The private sector seems to have a consensus on the assertion that the Chinese are handed CPEC projects with tax breaks, exemptions and a range of incentives not available to domestic players which make them uncompetitive. They believe that preferential treatment has created an air of unfair environment with barriers to entry and a reduced contribution and stake of local players in the new development overhaul taking place in Pakistan under CPEC. The Competition Commission of Pakistan (CCP) seems to strongly agree.
In exploring the question of competition in an assessment report on road construction and transportation, the CCP revealed that there were indeed barriers to entry for private sector players; and anti-competitive practices in executing road infrastructure projects under CPEC. To understand the magnitude of this, the projects in the pipeline amount to Rs1.6 trillion at national level.
The report reveals a few damning facts. First: only those constructors are allowed to bid for these high-value projects that have a portfolio worth Rs8 billion. Under Engineering Works bye-laws, the Pakistan Engineering Council (PEC) registers and issues licenses to contractors and assigns a category (based on financial soundless, engineer pool etc.) to each which in turn limits the projects that contractor can work on. This does pose as a barrier to entry and ensures only mega contractors and state owned enterprises (SOEs) are eligible to bid. Second is the possible bid rigging and collusion between implementing agencies and bidders.
Third: SOEs are given preferential treatment for projects floated by the National Highway Authority (NHA) which in this case is the implementing agency of these projects by way of exemption to income taxes and bid securities. These incentives are not accessible to private firms. This is similar to 2014 when public sector firms such as National Construction Limited (NCL), Frontier Works Organization (FWO) and National Logistics Cell (NLC) were given exemptions making it impossible for the private sector to compete with the SOEs. In KP, amendment to laws now exempt public sector organizations from open bidding and award contracts to them directly. Under the public private partnership act, both foreign and domestic SOEs can be awarded construction projects without competitive bidding.
Fourth: that foreign firms (primarily Chinese, entering only via joint ventures-JV under PEC bye-laws) end up winning the investment opportunities by bidding below government estimation but later apply for various financial claims or enter into renegotiation for incentives. Moreover, once they win the contracts, they leave the execution of civil work to their partners, or small local firms that are subcontracted or sublet, but not whetted by any regulatory agency. There is no surety of whether these firms have the capacity or the expertise. In fact, under PEC, they won’t be able to bag these projects on their own. This greatly undermines the quality of the projects.
It is important to know that the Chinese firms do the technical work on its own and subcontractors are involved in the physical construction part. Do Chinese firms have their own way of checking and ensuring the subcontractor has the resources and tools in place to execute the project. The funding is important for sure, but are the benefits accrued from these foreign investments leading to technology transfer, knowledge sharing, research and development, training of engineers contractors, turning unskilled labour to skilled labour and so on.
The CCP lists a number of actionable recommendations including converting large projects into optimal packages so smaller firms can also participate, monitoring of JVs as well as of subcontractors, either removing exemptions/incentives provided to SOEs and Chinese firms that give them undue cost advantage over private firms, or give some leeway to private firms through a margin of preference.
There should be a greater emphasis on the monitoring of projects as well as prequalification of subcontractors that need to go with evaluation standards, and stringent quality controls.All projects should have key performance checks so contractors and investors can be brought to task.
Another option is providing incentives based on performance targets, rather than doling them out from get-go. The private sector has complained that some Chinese firms are delivering poor quality work and there is no stopping them from winning more bids in the future. There are also claims of corruption and collusion. Another problem is one of too many regulatory bodies with a lack of coordination between them.
In the government’s commitment to open partnership, these projects could adopt World Bank’s framework for disclosure in public-private partnerships or use components of similar frameworks such as the OECD’s integrity framework for public investment.
These give policy and legal options to disclose timelines, pre and post procurement and performance of projects which could ensure their transparency, efficiency and competitiveness, and uphold the ideals of accountability.