Financial Times

Loan negotiation alone won't stop corruption
By Sellakapu S. Upasiri de Silva
Chairman, SAARC Construction Council Mr. Eddie de Zylva OIA, with his experience of running the National (Sri Lankan) Construction Contractors' Association (NCCAL), in his recent article in The Sunday Times FT has provided timely advice on how to negotiate loan agreements with the international donor community for construction contracts.

Some of the suggestions are within the easy reach of construction professionals responsible for procuring construction contracts, if they know how to utilize normal procurement procedures. But the widespread corruption among construction professionals, their inadequacy in understanding the modern procurement practices, use of defective conditions of contract and the inefficiency in administering construction contracts has driven the domestic construction industry to the wall. These suggestions by Mr. De Zylva are an indication that the construction professionals responsible for procurement of contracts have failed to provide a level playing field for the local contractors.

Registration of contractors
As suggested a mixture of bidding procedures by the lending agencies may not be a solution to the problem in hand. All bidding procedures should be invested on the recipient of these loans by the lenders if their aim is to help the recipients of these loans. Lenders are entitled to impose some conditions, such as the inclusion of consultants and contractors of their own at the bidding process and the recipient may agree to such conditions if they think that these conditions may enhance the facilitation of these loans. If the funds come as a donation or a gift then the country or the agency donating the funds may agree with the recipients to include some of their own consultants and contractors, but if the recipients are contributing an equal or more share of the cost of the project, such requests should be negotiated in a more democratic manner.

All contract bidding should be open to contractors of respective categories registered with the ICTAD under the guidelines for grading of construction contractors. This grading system for main construction contractors need regrouping and the limits imposed under this document should be increased irrespective of the workload in hand. The restrictions and the grading system have weighed down most of the Sri Lankan contractors and restricted them in participating in a fair-go race with the foreign contractors. After serving for over 30 years in the construction industry as a very senior construction professional in many foreign countries, I have never seen a "cumbersome and mediocre" document like ICTAD/ID/10 to grade local contractors.

This document prepared with the assistance of industry participants clearly demonstrates that these members lack a clear understanding of the very serious nature of the construction industry and how foreign consultants and contractors have taken control of the industry. This document discriminates our own consultants and the contractors against the foreign registered consultants and contractors.

The main aim of the review committee was to increase the level of efficiency and performance of the construction contractors, but they have failed to achieve this requirement by complicating the procedures and undermining the local contractors. Government should consider appointing experienced construction experts from all disciplines including experienced contractors to prepare a Code of Practice, Code of Tendering for the Construction Industry and a very simple grading system to bring the Sri Lankan construction industry in line with other (developing and developed) countries.

Cost of projects
It is a known fact that our construction professionals are not cost conscious and lack expert knowledge to understand what contractual and construction risks are. For them the cost and the risk are not very important items in procuring a contract. Construction professionals' worldwide use all avenues available for them to control the cost and the contractual and construction risk of construction projects, as the economy dictates the need of cost effective construction projects. Even though, our very weak economy demands us to use all avenues to plan and procure cost effective construction projects we neglect this very important ingredient in procuring a contract.

The following completed projects from loans obtained from agencies and donor countries bear testimony that we procure contracts without considering the cost. Some examples are the accelerated Mahaweli Basin Construction project, (this project compressed to five years from thirty years for a cost of another three projects and not much benefits versus the cost to the population), Samanalawewa Dam project (one billion rupees not accounted for), New Parliament House (completion of massive variations surpassed the construction completion time.

Some of the variations never completed but paid by the government) and the Kalutara Twin Bridges (destruction of 12 old bridge structures by the Korean contractor at a very high cost). The above projects cost the Sri Lankan many billions of rupees than the actual 'optimum' construction cost'. The Sri Lankan government rupee component was much greater than the loans we received. Mr. S.B. Karaliyadde in his article (Foreign aid utilisation -Sunday Times July 6) has completely ignored the Sri Lankan government rupee component for the completion of Maduru Oya, Kotmale, Victoria and Randenigala as part of the Mahaweli project in supporting the engagement of foreign consultants and contractors. Most of these loans were "discounted" with a 10% nominal 'discount rate' at a terrible loss to the country in terms of environment and the benefits limited approximately to 30 years.

These restrictions imposed on our own contractors and consultants by the government training and development body (ICTAD) with the assistance of NCCASL may be a reason for locals to get an unfair deal from the international agencies. Professionals mostly quantity surveyors, builders and a few engineers manned most foreign construction companies engaged in the construction of buildings and other projects. This may be a reason for international agencies negotiating loan agreements to impose harsher procurement options to overcome the "ambiguous restrictions" imposed on contractors. If the project is beyond the financial and technical ability of the locally registered contractors then those contractors should be allowed to use 'partnering' as a mean of procuring the construction project.

Negotiation of loan agreements
So, why not negotiate the loan agreements to suit the needs and the economic requirements of the Sri Lankan people? World Bank and Asian Development Bank funding regulations allow consultants and construction companies from members to tender for projects funded by them if they meet the procurement requirements set out by the recipient government.

If Sri Lanka is a member country of both these organizations there is no valid reason to legally bar any Sri Lankan consultants and contractors from tendering for such projects unless the Sri Lankan government agrees to such conditions.

The WB and the ADB are two organizations established to help developing countries and one way of helping these countries is to allow them to participate in construction activities under the loan funds, and provide experienced professionals to provide technical know how from UNDP, HABITAT, ADB or CFTC. If our negotiators agree to bar our own contractors and allow the agencies to include such conditions to help foreign contractors then it is tantamount to corruption. If such restrictions are imposed then the construction professionals responsible for procuring the construction projects should use their technical ability to overcome these unwanted restrictions by preparing the documents to meet local conditions.

The Treasury and Central Bank teams negotiating fund agreements for construction projects or any other service projects should include capable technical personnel to agree on technical specifications so as to overcome agency demands. Past evidence from fund agreements negotiated by officials of the Treasury and Central Bank indicate that those agreements were disadvantageous to the Sri Lankan government as well as the construction industry. They created an unequal playing field for the local contractors by raising the height of the procurement bar without realising that they are damaging the fragile economy of the country.

This attitude of our negotiators may be a reason for the qualified technical professionals to leave the country in search of greener pastures. A senior director of the WB once told me that most officials from developing countries, (who participate in loan agreements), try not to confront WB officials due to some unknown reasons. Can this be true with our negotiators? The petty differences between the administrators, technical professionals and others should be set aside for the good of the country when negotiating loan agreements. The end result of these trivial differences has affected the country so much that we are paying a very costly price for all those petty differences.

Procurement procedures
The suggested increase of LCB procurement procedure and re-defining the terms are not going to bring any tangible long term good for the construction industry. What we should do is to limit the influence of the lending agencies and take control of the procurement of contracts with these loan agreements. In a sovereign country like Sri Lanka, the controlling power of all contract procurement procedures should be vested with government appointed construction professionals under these loan agreements. Procurement of loans and the procurement of projects should be put in two separate baskets not allowing the lending officials to combine both together. Why allow outsiders to dictate terms in procuring contracts with the funds lent to us on interest?

I have repeatedly stressed that the government should take immediate action to correct the prevailing corrupt construction procurement practices in the construction industry, (this applies to other services also), if they expect to negotiate loan agreements in a level playing field with the lending agencies. As long as our construction industry is rampant with corruption, Sri Lankan contractors will never be able to move away from the wall they were driven into by these corrupt procurement practices introduced (knowingly or unknowingly) by the ICTAD.

Most Sri Lankan contractors like to get an advance payment of 30% under Clause 60, but the changes to Clause 60 of the Condition of Contract to pay an Advance Payment of 30%, created corrupt practices and foreign consultants and contractors rushed to Sri Lanka in droves to make a quick profit using these flawed conditions.
Most Sri Lankan politicians, government officials and the construction professionals are well aware that the construction industry is manned mostly by corrupt people and they used flawed procurement practices to procure construction projects. But so far no action has been taken to eradicate these practices and save the construction industry, contractors, consultants and the economy.

To procure a construction project - small to major - we need a set of documents. These documents include but are not limited to the following: (a) Architectural or Engineering Drawings, (b) Architectural or Engineering Specifications, (c) Condition of Contract, (d) Bill of Quantities, (e) Tender Conditions and (f) Tender, or any other conditions agreed to with the lending agencies and the respective contractors.
The professionals who prepare these documents should be able to separate contracts into suitable packages and restrict the limit of packages a single contractor can bid.

Under an annexure to the Condition of Contract the Sri Lankan government can restrict foreign contractors and consultants without imposing any rules at the loan negotiations. Clause 5 (1)- Language and Law, the construction professionals (working for the employer) preparing the contract (procurement) documents should include the Law ( - the Law practice in Sri Lanka in dealing with Taxation and Arbitration) and the language applicable to the contract. Employment of foreign personnel is the responsibility of the government. Restriction of work permits can curtail the use of unnecessary labour by foreign contractors. Under Clause 60 (3) of the Condition of Contract - payment in foreign currencies can be included in addition to the payment by local currency.

Under Clause 21 - Insurance - the employer can dictate how he wants the insurance -local or foreign. When we have the instruments under our control, to control foreign consultants and contractors, why include these as recommendations for negotiators. All construction professionals should read the ICTAD sponsored ICE/FIDIC Condition of Contract and be familiar with all these clauses to save the construction industry.

All temporary employees are subjected to local taxes in all other countries and the employer is held responsible for collecting the taxes from the employees. Why is this different in Sri Lanka? If the construction contractors are facilitated under the BOI tax relief schemes then it is the responsibility of the BOI to rectify these defective engagements. It is absurd to suggest that foreign consultants and contractors should obtain loans from local banks unless the interest rate is more favourable to them than the foreign banks they do business with. At present the contracts procured using ICTAD approved condition of contract, the contractor is eligible to get an advance payment of 20% +5%+5% a total of 30%. Why not pay this to the local banks (if we are going to use this condition of contract any further) and retain this money in the country?

Corruption
Many contract documents used to procure major contracts are very poorly documented and contain many ambiguous irregularities. Some of these contract documents are not adequate even to procure a small contract of a few thousand rupees but we use them to procure multi million-rupee contracts. By producing inadequate contract documents construction professionals help to create corrupt practices and unnecessary variations and increase the net cost of the project from the optimum cost. Preparing contract documents to create variation is like aiding and abetting corrupt practices.

Contractors who employ experienced contract administration staff (specially quantity surveyors) greet variation as a way of making a few million extra rupees from the contract. The new trend in construction procurement under "method of risk sharing" is to direct the cost of all these extras (variations) to the respective consultants and contractors and charge the cost to them.

Most drawings - architectural and engineering - used in many countries are inadequately prepared and lack detail. Some drawings are completed between 65% to 80% at the time of going to tender creating a minefield of variations. These variations are created by "Rework" due to these inadequacies. But in Sri Lanka many contract documents were infested with inadequately prepared drawings, and some were not adequate enough to be included as tender documents.

Most specifications I have examined contained many ambiguous statements and incorrect explanations of construction details. As specifications supersede the drawings, incomplete and ambiguous statements create "rework" confusing the contract administrators and a load of variations for the contractor. Another very pressing problem we face in Sri Lanka is the use of incorrect terminology in writing specifications. Most specification writers use uncommon technical terms. The ambiguity created by using uncommon or incorrect technical terms will create "rework" and this "rework" creates variations. As a matter of urgency, the construction industry needs a Glossary of Building Terms to use in writing specifications and for preparing contract documents.

If we want to improve the construction industry and take charge of our destiny by helping local consultants and contractors we should seriously consider reorganising the industry to meet the harsh economic climate Sri Lanka is facing now. This move needs the support of all construction professionals as well as the contractors and the politicians.

Meanwhile if we are going to utilize the $ 4.5 billion loan fund with the "other stakeholders" to develop the devastated economy and the country, we should plan well in advance and show the world that we are marching with the rest of the world. Our professionals have the knowledge but lack practical application in using best practice modern methods to uplift the construction industry. We need to re-organise the industry to save the construction contractors, consultants and the future generations of our professionals taking over the construction industry.
The author is a consulting engineer residing in Sydney Australia. He could be reached at upasiri@optusnet.com.au

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