Collusion in the eye of the beholder?

World Bank, DPWH review same bids but draw opposite conclusions

COLLUSION, LIKE beauty, may be in the eyes of the beholder — or the investigators — at least as far as public-works projects in the Philippines are concerned.

When the World Bank’s powerful and dreaded anti-corruption unit, the Department of Institutional Integrity (INT), looked closely into three rounds of international public tenders for two Bank-funded road projects in the Philippines between 2002 and 2006, it found convincing proof of collusion and excessive pricing among some of the 15 Filipino and foreign bidders.

A fortnight ago, the World Bank’s sanctions board barred four Chinese firms and three Filipino companies from participating in any Bank-funded project for at least four years for their alleged role in the collusive scheme to artificially inflate bid prices.

One Philippine company and its owner were de-listed permanently, and two other local firms, suspended for four years. A Korean firm, which did not contest the allegations, was debarred for four years in August last year.

In stark contrast, at least two investigations conducted by the Department of Public Works and Highways (DPWH) found no evidence of collusion and overpricing, respectively, in the 2002 and 2004 rounds of civil works tenders for two road projects being funded by a $150-million loan from the World Bank.

Under ordinary circumstances, that would just be taken as a difference of opinions between two groups of experts. But in the Philippines, where public distrust of the DPWH is very high, the sharply opposing conclusions are fueling public perception that department officials are in league with road-building contractors.

Already, a senator is making the allegation that one of the debarred contractors is a close friend of Jose Miguel Arroyo, the president’s husband.

To be sure, the difference in conclusions could be partly because some of the evidence, particularly testimonies of people who told the World Bank investigators about the collusive scheme, were not made available to the DPWH.

But the Bank investigators also relied on other data available as well to DPWH officials.

‘Strange, unnatural’

The January 2009 decision of the Bank’s sanctions board, a copy of which was obtained by the PCIJ, reads in part: “(The) circumstantial evidence consists of alleged indicia of collusion, including high bid prices, symmetrical relationships among bids, bids containing significant errors, ‘clusters’ of bids, ‘strange and unnatural’ bid prices, submission of fraudulent bid securities, and inconsistent application of criteria within the prequalification process.”

A PCIJ analysis of the bids showed that in five of seven cases, the percentage difference between the lowest and second lowest bids was always several times higher than the percentage differences between all the other bids. (see graph)

Procurement experts say that the clustering of bids or symmetrical relations among bids is a possible indication, although they clarify that it is not a conclusive proof of collusive behavior.

How much elbow grease was used in the investigations could be another factor that may explain the difference in findings.

Former public works secretary Fiorello Estuar, who helped oversee an investigation of collusion that led to the suspension of some 80 road-building contractors in 1987, recounted that the investigators then had to sift through hundreds of pages of bidding documents to look for evidence of connivance.

“We found evidence — bids from rival firms prepared in the same handwriting or containing the exact same unit prices and quantities,” recalled Estuar. “In some cases, the same spelling mistakes could be found in competing bids. They spelled bunker fuel as ‘banker fuel’.”

Suspension? Not really

It’s easier to figure out why the DPWH is not winning any points in the public-perception department. After all, the DPWH had the second lowest rating among state agencies in terms of perceived sincerity in fighting corruption, according to a Social Weather Stations survey last year.

And so hardly anyone blinked when DPWH Secretary Hermogenes Ebdane admitted last January 21 before the House committee hearing on the World Bank sanctions that the DPWH’s temporary suspension of the seven construction firms in question did not really mean anything. It was just, he said, a pre-emptive move designed to protect the government’s image.

Responding to a question by Rep. Ronaldo Zamora, Ebdane said: “Since the issue has affected public opinion and that the dignity of the government and the department is at stake, we, maybe we have faltered but without any malice or intent with malice.”

“We initiated that if only to make a point,” he added. “Anyway, for the next few days there are no scheduled biddings except the one that was held today. It will not in any way physically affect their name.”

Ebdane has also said that he is forming a special panel to investigate the allegations of bid rigging. But given his admission at the House, there may be few surprises in that special panel’s findings.

At the hearing, Ebdane also said the DPWH was ready to discuss the matter with the debarred firms, and admitted the department may have committed a legal blunder in unilaterally suspending them.

“We are also in coordination with the parties involved and we will consider their inputs,” he said. “In fact, if there is a need to do some flexibility — if only it is within the law — we are more than willing. We are taking note of your advice since really we have gone maybe a little overboard.”

In response to the World Bank’s move, the DPWH had announced that it would temporarily suspend the seven construction firms from participating in biddings for government projects for 15 days, during which the department would conduct its own investigation and decide on more permanent measures.

An extension of the temporary suspension could have huge potential consequences on the construction firms, as well as on DPWH. Six of the seven debarred firms are some of the biggest and most successful contractors for government infrastructure projects.

Cavite Ideal International Construction, CM Pancho Corp., EC Luna Construction Corp., China Road and Bridge Corp., China State Construction Corp., and China Geo-Engineering Corp. bagged 27 percent of the total value of civil-works contracts of ongoing or completed foreign-assisted projects between 2004 and 2006 evaluated by Construction Industry Authority of the Philippines and Philippine Domestic Construction Board (CIAP-PDCB).

The six firms are among the top 20 contractors for foreign-assisted projects during the same period, according to the 2007 CIAP-PDCB Constructors Performance Evaluation System report.

Two debarred firms, China Wu Yi Co Ltd and Dongsung Construction Co Ltd of Korea, were not covered by the CPES report, which tackles about a tenth of the total government infrastructure projects in the Philippines.

The World Bank probe

The World Bank’s Evaluation and Suspension Officer, who evaluates evidence gathered by the INT, issued the notice of sanctions to bidders suspected of collusion in May 2008. That began a process for the bidders to refute the allegations but not to confront the INT’s anonymous witnesses.

Except for Dongsung Construction, all the debarred construction firms contested the allegations of collusion, and presented counter-evidence to the World Bank.

The notice “presents evidence that the respondents had engaged in corrupt, collusive and other fraudulent practices in connection with multiple rounds of bidding for two road construction and rehabilitation contracts under this World Bank-financed project,” according to the sanctions board’s decision.

Indeed, the INT investigators were convinced that Filipino government officials and politicians were involved in the elaborate collusive scheme.

The notice of sanctions, according to the sanctions board, indicated that the debarred firms’ allegedly fraudulent actions “include participation in a collusive scheme, also involving politicians and government officials, whereby awards were directed to particular contractors in exchange for bribes, kickbacks and payments designated losing bidders.”

The notice “alleges that each Respondent had additionally engaged in corrupt practices either as a principal in a joint enterprise the intent of which was to offer bribes to public officials, or as a secondary party who ‘aided and abetted’ the principals in the payment of such bribes.”

The debarred contractors, though, has this going for them: The World Bank’s sanctions board, after hearing the INT’s evidence, decided there was not enough proof of fraud and corruption. And while it upheld the INT’s findings of collusion, it concluded that the evidence “did not establish that it was more likely than not that the Respondents had engaged in fraudulent practices separate from the collusion.”

“In addition,” read the board’s decision, “the Sanctions Board concluded that the INT had not presented evidence sufficient to establish that it was more likely than not that these Respondents had engaged in corrupt practices.”

Under World Bank rules, corrupt practices mean “the offering, giving, receiving, or soliciting of any thing of value to influence the action of a public official in the procurement process or in contract execution.”

‘Kinder, gentler’ probe

The debarred firms may also fare better dealing with the DPWH, which has, rightly or wrongly, become notorious for clearing those accused by the likes of World Bank of any wrongdoing.

In 2002, the DPWH conducted an investigation after the World Bank rejected the outcomes of two out of 11 tenders for several components of the first phase of the Bank-funded National Road Improvement and Management Project (NRIMP I) because of suspicions of overpricing and collusion.

China Road and Bridge Corporation won one of the two disputed tenders — for road projects along the Surigao Davao Coastal Road — offering a bid 27.8 percent higher than the approved budget contract (ABC).

The other tender — for the rehabilitation of a road in Negros island — was won by a joint venture of AC Luna Construction Corp and China State Construction Corp, which offered a bid that was 25.5 percent higher than the ABC.

In June 2003, then DPWH Secretary Simeon Datumanong appointed a three-person panel to investigate a similar accusation of collusion. The panel was composed of lawyer and internal audit services director Camilo Foronda, project assistance division chief Carlito Nacional, and contract management division head Constancio Fernandez.

The panel examined the documents submitted by the bidders for any sign or indication of collusion, giving special attention to unit cost analyses. It also summoned representatives of the lowest bidders — China Road and the joint venture of AC Luna and China State — to explain their bids.

At the end of the 11-day investigation, the panel concluded that there was no sufficient evidence to support the World Bank’s suspicions of collusion among the bidders. Said the panel in a June 23, 2003 report submitted to Datumanong: “The bidders’ unit cost analyses differed from one another. There were substantial variances in the unit prices for many items of work. No definite pattern was observed in the computation and the unit prices did not show unusual coincidences or follow a designed pattern.”

“Since suspicion of collusion by the Bank, as noted, is very hard to prove,” it added, “corollarily, there are neither bidders nor Department officials who can be said to have participated therein.”

Still, the panel recommended that the tender won by China Roads and Bridges Corp. should be declared a failure because the winning bid, which was 27.8 percent above ABC, was too high compared to bids in adjacent projects. Still, the panel urged the DPWH to uphold the award of the other project to the joint venture of EC Luna and China State even though the bid was also nearly as high — 25.5 percent above ABC. “This contract package has no adjacent projects with which a comparison can be drawn,” it explained.

Bank won’t budge

The DPWH conducted its second investigation, or what Ebdane refers to as a “study,” after the World Bank rejected the outcomes of the second round of tenders for two subprojects in 2004. The tenders were won by China Roads and Bridges Corp., which offered a bid of 27.18 percent above ABC, and a joint venture of AC Luna Construction Corp and China Roads and Bridges Corp., which bid 24.83 percent above ABC.

After refusing to award the two contracts to the lowest bidders because of what it believed were excessive bids, the World Bank proposed to hire an independent engineering specialist to assess the bids offered during in the latest tender.

Hoping to persuade the Bank to award the contracts instead, Ebdane, in a June 22, 2005 letter to the financial institution, presented a study conducted by a DPWH project monitoring office that showed “the reasonableness of the lowest evaluated bids submitted during the bidding of the subject Projects compared to the current price levels.”

By updating the approved budget for contracts using unit prices used in a couple of recently tendered projects, DPWH project director Mario Bandelaria showed that China Roads’ original bid of 27.18 percent above ABC in 2004 was down to only 11.28 percent above ABC by 2005. The premium over ABC of AC Luna and China Roads’ original joint bid of 24.83 percent fell to only 9.63 percent.

The World Bank, however, was not convinced by the DPWH’s efforts to justify bids submitted the previous year by the simple expedient of comparing them to current prices.

The following year, 2006, the DPWH held the third round of tenders for the road projects. When the World Bank again rejected the bid results, the DPWH no longer bothered to investigate. Ebdane took the sub-projects out of the World Bank-funded program and implemented the same as locally funded projects.

Cooperation amid conflict

Remarkably, the World Bank and the DPWH have managed to cooperate to address weaknesses in the bidding process and reduce the likelihood of collusion and overpricing in spite of their starkly opposite conclusions about the allegations of collusion.

Prompted by a series of World Bank rejections of the bidding results, the DPWH introduced changes in the tendering procedures. These included removing the pre-qualification requirement to open up the bidding to more contractors, the establishment of call lines for any party to report any deviation from the published procedures, and inviting civil society groups to witness the auctions.

Last year, the Bank’s board of directors finally cleared a stalled $232-million loan for the second phase of NRIMP after the DPWH adopted “comprehensive anti-corruption measures,” including the establishment of a civil society group to monitor road projects.

Approval was frozen in November 2007, in spite of favorable recommendation from the World Bank management when directors asked INT investigators to first complete a four-year probe into bidding irregularities in the first phase of NRIMP.

The World Bank and the DPWH are also working to narrow the policy gap on bid ceilings. Philippine procurement law automatically disqualifies any bid above the ABC but guidelines of the World Bank and other lenders disallow such ceilings that interfere with market forces.

The Bank has agreed to use the country’s rules on a few small-scale road projects reserved for Philippine construction firms to see if the policy can help reduce collusion. The Bank, however, backed off from a pilot initiative to apply the bid ceiling on international tenders for road projects in the Philippines.

The INT discussed its probe as well with representatives from the Office of the Ombudsman three times in 2006 and 2007. In July 2006, a deputy Ombudsman even went to Washington DC for extensive briefings on “how the cartel operates,” said a World Bank official.

The official also said that in November 2007, Ombudsman Merceditas Gutierrez received a copy of the INT report after a two-hour meeting where she was provided “with a detailed investigative roadmap, including the names of all companies and bribe recipients found through the Bank’s investigation, which bidding documents would corroborate (the Bank’s) findings, as well as how the collusive scheme operated on this project.”

More than a year after receiving the INT report, the Office of the Ombudsman said it was still completing its fact-finding investigation.

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