Bids sans caps, tied loans favor foreign contractors

This three-part series written by Roel R. Landingin, Manila senior correspondent of The Financial Times of London, caps a six-month review by the PCIJ of project and official documents covering 71 ODA projects funded by the Philippines biggest ODA lenders.

Part 2 delves into how the absence of caps on bids, tied loans and conditionalities of lenders have favored foreign contractors and triggered cost overruns and project delays.

FOR ANTONIO Molano Jr. and other government engineers at the Department of Public Works and Highways (DPWH), it felt like being in “Groundhog Day,” the Bill Murray movie about a cynical TV reporter who kept reliving the same day over and over again.

Over a span of four years, Molano and his colleagues at the DPWH bids and awards committee (BAC) held three rounds of bidding for two World Bank-funded road projects in Mindanao and the Visayas.

Each time, all the bids exceeded estimated costs by wide margins. Each time, virtually the same set of construction companies won the first and second rounds.

The road projects were part of Phase 1 of the $305-million National Road Improvement and Management Project (NRIMP) that the World Bank was supporting with a $150-million loan. Unhappy with the high bids, the World Bank rejected the bid outcomes not once or twice, but thrice.

The DPWH went to great lengths to boost competition in the bidding for the road-building projects. At one point, “an independent call line outside the DPWH was established for any party to report any deviation from the process,” says Molano. “We invited civil society groups such as Procurement Watch and the Volunteers Against Crime and Corruption as observers.”

A portion of the Halsema road project that should have been funded under the National Road Improvement and Management Project – Phase 2, which was deferred in November 2007 by the World Bank. [photo by Harley Palangchao]

But these and other measures proved to be no match to the persistence and power of some suppliers to dictate their terms on bids for government infrastructure contracts, often in defiance of government rules and policies.

Rigged bids, same firms

The contractors’ doggedness underscores the huge and lucrative merits of building foreign-assisted projects, and is among the symptoms of what Rodolfo Lozada Jr., a Senate star witness in the National Broadband Network (NBN) scandal, has called a “dysfunctional” government procurement system.

Some of the construction firms that took part in the controversial projects were also among the most successful bidders for government public-works contracts. This is evident in a report prepared by the Construction Industry Authority of the Philippines and Philippine Domestic Construction Board (CIAP-PDCB) that the Philippine Center for Investigative Journalism (PCIJ) analyzed.

Nine mostly Chinese and local construction firms that joined the ill-fated bids for the road projects were also the big players in many other projects funded by foreign money.

These nine firms accounted for 46 percent of the total value of civil-works contracts of ongoing or completed foreign-assisted projects between 2004 and 2006, the CIAP-PDCB’s Constructors Performance Evaluation System report showed.

Bid-rigging and corruption were suspected by the World Bank, which carried out a year-long investigation into the matter. Last November, the Bank deferred approval of a $232-million loan for the national roads project’s second phase, pending completion of its probe.

But contractors and government officials alike say foreign lenders like the World Bank may also be to blame for the apparent corruption plaguing official development assistance (ODA)-funded projects.

International financial institutions had thumbed down a Philippine proposal to impose a cap on bids for these projects. Instead, the lenders have insisted on exempting foreign-assisted projects from new Philippine procurement rules that disallow bids above the so-called approved budget contract (ABC), the estimated cost that is calculated by third-party consultants at considerable expense.

Invitation to collusion

Manolito Madrasto, executive director of the industry group Philippine Contractors Association, says the industry itself is supporting the government’s efforts to convince ODA donors to adopt Philippine procurement rules.

He says the absence of caps on bids for these projects is a virtual invitation to collusion.

“Anybody who bids beyond (the ABC) in the Philippine setting is automatically out of the running,” he points out. “Under World Bank (rules) there is no limit. You can even put in 10 times if you want. If the bidders talk to each other, is there a way to stop it?”

Cipriano Ravanes Jr., an independent procurement expert, agrees that putting a cap on bidding may be necessary, given the rampant collusion and overpricing in the local contracting industry. “If the approved budget contract reflects market price, it will protect the government,” he says. “But even if the ABC is overpriced, it can still help because it imposes a limit.”

In June 2002, the DPWH issued a department order stating that bids for civil works and supply contracts above 15 percent of the approved budget contract would be rejected outright. Then Public Works Secretary Simeon Datumanong noted that awarded contracts for foreign-assisted projects were higher than approved costs by an average of 15 percent, with some going as high as 30 percent.

Country managers of the Japan Bank for International Cooperation (JBIC), Asian Development Bank (ADB), and World Bank promptly wrote a joint letter opposing the order, reminding Datumanong that the imposition of contract price ceilings violates their procurement guidelines.

The order was not implemented because of the lenders’ objections.

More ‘groundhog days’

Without the caps, DPWH’s Molano could only have more “groundhog days,” even as he and his colleagues scamper to implement stricter procedures for the biddings on infrastructure projects.

Poblacion Bridge in Makilala, North Cotabato, is a costly P17.5-million affair that straddles an impassable road. [photo courtesy of Sinag ng Bayan Foundation]

Up to now, Molano can only shake his head over their efforts in trying to prevent any shenanigans in the two road projects in Visayas and Mindanao. After the World Bank rejected the results of the first bidding, Molano and company changed some of the procedures for the second bidding. Among these were the disqualification of one of the bidders and the removal of the pre-qualification requirement.

This opened up the bidding to more contractors — to no avail. The winner in the second bidding, China Road and Bridge Corp., a Chinese state-owned firm, had also clinched the first bidding for a section of the Surigao-Davao coastal road project in Mindanao. The other project component, the Kabankalan-Basay section in Negros Island, was won by a joint venture of China Road and local contractor EC Luna, which also figured as a winner in the first bidding (though its partner then was China State Construction Corp.).

When the World Bank again rejected the bids, the DPWH made more changes for the third bidding. The Negros island project was divided into two smaller packages. Instead of just one, two complaint hotlines were established — at the World Bank country office and the Government Procurement Policy Board. “We were very strict,” says Molano. “If a bidder lacks a document, we disqualify it.”

The results were a little different for the third bidding held in 2006. China Road, which previously won the Surigao-Davao section, bagged one of the two components of the Negros road project. But two new bidders, China Wu Yi Corp. and China Geo Engineering Corp., won the two other projects.

Still, the World Bank rejected the results due to what it called “strong signs of collusion and excessive pricing.” Bank officials did not explain what that meant but a person familiar with the investigation said a disgruntled supplier had reportedly written the Bank a “poison letter” outlining plans by bidders for manipulating the auction.

All the bids in the third round were higher than the DPWH’s estimated cost. Also, all the bids, save for the lowest, clustered around a high number, a possible but not conclusive sign that the bidders were helping one of them win the contract.

The PCIJ wrote letters and made calls to all the companies involved but most did not respond to requests for comment. Hanjin, in an email, said the company’s officials “are not aware of any allegations of collusion and excessive pricing.”

Tied money

In large part, the lenders’ objection to caps on bids reflects their view that the price of government projects, like everything else, should be set by free and competitive markets rather than by government bureaucrats.

In practice, however, the policy against bid caps tends to benefit big foreign construction companies that win contracts for public-works projects funded by ODA loans.

A view from the air of the P355-million Subic-Clark-Tarlac Expressway, the Philippines’ second biggest foreign-funded project, courtesy of the Japan Bank for International Cooperation. [photo by Tonette Orejas]

PCIJ’s analysis of the CIAP-PDCB’s Constructors Performance Evaluation System Report revealed that 18 companies from Japan, Korea, Thailand, and China won 71 percent of the total value of civil-works contracts for foreign-assisted projects reviewed in the report. These foreign firms were awarded an average of P2.6 billion worth of contracts.

In contrast, 79 Philippine companies, which got the remaining 29 percent of civil-works contracts, won an average of only P240 million worth of contracts per firm.

Of the 10 biggest construction contracts for ODA-funded projects included in the report, only one was awarded to a Philippine company, Cavite Ideal International Construction & Development Corp. It won a P1.6-billion contract to build or upgrade a stretch of road linking Baguio to nearby towns in Benguet province.

The dominant role of foreign contractors in implementing ODA projects is a sore point for local contractors who feel that pre-qualification standards imposed by lenders are biased in favor of big foreign bidders.

Comments Madrasto: “When they fund an airport, they require that the contractor must have experience in putting up an airport of the same size in the last five years. But how often do you put up an airport?” Yet when the projects are awarded to foreign companies, these just turn around and subcontract the bulk of the actual work to local firms.

Cost overruns

For some reason, excessive bids and cost overruns are quite common for projects funded by bilateral lenders — notably Japan, Korea, and China — that still tie up sizable portions of their foreign aid to the purchase of goods or services, including consultants, from companies based in their respective countries.

Allowing bids to exceed estimated costs makes infrastructure projects costlier for borrowers. “These cost overruns have resulted in an increase in GOP (Government of the Philippines) counterpart funding,” Datumanong had stated in his proposed department order back in 2002. “In some cases, it has caused the decrease in the scope of work of the other remaining projects in the loan package to compensate for increased cost of the projects already bid out.”

A 2007 study for JBIC by the consulting firm Virata and Associates found that 13 of 14 road projects funded by the World Bank, ADB, and JBIC cost 26 percent to 51 percent more than DPWH estimates.

Last year, the National Economic and Development Authority (NEDA) also reported that 21 projects — nearly a fifth of the 123 ongoing foreign-assisted projects it reviewed — incurred cost overruns amounting to almost P36 billion, raising the total costs for these projects by more than a third.

In nine of the 21 projects, bids in excess of the approved costs were cited as a reason for the cost escalation. Eight of these nine projects were financed by JBIC.

The JBIC also funded 18 of the 21 projects that incurred cost overruns last year, while the other three were financed by loans from China, South Korea, and the World Bank.

A cost-benefit game

High bids and cost increases in bilaterally funded projects show that the debate over bidding caps is more than an academic or policy debate. It is, in truth, a cost-benefit game.

A two-lane steel bridge that leads to nowhere, the Natan Bridge in Diplahan, Zamboanga Sibugay, was funded by a loan from the United Kingdom. [photo courtesy of Sinag ng Bayan Foundation]

The issue entails costs for borrowers such as the Philippines, which must raise its local counterpart funding. In contrast, the situation benefits contractors awarded the lucrative contracts with no or restricted bidding among companies from the lending country.

A case in point is the Subic-Clark-Tarlac Expressway Project, the country’s second biggest foreign-funded project that is being built by Kajima Corp., Hazama Corp., and other Japanese companies with the backing of a $355-million loan from JBIC.

Apart from being Japan’s single biggest project loan to the Philippines, it is also notable for another less edifying reason: It has the biggest cost overrun so far among the ODA-funded projects.

When NEDA approved the project in 1999, the cost was estimated at P15.3 billion. In 2000, the Bases Conversion and Development Authority (BCDA), which was implementing it, raised the cost estimate to P18.7 billion. NEDA approved this the following year.

But the lowest bid BCDA got when it auctioned off the contracts between September 2003 and January 2004 was P27 billion. Though it knew that costs had gone up to P25.1 billion, BCDA was hoping competition among the bidders would force down the price.

BCDA was being overly optimistic. The loan was tied and bidders were limited to a few Japanese construction companies. Madrasto suggests that BCDA could have gotten lower bids if the tender was opened to local construction companies.

NEDA refused to approve the higher cost, prompting BCDA to negotiate with the winning bidder to bring the price down to P20.1 billion. NEDA cleared the award to the Japanese companies but the latest indications are that the cost may go up to P32 billion.

An even chance

Still, some lenders seem to be softening their opposition to Manila’s moves to impose bidding caps for foreign-assisted projects. The World Bank has agreed to set price ceilings on at least three road projects that it plans to fund as part of the stalled loan for the second phase of the National Road Improvement and Management Project (NRIMP).

The World Bank has also started packaging its Philippine projects into smaller components, giving local suppliers and contractors an even chance to win the contracts.

About 55 percent of goods and services for World Bank-funded projects procured through international competitive bidding between July 2000 and February 2007 went to Philippine-based suppliers, according to World Bank procurement data. The Philippines was followed by South Korean suppliers, who got 18 percent, and Chinese companies, 13 percent.

Some of the so-called Philippine companies, however, are subsidiaries of foreign companies that were incorporated locally. In fact, the single biggest World Bank-funded civil-works contract tendered through national competitive bidding was awarded to China State Construction Engineering Corp., which was classified in the World Bank database as a Philippine company even though it is a unit of a Chinese state firm.

Japan had already begun to reform its lending policies in the 1990s in response to criticisms that tied aid smacks of false and self-serving altruism. It reduced the proportion of tied packages in its foreign aid portfolio from 100 percent in the 1980s to only 26 percent in the early 1990s — though this has gone up again in recent years, according to a study completed last year by University of the Philippines Professor Eduardo Tadem.

In the Philippines, Tadem says, JBIC still links, totally or partially, almost 90 percent of its loans to purchases from Japanese companies.

China, an emerging major source of ODA that was the country’s fifth biggest lender as of end-2006, also ties all of its aid to the Philippines. The Export-Import Bank of China is lending $400 million, the single biggest ongoing project loan, for the North Luzon Rail project that aims to revive rail services between Manila and Central Luzon.

Apart from tying aid to procurement from Chinese companies, China also unilaterally chooses its project contractors, precluding any competitive bidding to select the best and least costly supplier.

The practice, which is inconsistent with Philippine laws that require competitive bidding for ODA-funded projects, has generated a lot of public enmity for Chinese development aid, and sparked suspicions that the goods being supplied are either overpriced or of dubious quality.

Widespread criticism of Chinese ODA prompted President Gloria Macapagal Arroyo to cancel the $329-million National Broadband Network (NBN) deal with ZTE Corp. and to review other China-funded projects, including the $542-million Cyber Education project.