Pakistan’s private contractors lack the experience to participate in the development of mega road projects under China Pakistan Economic Corridors and are losing lucrative business opportunities to Chinese contractors.
Furthermore, the preferential treatment being given to foreign firms is keeping the local contractors away, according to a study conducted by the Competition Commission of Pakistan (CCP).
Projects floated by National Highway Authority (NHA) for construction of motorways and highways under CPEC require constructors to have experience in past projects worth Rs. 8 to 9 billion.
Chinese firms in road construction are receiving various exemptions, such as import duties and income tax exemptions under CPEC.
However, the local constructors excluding State Owned Enterprises often do not have experience in executing projects worth more than Rs. 6 billion in their portfolio, since this was the average size of most projects in the pre-CPEC period.
This, as a consequence, limits the local firms from bidding in such high valued projects. In order to ensure greater participation projects should be broken down into smaller sized packages. There are some examples of breaking down large-scale road construction projects such as the Rawalpindi-Islamabad Metro Bus Project and the under-construction Lahore-Karachi motorway M-5 various sections of which have been divided into packages.
Local constructors do not have experience in executing projects worth more than Rs. 6 billion in their portfolio.
Consequently, smaller constructors will gain the opportunity to compete as well, rather than restricting participation and allowing only a few large constructors of the top category to participate.
According to CCP study on Competition Assessment on Road Construction Sector, there is the possibility that dividing a project into very small packages could facilitate collusion between firms (i.e. by dividing the package each firm would bid for) therefore, the implementing agency needs to ensure an optimum size for packages.
Under CPEC the Chinese firms in road construction are receiving various exemptions, such as import duties and income tax exemptions consequently lowering their cost of doing business. The local constructors do not receive any such exemptions and therefore, this leads to discrimination between the local and the foreign Chinese construction firms. To maintain a level playing field, the local constructors should be given relief on import duties and taxes as well in order to enable them to compete in road projects.
CCP recommended that the local bidders should be given a margin of preference of 6-7% for the road construction sector alternatively to assist them to become competitive. Under The World Bank Standard Bid Evaluation Guide-Procurement of Goods and Works, 1996, Section 7, domestic preference is applicable in determination of awards to the domestic firms who are nonexempt importers.
Preferential Treatment for Foreign Firms
Pointing out the anti-competitive process, CCP said there should be no preferential treatment given by the government in awarding road contracts to any foreign constructor including the Chinese firms who have not performed well in the previous projects. During the study through various stakeholders’ interviews in the sector, this issue has been highlighted, that those foreign firms have received additional projects even when their performance on the past projects was not up to the required quality standards.
The SOEs enjoy income tax exemption and under the PPRA Rule 25, bid security exemption while competing for road construction projects floated by the federal or the provincial governments. These two exemptions, as a consequence, give the SOEs a competitive edge as these lower their cost of doing business.
Foreign firms have been granted contracts despite dismal performance in past projects.
The private construction firms, on the other hand, do not have any such exemptions. In order to create a level playing field in the road construction sector, there should be no discrimination between public and private firms and equal opportunity must be provided to all players. It is therefore recommended that either these exemptions to SOE’s maybe annulled. Alternatively, where these exemptions to SOEs continue, the private sector should be given a comparable cost margin at bid submission stage.
It has been observed that some local constructors entered into Joint Venture with foreign firms, in particular, Chinese firms, the latter act as sleeping partners, whereas the entire civil work of the project is executed by the local firm.
In the top category, there are 10-15 large Pakistani contractor companies including two SOEs — FWO and NLC out of 131 firms having paid up capital of Rs 100 million.
No preferential treatment should be given in awarding road contracts to any foreign constructor including the Chinese firms who have not performed well in the previous projects.
The initiation of CPEC projects has altered the market structure somewhat with a number of Chinese contractors entering the Pakistani market by establishing offices or through Joint Ventures. Some of these include, Xinjian Beixin Road & Bridge Construction Co. Ltd, China Railway First Group, Sinohydro Corporation Ltd., China Communication Construction Co., China Gezhouba Group Company Limited, and China State Construction Engineering Corporation.
Opportunities under CPEC
CPEC has resulted in a manifold increase in the demand for road construction projects in Pakistan. It has also drastically altered the market structure with the entry of large Chinese entities.
In road construction/infrastructure development under CPEC, NHA is planning and developing a network of roads, currently pertaining to CPEC worth Rs. 700 billion. These include short, medium, and long-term projects. Short to medium plan period is 2013-18 and 2018-23, whereas the medium to long-term project plan period is 2023-28 and 2028-33.
The modalities for execution of CPEC projects vary slightly from other projects, with limited bidding being held between three to four Chinese companies nominated by the Chinese Government. This means that Pakistani firms cannot participate as lead contractors in these projects.
Therefore, such conditions have resulted in a negative impact on the process of competition as such projects are not completely open to competitive bidding. It should, however, be noted that Chinese contractors and consultants, like any other foreign participants, have to be registered with the Pakistan Engineering Council (PEC).
It should be further noted that as mentioned earlier, under CPEC agreements, the Chinese government has allowed 30 percent of the project to be sub-contracted to Pakistani contractors and consultants as per the request of the Government of Pakistan. A concern has been raised by a firm regarding sublet contracting to Pakistani firms by Chinese companies who have been awarded CPEC projects. It was submitted that sublet contracting entails lower remuneration and a better option is to enter into JVs instead.
Moreover, the Chinese firms are primarily state-owned which gives them a competitive edge over the local firms who are competing by means of their privately owned funds, capital, and resources. This factor significantly disrupts the level playing field of the road construction sector. In addition, the enormity of the size of these firms may result in abuse of dominant position by the Chinese firms as a whole, creating a threat for the local industry.
Furthermore, as pointed out earlier, certain Chinese firms are also enjoying major tax exemptions, such as on import duties, income tax, etc. This has resulted in a major imbalance between the cost structures of the domestic and other foreign companies vis–à–vis Chinese companies.
Chinese government has allowed 30% of the project to be sub-contracted to Pakistani contractors and consultants after Pakistan’s request.
Additionally, the documents submitted for qualification, such as financial performance, annual construction turnover, experience and qualification of personnel, and capabilities of the foreign firm at bidding are not verifiable by the local authorities. These documents are submitted in languages other than English and there is no third party verification of these bidding documents by the implementer.
CCP sought comments of the stakeholders in this connection. The complete study can be read here.
The study offers recommendations to remove competition distortions in the sector, improve transparency in the bidding process, and create a level playing field for all market players. It asks the implementing agencies to ensure compliance with the bye-laws as well as the pertinent rules and regulations to ensure quality in the construction of roads to save the national exchequer from associated losses.
It also urges the regulatory bodies such as the National Highway Authority, Pakistan Engineering Council, and Public Procurement Regulatory Authority (PPRA) to ensure competitive procurement by all the participants in the sector.