its cost being more than Rs. 100 million, is eligible to tender for the project. But the TEC overruled SEC consultants’ recommendation and revised the condition to allow only those companies that have built buildings above 9 storeys at the cost of Rs. 500 million to bid for the project. When we called for tenders, only two companies were able to tender for that project — MAGA and CCE. MAGA won the tender.
Why did the National Procurement Commission established under the 19th Amendment allow this to go through? Is the commission in operation?
Condition No. 2: This is practised only in Sri Lanka. This should be changed. Instead of a massive bid bond, the rules should be changed to obtain a bank bond. A Bid Bond gives an assurance that the contractor will not run away leaving the project half finished. But our system allows companies that have dishonoured their contractual obligations to go scot free. But if a Bank Bond is obtained, the contractors may not be able to do so as their valuable properties are mortgaged to the bank.
Experienced construction managers will disagree with this condition. A solution for this is to break the mega project into parcels of 100-200 houses and prepare tender documents to cover them in an appropriate manner as explained above. For the Ippolgama Ranawiru Housing project (a Rs.3.5 billion contract), the SEC did not impose a Bid Bond and the risk was removed by strict conditions. NPA guidelines were not followed for documenting this project.
Condition No. 3: If the contractor provides a suitable Bid Bond, his bank guarantees his funding capacity and the contractor is allowed to borrow funds against the contract from the bank to go ahead with the project, and furnish secure operational guarantees that he can complete the houses (lots) under his contract, then why did the CANC allow these conditions?
Legal implications
A contract will not exist unless there is an intention to enter into a legal relationship, the parties have the legal capacity to form a contract and have consented to the agreement without coercion, if the contract meets the necessary contractual obligations covered by law. The courts will not uphold an agreement to engage in an illegal contract. Can any Contract Law expert draft a contract to cover 65,000 houses to be constructed in different places in two provinces while meeting the legal requirements under the prevailing laws in Sri Lanka?
Contacts for projects such as dams and roads may involve two or more provinces and meet the Contract Law requirements, but individual houses in various places in one division may not have the same legal capacity to form one contract. I wonder how the CANC approved these pre-contract conditions without considering the legal implications. As a contract lawyer and an experienced arbitrator, I shall not advice any client of mine to enter into a single contract to construct houses in various locations in two provinces due to difficulties in (legally) administering the contract.
CANC
What are the guidelines used by the CANC? Is the CANC exempted from using suitable consultants? Why did it adopt NPA guidelines when the NPA is now closed? There are many ambiguities and inconsistencies in these guidelines? Is the National Procurement Commission operating? Contracts are offered on established pre-qualification guidelines and not purpose made pre-qualification guidelines to suit a certain construction company. Who are the members of the CANC and are they qualified to handle a major project of this nature?
Construction Cost
As an expert Construction Cost Engineer/Estimator, I believe even with a 100% cost increase for the materials and transport including the labour cost, these houses are too costly to meet the Cost Engineer’s opinion. Allowing some cost for the basic furniture, my estimate for these house may not cost Rs. 2.1 million each, if I do the costing I assure the public that these houses may not cost more than Rs. 1.1 million, allowing a transport cost of Rs. 50,000 per house to bring building materials from Colombo to the site.
Corruption in the construction industry
The construction Industry is awash with corruption. After 1978, a Secretary to the Ministry of Housing and Construction changed the contract condition and included an Advanced payment — then 30%, now 20%, for all the contracts — to be paid when the contract was signed and recovery of the advance payments when the construction work is 95% completed, on a flimsy Bank Bond.
Before this advance payment system was introduced, the then Public Works Department did offer major contracts to local contractors, but helped them to get a bank overdraft with a guarantee of payments direct from the PWD, to complete the work. Corruption during the old PWD days was minimal and contractors did not abandon construction projects and run away leaving clients in an embarrassing position. But with the Advance payment system, the contractor spends the money to buy vehicles and properties and leave the half completed job to be completed by another contractor at an exorbitant cost, as the new work involves re-work with the cost being 40 to 100% over the original cost.
Conclusion
As these houses are in two locations within two provinces, legally it is impossible to bring the 65,000 houses under one contract. The construction work can be divided to meet the ground conditions and other site conditions. If 40,000 houses are to be constructed in the North in various locations we can separate these houses to meet the requirements of the locations and if my knowledge about North and East is correct, the maximum number of houses we may have to construct in one location may not exceed 200. The cost can also be kept within Rs. 1.1 million per unit.
The present design needs to be changed to include a verandah and a few facilities required to meet modern living conditions. I am sure local contractors will be able to handle projects of a few hundred houses and bring a positive cash flow to the local economy.
As we did with Army Ranawiru Housing projects, the authorities should discuss with the Sri Lankan banks and obtain funds for the project at a low interest rate within a fixed time repayment period.
This is an opportunity for President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe to rid the country of corruption. They can prove Yahapalanaya is still very much on track, by stopping this daylight robbery of Rs. 1 million from each house by some interested parties.
The writer can be contacted on upasiri@bigpond.com