The Competition Commission of Pakistan (CCP) has recommended the Planning and Development Division, the Ministry of Housing and Works, and the Ministry of Defence to withdraw exemptions granted to certain public sector undertakings including National Logistics Cell (NLC) to create a level playing field in the bidding process and award of civil works' projects within construction sector.
In this regard, the CCP has issued a Policy Note to the said ministries here on Wednesday. According to the policy note, the CCP took notice of concerns raised through media on exemptions granted to the National Logistics Cell (NLC). CCP gathered further information about similar exemptions extended to other undertakings in the construction sector, and it was revealed that the Frontier Works Organisation (FWO), National Construction Limited (NCL), and National Logistic Cell (NLC) also enjoyed such exemptions. Under these exemptions, the entities concerned are not required to furnish Performance Bond and Bank Guarantee against Earnest Money, and Bank Guarantee for Advances in the case of government works contracts.
In Pakistan, construction is an important sector of the economy: its share in the industrial sector is 11.48%; its contribution to GDP is 2.4%. The sector has shown a high growth rate of 11.31% in 2013-14. This growth is attributable to considerable activity in various development schemes and construction projects of federal and provincial governments. Being labour intensive in nature, it provides employment to 7.44% of the employed labour force. The importance of the construction sector for the economy is evident. It is hence desirable that any anti-competitive constraints to the growth of the construction sector be removed by introducing competition-oriented reforms.
The construction sector consists of two sub-sectors: a) architectural and engineering design; and b) construction and related engineering services, or "physical construction services". According to Pakistan Engineering Council (PEC), construction of any engineering work includes surveys, sub-soil and other investigations, erection, installation, testing and commissioning, and execution of all activities required to achieve the desired final shape of an engineering project, and shall also include extension remodelling, rebuilding and repair works and all other works incidental thereto, it said.
As per practice, Pakistan Engineering Council (PEC) issues licenses permitting a licensee to construct or operate projects, whether in the private or public sector, for a category and period specified in the license. Out of 144 registered companies, the majority are in the private sector except a few, including FWO, NCL and NLC. In the categories of contractors and operators of projects, only public sector companies are availing the abovementioned exemptions.
The CCP found out that the Ministry of Defence has exempted FWO from furnishing a Bank Guarantee against Performance Security and Mobilisation Advance for services it renders to the federal and provincial governments. Similarly, the NCL benefits from exemptions granted by the Ministry of Housing and Works. Accordingly, in the case of government works contracts, NCL is not required to furnish a Performance Bond in relaxation of Rule 276-GFR (Pt-I); and Cash Deposit Requirement/ Bank Guarantee against Earnest Money and Bank Guarantee for Advance, if any, provided under the contract agreements. These exemptions are applicable in the case of services provided by the NCL to the federal as well as provincial governments.
Likewise, the Planning and Development Division exempted the NLC in contracts for government works, from providing a Performance Bond, Bank Guarantee for Advances, if any, provided under the contract agreement, and Release/ Adjustment of Retention Money.
The CCP noted that the clients of various construction projects undertaken by the FWO, NCL and NLC have remained the federal and provincial governments. Private sector contractors cannot compete for such projects due to these 'exemptions'. In the long run, this affects their growth and international competitiveness. As the private sector contractors cannot participate in national level construction projects, they cannot develop, strengthen and upgrade the technical expertise that is required of global players. The undertakings listed above do not face real competition from other construction companies, which they would face in the absence of these exemptions.
The CCP observed that FWO, NCL and NLC have grown stronger and no longer need protection in the form of 'exemptions' as illustrated by the strong financials of NCL and FWO and their ability to compete abroad. Hence, the infant industry argument is no longer valid; therefore, the continuation of exemptions is not justified. Besides, other companies in the construction industry with heavy investments in machinery and equipment should also get a fair chance to compete.
The CCP is of the view that the exemptions, being discriminatory in nature, create a barrier to entry. An exemption from the requirement to submit a Bank Guarantee to serve as a Performance Bond, and Bank Guarantees to secure Advances provides an advantage to the undertakings at the beginning of the project, as these guarantees are needed at the bid stage. The exemption from furnishing Bank Guarantees that are contingent liabilities impact the financial commitments of the undertaking. The exemption from the requirement of Retention Money Adjustment provides a clear cash flow advantage during the course of the project at any point when money is not retained from payments made to the undertaking, and is retained from its competitors. Also, on account of being exempt from the Retention Money requirement, the undertaking availing this exemption can earn bank profits on funds; its non-exempt competitors do not have these funds available to earn profits on.
The Commission estimates that the cost advantage (in terms of contract cost) to FWO, NCL, NLC is 30%,22-25% and 30-35% respectively. The CCP has recommended that the Planning and Development Division, the Ministry of Housing and Works, and the Ministry of Defence immediately withdraw the exemptions granted in order to ensure a level playing field for all market players. Open, transparent and non-discriminatory procurement is the best tool to achieve 'value for money' through competition among suppliers. Competition principles envisage a level-playing field between all undertakings acting in a competitive market, regardless of whether they are government entities or privately owned.
Since public resources are scarce, the efficiency of the procurement process is a prime consideration for the government. Open, transparent and non-discriminatory procurement is the best tool to achieve 'value for money' through competition among suppliers. Competition principles envisage a level-playing field between all undertakings acting in a competitive market, regardless of whether they are government entities or privately owned. The Act has specifically taken away the exemption given to government entities through the application of Section 25 of the Monopolies & Restrictive Trade Practices (Control and Prevention) Ordinance (MRTPO), which the Competition Act, 2010, repealed and replaced.
Instructions issued by the P&D Division, Ministry of Defence and Ministry of Housing and Works are applicable to all federal ministries/ divisions and departments, autonomous/ semi autonomous bodies under their administrative control as well as to all provincial governments and departments, autonomous/semi autonomous bodies under their administrative control requiring services of FWO, NCL and NLC. Therefore, the exemptions granted to the undertakings distort competition in the public sector construction work and result in undue advantage to them, while their competitors are subject to more burdensome terms. The magnitude of the financial advantage estimated above is significant. The exemptions are hence not in line with the letter and spirit of the Competition Act, 2010, policy note added.