The Competition Commission of Pakistan has issued a Policy Note to the Planning and Development Division, the Ministry of Housing and Works, and the Ministry of Defence, recommending them to withdraw exemptions granted to certain public sector undertakings in the construction sector to create a level playing field in the bidding for and award of civil works' projects. 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 Organization (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. 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. CCP found out that the Ministry of Defence has exempted FWO from furnishing a Bank Guarantee against Performance Security and Mobilization Advance for services it renders to the federal and provincial governments. Similarly, 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 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. 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. 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, 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. 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. 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.
The Competition Commission of Pakistan has issued a Policy Note to the Planning and Development Division, the Ministry of Housing and Works, and the Ministry of Defence, recommending them to withdraw exemptions granted to certain public sector undertakings in the construction sector to create a level playing field in the bidding for and award of civil works' projects. 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 Organization (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.
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.
CCP found out that the Ministry of Defence has exempted FWO from furnishing a Bank Guarantee against Performance Security and Mobilization Advance for services it renders to the federal and provincial governments.
Similarly, 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 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.
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.
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, 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.
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.
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.
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