Further Improvements Needed in the Public Procurement Act

Timely completion of various development and construction projects, both small and large, continues to be a major concern for the general public. This issue became a significant electoral agenda during the elections held on Falgun 21 (early March). Candidates participating in the polls highlighted the problems related to project delays and expressed divergent views on the matter.

Notably, the former prime ministerial candidate and Nepali Congress president Gagan Kumar Thapa and senior leader of Rastriya Swatantra Party (Raswapa), Balendra Shah, drew considerable attention to this issue. Gagan Kumar Thapa pointed out that delays in government projects are compounded by ill intentions of certain stakeholders and some legal obstacles, making amendments to the law necessary. Meanwhile, Balendra Shah stated, “A road that should be finished in two years is not completed even after twenty years. It should be done within one and a half years, whether tied to a tree, laid on the road, or kept in a shed, the road must be built.”

Voters gave strong support to Raswapa, leading to Balendra Shah becoming prime minister with nearly a two-thirds majority. Under this powerful leadership, the government has sought to accelerate development projects by amending the Public Procurement Act through an ordinance.

This is a positive move; however, questions remain as to whether the ordinance fully resolves the underlying issues. This article presents a detailed analysis of these concerns.

There are several fundamental challenges within Nepal’s contracting system. Among these are submitting bids at minimum prices, lack of sufficient capital among contractors, government delays in approving designs or drawings, and contract agreements signed without confirmed budget allocations.

Addressing some of these problems could reduce construction delays. The recently amended Public Procurement Act attempts to eliminate prolonged delays and low-price bids in the construction sector.

Delays during the construction period bring criticism to both the government and honest contractors alike.

The amended act mandates budget certainty, full site clearance, compensation distribution, and environmental approvals before tendering contracts, which should gradually reduce work stoppages. However, these provisions existed previously and do not differ significantly from former regulations.

Contract notice periods could be shortened, and promotion of local materials increased, but these alone will not completely solve the challenges.

The new rules identify bids that are less than 30 percent of the estimated cost as ‘abnormal.’ These bids are not necessarily rejected outright but require contractors to provide technical and financial clarifications. If the evaluation committee is not satisfied, they may annul the bid. The question arises: is this sufficient?

Previously, contractors were required to provide additional guarantees when bidding low, increasing costs. Cancelling contracts would delay projects further and prevent expected benefits from timely completion. Hence, this method of curbing low-price bidding may not be fully effective. What alternatives exist? Let’s discuss.

Methods to Prevent Low-Price Bidding

1. Average Bid Method: Instead of awarding the contract to the lowest bidder, this method awards it to the bidder whose price is closest to the average of all bids and the cost estimate. This discourages ‘suicide bidding,’ where contractors aggressively bid low prices that harm project quality and increase risk. Excessively low bids pull the average down, reducing that bidder’s chance of success mathematically.

This method is applied in places like Taiwan, Peru, and Florida, and historically in parts of Italy.

Other international practices include the European Union’s Most Economically Advantageous Tender (MEAT) approach, which prioritizes value over price alone. It evaluates financial and technical qualifications, methodology, environmental impact, and lifecycle costs.

The government’s attempt to expedite development via procurement law amendments is commendable but more reforms are needed.

2. Dynamic Abnormal Low Tender (ALT) Threshold: Instead of a fixed 30 percent cut-off, some countries use statistical methods. Bids falling below one standard deviation from the median bid are automatically flagged for stringent scrutiny or rejection.

3. Quality and Cost-Based Selection (QCBS)/Two-Envelope System: Bidders submit two sealed envelopes—technical and financial proposals. After assessing technical qualifications, only the financial bids of qualified contractors are opened. The contract decision is based on a combined score, ensuring that the contract goes not only to the lowest cost but the best quality. This method is used in some World Bank and Asian Development Bank projects in Nepal.

For Nepal, the Average Bid Method appears more suitable due to its simpler evaluation process and lower chances of manipulation compared to methods involving complex technical assessments vulnerable to bias.

For example, if the cost estimate is NPR 2,000 and four bidders submit offers of NPR 1,800, 1,600, 1,950, and 1,400 respectively, the current method requires the lowest bidder (1,400) to provide additional guarantees, increasing costs and potentially degrading quality.

Under the Average Bid Method, the average is NPR 1,750, so the contract would likely be awarded to the bidder offering NPR 1,600, who represents a more realistic and higher quality proposal, reducing disputes.

Development projects are a shared responsibility among the government, contractors, and the public.

Nepal’s challenges include not only low bidding but also issues with government decisions such as variation orders. If variation work stays within average price limits, decisions are made promptly by relevant engineers or office heads, and contractors formally notify within 10 days, the ordinance’s effectiveness will be enhanced.

Variations exceeding NPR 2,000 million require cabinet approval but implementation should only proceed after mandatory audits by the National Vigilance Center through appointed technical auditors. This would ensure transparency, timely decisions, and curb irregularities.

Another issue for contractors is lack of operating capital. Contractors often cannot continue work without payments, causing project stalls and unpaid bills.

A solution is for the government to allow contractors to utilize 70 percent of prior billing amounts on the same project, backed by bank guarantees, preventing project delays.

Projects belong to the government, contractors, and the public. They cannot be completed on time without honesty and accountability from all parties. Success and national development require the government to facilitate contractors, contractors to act with integrity, and the public to avoid interfering with work.

(Author Rohit Paudel is active in the energy, construction, and academic sectors.)